The agricultural sector, the second-largest contributor to global climate-change emissions, faces significant disruption from climate policies, technology developments and shifting consumer preferences to more sustainable diets, according to a recent report.

Pressure to address drivers of deforestation and land-use change could lead to higher raw-material costs, a need for supply-chain investments and reduced demand for certain products, states the report published by Fitch Ratings.

The agribusiness sector has been largely shielded from climate-related policies because of the difficulty in monitoring emissions from the sector and concerns that it would raise food prices. In addition, curbing emissions, Fitch notes, is often equated with reduction of production volumes, which is unpopular in view of food security concerns and the economic importance of agricultural exports for some countries.

While fundamental demand drivers are strong for the agribusiness, packaged food and beverage sectors as a result of population growth and rising affluence in emerging markets, pressure to stem agricultural emissions could lead to growing disruption for companies operating in the meat and livestock sector, in particular, given its significant environmental impact.

As well, policy pledges at 2021’s UN COP26 conference and rising investor scrutiny of the sector for climate risk are driving companies to set targets for emissions reduction, although these are often limited, according to the report. The fragmented nature of the agribusiness sector will present challenges for implementing tighter emissions standards, but pressure from investors and regulators to limit land conversion will grow.

And the confluence of policy shifts with technology developments in the alternative proteins space could lead to meat production peaking as soon as 2030, before falling from 2035 as, the report warns, the economics of alternatives become more favourable and meat consumption is increasingly taxed.