Responsible Investing: Funding sustainable aquaculture farming

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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on October 23, 2017 – October 29, 2017.
Dutch entrepreneur Mike Velings has observed the decline of the marine ecosystem in many oceans around the world in his 20 years of recreational scuba diving. His resolve to prevent further destruction hardened during a National Geographic expedition in 2009 after witnessing what oceans could and should look like.

“They were going to the Southern Line Islands, which are in the middle of the Pacific Ocean. We saw some of the most pristine underwater ecosystems on the planet that were completely untouched. When I went there, I said, ‘That is what it is supposed to look like when there is no human touch,’” says Velings.

He was determined to use his entrepreneurial experience to find a financially sustainable solution to protect the world’s oceans. This led him to set up a Netherlands-based fund called Aqua-Spark in 2011 to invest in companies around the globe that supported or adopted sustainable aquaculture practices.

Velings got the idea for the fund at a TED (Technology, Entertainment, Design) conference in the Galapagos, which was held aboard a ship called Mission Blue. This was where he met Amy Novogratz, now his wife and business partner.

“I was listening to the director-general of WorldFish, a Penang-based organisation that combats poverty through aquaculture, mostly in Asia and Africa. He was in a room full of environmentalists, speaking about aquaculture and sketching a picture of what was going on in this area, which does not have a good reputation in the West,” says Velings.

Aquaculture refers to the farming of aquatic organisms, whether in coastal or inland areas. According to the Food and Agriculture Organization (FAO), it is the fastest food-growing sector and accounts for 50% of the world’s fish consumption. But aquaculture is also dogged by reports of pollution due to discharge of wastewater containing faeces and chemicals as well as the spread of disease in farms as a result of poor hygiene practices.

“I expected everybody to listen politely and then ignore the facts, but the opposite happened. Everyone started asking questions, which got us very interested,” says Velings.

He approached the WorldFish director-general and found out that the organisation was facing funding issues. So, he decided to set up a fund that would benefit its work. But after he and Novogratz started talking to the experts, they realised that aquaculture was a growing industry in need of not only funding but also guidance.

“From 2011 to 2015, we learnt more about the topic and built a platform of global experts. We came to the conclusion that we could actually play a major role in this industry as it is not as figured out as other industries,” says Velings.

“It is already quite a large industry, but it still has the potential to triple before the end of the century. There are a lot of good things about aquaculture, but there are also a lot of bad things we would like to see changed.”

Growing demand for sustainable aquaculture

According to the FAO, global per capita consumption of fish rose from an average of 14.4kg in the 1990s to more than 20kg a year in 2016. However, the supply of wild-caught fish has remained relatively stagnant since the late 1980s and almost a third of commercial fish stocks have been overexploited.

“At best, global fisheries will stay at the same level — they will never grow or grow just a bit if our oceans are perfectly managed. Wild catch is never going to fill the gap, so farming will grow no matter the preference of the customer,” says Velings.

“The global wild catch is currently at 65 million tonnes and production from aquaculture is about 70 million tonnes. These could reach 210 million tonnes by the end of the century if we can find the resources and feed.”

Population growth is another factor driving aquaculture, especially as the world’s population is expected to pass nine billion by 2050, he adds. “A lot of the growing population live in countries such as Indonesia, where people traditionally eat more fish than meat.”

Consumers are increasingly looking for healthier options as researchers have found traces of pollutants and toxic chemicals in wild-caught seafood. “If you eat something well farmed, has good ingredients and has had a healthy life, you know exactly what you are eating and that it is good for your body. If you eat something wild caught, you do not know where it came from, what water it swam in or what it ate. So, there is a lot more health risk eating that,” says Velings.

The awareness of wildlife conservation plays a role in driving the demand for sustainable aquaculture, he adds. “If you eat wild-caught fish such as the Atlantic halibut, almost none of which is left in the wild, or the bluefin tuna, you can say that you don’t care. But it means that it may not be there anymore if you want to eat it again the following week.

“If you eat something farmed or from aquaculture, especially one that does not have a large footprint, you could keep doing that forever. If you keep eating out of the ocean, one day you will wake up and find that you have nothing left.”

But aquaculture, if not done properly, also contributes to environmental pollution, as reports have shown. Velings says this is where he hopes Aqua-Spark can prove that sustainable aquaculture is possible.

“It is up to the aquaculture industry to make sure it shows that this is actually better. A lot of the industry still needs to be developed and we have the opportunity to influence how it will be done. So, we want to have a large group of companies across the value chain globally to show you that you can have sustainable, affordable and healthy aquaculture as well as good financial returns,” he adds.

This means that Aqua-Spark has to ensure that its investees adhere to sustainability principles, which can be observed by the type of fish they rear, for instance. The amount of feed required to sustain the fish population is a good indicator of whether it can be sustainably farmed.

“It is a sustainable alternative if you choose the right species compared with other forms of animal farming. For example, in Norway, our inland farm has halibut where you only need 900g of feed for 1kg of halibut,” says Velings.

“However, it is very different if people farm bluefin tuna. Although it is a high-value product because the species is going extinct, in terms of the feed conversion ratio, it is three times as bad as beef. You need 24kg of feed for 1kg of bluefin tuna.”

By comparison, he points out, 9kg of feed and 18,000 litres of water are needed to produce 1kg of beef, while 2.5kg of feed is needed for 1kg of chicken.

“We understand there is a market for bluefin tuna, but it is only depleting our planet quicker. Maybe in the future, with a lot of research, there may be alternative ways to produce them. But right now, we think we should stay away from this species,” says Velings.

