Perspectives: Obesity drugs, agriculture, proxy season wrap-up

If there’s anything comparable to the AI takeover of social (and investment markets) discourse over the past two years, it has to be injective semaglutide, a class of obesity drugs (e.g., Ozempic) that mimic a gut hormone, GLP-1, to increase insulin release. Originally approved for Type 2 diabetes, the drug has been shown to suppress appetite and reduce food cravings, and can lead to an average of 22.5% in weight loss. Long-term use has also been associated with reduced risk of cardiovascular and kidney diseases.

Obesity is a global challenge: the World Health Organization (WHO) estimates over 1 billion people are affected globally, and associated health costs are USD 990 billion (13% of global health costs). It is also a challenge of income inequality, with higher prevalence rates in emerging markets or among lower-income households, even within developed markets.

The market for obesity and diabetes drugs is estimated at approximately USD 42 billion in 2024, and may reach an estimated USD 100–150bn by 2030, of which GLP-1 is the fastest growing. But sales of GLP-1 have so far been dominated by the US, where 1.7% of the population had been prescribed the drug in 2023, according to healthcare journal Epic Research. Here, these drugs retail at around USD 1,000 per month, and are only covered (in diabetes-targeting forms only) by Medicaid in 10 states. A study by Prime Therapeutics attributes high retail prices as a key contributing factor to why only 32% of people prescribed GLP-1 drugs were still taking the medication a year later.

Pharmaceuticals and food producers alike are attempting to identify alternative forms of GLP-1, including those naturally occurring or compounded with other vitamins. Officially, Novo Nordisk’s patent is due to expire in 2026 in China, and generic alternatives for an earlier version of the product, liraglutide, are already receiving tentative FDA approval. As the affordability of the drug improves, so too does its potential positive social impact on global health.

There is another side to this story, however. A survey by Mattson, a food developer consultancy, suggests that 66% of GLP-1 users are drinking less soda and alcohol, eating fewer sweets, fatty and highly processed foods, and instead consuming more fresh foods such as eggs, produce, grains and legumes. Walmart, which sells the drug, has publicly acknowledged changes in consumption patterns associated with shoppers on the prescription.

This shift underscores a broader issue: the scarcity of healthy food. In 2022, the UN estimated that over 2.8 billion people couldn't afford a healthy diet, contributing to undernourishment and the double burden of malnutrition. Emerging market countries are particularly impacted: In 2017 in India, the median income earner needed to spend 100% of their income to afford a healthy diet, while in China it was 30% according to research from Herforth et al. (2020). While GLP-1 drugs drive demand for healthier food, this development also highlights the urgent need for a global food system reset.

To tackle this, two other major relationships of the global food system must be reset: first, the one between food and agriculture. Currently, one third of agricultural produce is wasted, and this wastage alone could solve global hunger. Trade policies, poor transportation and storage, standardized procurement standards of Big Food and poor consumption behavior are all contributing factors.

The other is the relationship between agriculture and the planet. Industrial farming practices are environmentally destructive, and while they have been instrumental in driving scale in past decades, they also cause soil erosion and biodiversity loss. We need to accelerate the shift to organic and regenerative farming, but this shift is not straightforward—not only would it require upfront investment, but also means lower crop yields even if long-term soil productivity is improved.

While GLP-1 has been touted as a “miracle drug,” solving the global obesity problem would require even more breakthroughs. (Please see: Obesity, The food revolution, and agricultural yield)

Takeaways for investors:

• Weight-loss drugs may be at the cusp of improving affordability as generics are being launched. When given to those in need, these have considerable positive social impact potential given heightened incidence of obesity among bottom-of-pyramid societies globally.
• But equally concerning is that in many emerging markets, obesity co-exists with undernutrition. There is no “miracle drug” that could solve the fundamental challenges of the global food system.
• Transformation towards regenerative food systems, as well as investments into logistics, transport and storage to improve the resilience of existing food systems are all key facets to improving nutrition access.
• We see continued engagement opportunities with food and beverage companies to transform and reinvest in responsible food production and marketing.

Global production of primary crop commodities reached 9.5 billion metric tons in 2021, a 54% increase since 2000 (FAO). This growth has been driven by intensified farming activities, including increased use of irrigation, pesticides, fertilizers, and enhanced production technologies.

Despite this increase, food security challenges are expected to worsen. We see three drivers of continued innovation in the space, presenting the complexity of competing goals:

1. Growing demand for food, driven by an increase in population as well as economic growth;
2. Changing weather patterns due to climate change;
3. Increased demand for fresh and organic food.

First, according to the World Bank, the world will need to produce approximately 70% more food to feed an estimated 9 billion people by 2050, and there is a strong correlation between GDP growth and calorie consumption. As emerging market countries—including the least developed countries—grow, pressure on additional agricultural output increases.

Second, as we have discussed in prior reports, this challenge is compounded by surging agricultural commodity prices and changes in environmental patterns. For instance, in February 2024, cocoa prices globally hit a record high as crops in West Africa were impacted by dry weather, while in July 2023 rice prices in Asia reached their highest levels in more than two years due to concerns about dry weather. In India, late and particularly heavy monsoon rains damaged the country’s rice crop, causing it to halt exports of some categories of rice. The relationship goes both ways, as agriculture is the fourth-largest contributor to global emissions.

Third, consumer preferences for fresh food, as discussed in the GLP-1 section of this report, as well as for organic food produced without synthetically manufactured pesticides, are on the rise as consumers become more health conscious and environmentally aware.

These three drivers are somewhat in conflict, presenting near-term challenges. The sheer need to maximize food supply while minimizing environmental impact points to the indeed to increase crop yields. Additional demand for fresh, not-processed, food also implies the need for increased yield, as we discuss in depth in the Agricultural yield – Update report. Technologies like precision agriculture for better soil management, weather forecasting and “plant by plant” application of the right fertilizer could increase productivity, and for some crops this has happened already. Yet, historically, the toxicity to the environment of fertilizers and pesticides has not been adequately considered.

With demand for organic food on the rise, consumer sentiment might push toward reducing fertilizer and pesticide use. And some regulators are going in this direction, with the EU’s “farm-to-fork” initiative requiring 25% of EU farming land to apply organic methods, as well as the reduction of chemical pesticides by 50% by 2030. However, it is not entirely clear that organic methods are better for the environment, and they might be challenging in the near term to the goal of feeding more people healthy food. A meta-analysis of 164 published life-cycle analyses found that organic agricultural methods for growing cereals and vegetables were worse in terms of land use, energy use and potential of polluting water bodies than conventional methods (Clark & Tilman, 2017).

We believe it will take some time for these challenges to be resolved, with regulators guiding markets in different ways. Regenerative agriculture methods have the potential to conserve biodiversity while over time resulting in higher yields, yet these methods are not yet tried at scale. Until that's done, precision agriculture with an increased focus on environmental sustainability to meet consumer and regulatory environmental expectations will remain the most likely interim solution.

Takeaways for investors:

• Rising global populations are expected to exacerbate food security challenges, especially when considered in light of changing climates. Increased demand for affordable, healthy food and consumer preferences for organic practices pose new questions for the agriculture sector as well.
• In the near term, the goals of biodiversity conservation and food security are competing with each other, although over the longer term these tensions should resolve.
• Precision agriculture techniques will be important in achieving global food security objectives, and we see continued importance and opportunity in engagement with issuers to ensure that environmental considerations are baked into processes and innovation.

The 2024 proxy voting season is coming to an end, and over 500 resolutions on sustainability topics were filed this year, according to Proxy Preview data from non-profit As You Sow. Average support for environmental and social shareholder proposals was relatively flat compared to 2023, with proposals at S&P 1500 companies gaining an average rate of support of 19% (compared to 21% last year). As we have previously noted, we continue to see an increase in the number of “anti-ESG” proposals brought forward to companies. Support for such proposals remains negligible (below 2%), highlighting that although support for sustainability proposals has trended lower, investors so far have not taken an opposing stance.

Ahead of the 2024 proxy season, we observed an increasing number of investment managers exiting collective climate action initiatives (see our June Sustainable Investing Perspectives on the topic). We highlighted that most of the managers leaving such initiatives did so while reiterating their continued support for corporate engagement and sustainability. While support for environmental and social proposals decreased year on year, support for climate risk and energy transition proposals actually increased moderately to 25%. Although not many proposals reached the threshold to pass, the lower support for climate action industry groups does not appear to have negatively impacted climate-focused proposals.

The discussion around sustainability proposals typically focuses on environmental and social topics. Governance proposals have garnered little attention, and we observe a nearly 40% decrease in the number of governance proposals at S&P 1500 companies in recent years. Support for governance proposals, however, saw a sharp increase this year: from 31% to 42%. Where environmental and social proposals face opposition from management (whether for being “too prescriptive” or “not financially reasonable”), governance proposals are more likely to gain management support—a big factor in determining whether a proposal will pass.

With the increased focus on artificial intelligence (AI), we highlighted that AI found its place on corporate ballots this year, too. We saw proposals focusing on the social impact and ethical guidelines for AI use, particularly generative AI. Proposals aimed to understand how companies assess the risk of AI misinformation, especially in a global election year. While early proposals at Microsoft (20%) and Apple (40%) gained relatively high support, comparable proposals at Alphabet (7, 18, and 19%), Amazon (10%) and Meta (14 and 17%) were less successful. We expect this to remain a topic of engagement in the near term.

Takeaways for investors

• Voting at annual shareholder meetings is the most direct way for investors to have their voices heard, and over the years we have seen the number of sustainability-related proposals increase.
• Investing in strategies that explicitly focus on ESG engagement (in both equities and fixed income) can provide investors with exposure to active engagement with company management, to drive strategic improvement in sustainability matters they believe are relevant to financial performance.
• We believe engagement strategies that address a diversified and broad range of sustainability topics beyond climate, and those that focus on small- and mid-cap companies that are less likely to rely on collective engagement, are well positioned to continue delivering on impact outcomes.