Another issue with aquaculture is the use of antibiotics to treat bacterial diseases in fish farms. Scientific reports have shown that overuse of antibiotics in farming activities has led to antibiotic resistance in humans who consume the animals, potentially causing treatment-resistant illnesses.

Velings says the fund strives to invest in farms that do not use any antibiotics. “Our current farms do not use antibiotics. But we also understand that if your animals are sick, you need to be able to treat them. So, we need to find better treatment methods.

“However, if they do use antibiotics, they need to really make sure it never ends up in the human food chain. We do not want antibiotics and want as little chemicals as possible. We want healthy feed with minimal footprint and good animal husbandry and stocking densities.”

Aqua-Spark does not discriminate between investing in open-water farms and inland aquaculture ones as long as the technology and system are in place to prevent pollution. “If you have an open-water system, the cage needs to be in a place where it is deep and has a lot of current so that it almost feels natural to have a lot of fish in the water. If you use healthy feed and no antibiotics, there will not be issues,” says Velings.

“If you have a land-based system, it depends on whether it is freshwater or saltwater. Freshwater is relatively easy to deal with. You can turn the waste into fertiliser. Saltwater is harder to deal with. But we are working with our farms in Norway and Iceland to find good solutions for the waste.”

One solution they are experimenting with is using the saltwater sludge from inland farms to feed sea cucumbers.

Using investments to effect change

Aqua-Spark has investments along the aquaculture value chain. It currently has 10 companies in its portfolio and €51 million (RM254.5 million) under management. The investees were chosen with the help of its board of experts. The fund has more than 1,000 potential investees in the pipeline.

“We invest in feed ingredients, farming technology, disease prevention … all the way to the supermarkets. We can do multiple runs of investments and create opportunities between these companies,” says Velings.

For instance, the fund negotiated with Calysta, one of its investees that grows microbes as an alternative to fishmeal, to sell its product at an affordable price to Aqua-Spark’s other investee farms. Farmed fish typically consume feed that have been specially formulated. The feed could include plant proteins, vegetable oils and fishmeal and oil, which are made from small ocean fish such as anchovies and herring.

The use of fishmeal has triggered concerns about the overexploitation of small ocean fish that may further the decline of the marine ecosystem. Some farms use soy in place of fishmeal, but Velings says it is not a long-term solution as it is unhealthy for the fish. Instead, feed ingredients comprise microbes, insects, seaweed and algae as they are more natural and sustainable replacements.

“We have farms in Madagascar, Mozambique, Norway and Iceland, where we ask them to replace their fishmeal with a more sustainable product, which is normally more expensive. But in this case, they get the same deal as Cargill — the world’s largest food company — for Calysta’s products, which means they are paying less than what they would otherwise pay today,” he says.

Protix, another of its investees, has a joint venture in China that builds fully automated plants for insect farming. It collects food or agriculture waste to nurture insects that can be used as feed on fish farms. It is seen as a natural option because insects are part of the fish diet in the wild, says Velings. The insects can also be fed to other animals such as chickens.

Another of Aqua-Spark’s investments is US-based company LoveTheWild, which places sustainably farmed seafood in supermarkets across the country. “We realised that if you just focus on the farm, it is hard to be truly sustainable. But if you do the whole value chain, you can show how all these things work and maybe influence how feed is made and how disease is tackled,” says Velings.

Aqua-Spark recently added two companies to its portfolio. One focuses on breeding technology while the other is working on an alternative to antibiotics.

“We are super excited about this — not just about the fish but also the other animals and even humans. Antibiotics are a really big problem, with some saying that by 2050, millions of people will die every year because antibiotics will not work anymore, as 80% of global antibiotics go into animal farming, which creates a massive amount of resistance. Coming up with an alternative is one of the most important things we can do.”

Investing for the long run

Velings says the goal is to grow the fund’s portfolio to between 60 and 80 companies, with a value of €1.5 billion within 10 years, and take five years to bring them to fruition. Most of the farms Aqua-Spark invests in are relatively young. None of them is profitable yet, but a few are in the midst of expansion using the funds raised.

“We invest relatively early when they have a proof-of-concept and a little bit of turnover. Maybe they are not profitable yet, but we see the quality of the team — they are doing something extraordinary and the technology is kind of figured out,” says Velings.

“We will help the company scale. For the first five years, all the money goes into growth and after five years, we want the companies to start paying dividends to their stakeholders.”

Velings aims to raise about €400 million in total. Currently, most of the fund’s investors are high-net-worth individuals and family offices. “We are growing pretty fast. We have 96 investors from 17 countries and we are interested in building out the platform in Asia more because while most of the aquaculture is in that region, we have relatively few investors there,” he says.

Investors from any country are allowed to invest in the fund, but the minimum investment amount is €100,000. Investors receive a valuation report every six months so that they are aware of the value of their shares.

Velings plans to deliver dividends to investors by end-2019, which is five years from the first Aqua-Spark investment. His goal is to achieve returns higher than individuals would get if they invested in global seafood companies regardless of their practices.

“We want to be successful and change where the money goes in this industry, so we need to come up with a return of at least 25% net of fees, at least for our early investors,” says Velings.

“If we have a return that is lower than the industry, companies such as Cargill may look at it and say, ‘Well, that is a really nice hobby, but not a nice business for us.’ And that would be a complete failure because we want to change things.

“You should see this as a long-term investment where your money gets worked on more over time. We have a really transparent insight into what is going on in the industry.”


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