As an impact investor, I’m very concerned about the effects of climate change. The world’s population is growing. It’s set to reach 10 billion people by 2050. But global warming is making it increasingly difficult to feed people today — let alone an expanding population in the future.

Droughts affected 14% of crops around the world in 2022. And scientists are projecting that droughts will be hotter and longer in the future, causing water scarcity for conventional agriculture and possibly diminishing farmers’ yields. 

Climate change and conventional agricultural practices are also damaging soil. A full 16% of conventional soils have a life span of less than 100 years due to erosion. This could damage the quantity of land available for agriculture and lead to increased deforestation. Last but not least, pesticide usage annihilates essential insect species — and pesticide poisoning makes 385 million people sick every year.

A logical solution would be for humans to consume more organic, plant-based food while making a global and rapid push to mitigate climate change. But this is a massive undertaking. 

As a result, impact investors may look to technology like vertical farming for faster smaller-scale solutions. Vertical farming is the agricultural practice of growing crops in vertically stacked layers, rather than in traditional horizontal rows. Vertically farmed crops can grow in a closed and controlled environment thanks to artificial lights and soil-less farming systems like hydroponics.

While vertical farming technology has been around since the 1970s, the price of LEDs recently decreased and triggered a wave of enthusiasm. The global vertical farming market was worth $5.9 billion in 2022 and is projected to grow at a 20.1% annual rate over the next seven years. Vertical farming startups have become more popular over the last few years, with 74 vertical farming startups founded in 2020 alone. Venture capitalists have invested at least $3 billion in vertical farming technology in the last three years.

Every time I hear about a specific technology that’s trending among investors, I like to take a step back and learn more to determine whether it is a temporary bubble or a truly revolutionary technology. So I called Michael Choi, founder and CEO of Ponix, an Atlanta-based vertical farming company, to learn more about vertical farming technology. I also went through various articles from vertical farming detractors and supporters.

So is vertical farming a good investment opportunity?

It depends on the use case. Let me explain.

Vertical Farming Solves Traditional Agricultural Problems…

During my call with Michael, he explained that vertical farming requires 95% less land and 90% less water than conventional soil farming. Because crops are grown in controlled environments, pesticides are unnecessary. Ponix uses hydroponics, a growing method that replaces soil with a water mixture that delivers the nutrients plants need directly to their roots. 

Vertical farming can also be a solution to social problems. Ponix’s strategy is to bridge the social divide of food deserts by expanding access to fresh crops in underserved urban areas. Vertical farms can provide employment and repurpose abandoned buildings like warehouses. Ponix is partnering with governmental agencies, NGOs, academic institutions, and HBCUs (historically Black colleges and universities) to grow access to fresh food in equity zones.

From these angles, vertical farming has great potential.

…But Increases Crops’ Carbon Footprint

Still, I left one aspect out of the picture so far: vertical farming’s carbon footprint. As the world works hard to lower greenhouse gas emissions, developing a new way of farming with significantly higher emissions simply does not make sense. 

Vertical farming requires LED lighting. The huge quantities of electricity the technology requires is pollutive if it comes from the U.S. power grid, where 40% of electricity comes from natural gas and 20% from coal. Several studies around the world show that growing lettuce indoors emits around 5.7 to 16.7 times more carbon dioxide than growing lettuce outdoors, a number that also varies based on a farm’s distance from stores.

If a vertical farm were to use only renewable energy, growing lettuce indoors would still emit 2.3  to 3.3 times more carbon dioxide than growing lettuce outdoors. This number takes into account that growing crops outdoors sequesters carbon dioxide in the soil — an advantage that is lost with vertical farming. Additionally, producing renewable energy from wind and solar ironically uses large quantities of land too — which vertical farming is trying to avoid in the first place.

Publicly Traded Vertical Farming Companies Are Fading

Michael told me customers should not have to pay a premium for vertically farmed produce, so Ponix’s lettuce prices are similar to lettuce produced by organic outdoor farms. Stores can also appreciate buying nutritious crops from producers whose harvests don’t depend on weather. So vertical farming can make sense from a business perspective.

But the investments required to launch these farms are tremendous. And like many investment bubbles in the COVID era, many vertical farming startups that recently became public are now losing steam.

AppHarvest was worth $420 million in 2021 but is now worth only $76 million. In its most recent quarterly report, it lost about $90 million and generated just $4 million in revenue. Village Farms International’s share price decreased from $17 in 2021 to $0.77 as I write. The company grew both its revenue and its losses in 2022. Hydrofarm’s market cap went from $3 billion in 2021 to $45 million today.

Venture capitalists made some healthy returns at the time of these companies’ IPOs. But these companies have yet to prove their profitability. Now that the bubble has popped, it might be difficult for investors to generate the same returns.

Investors looking at the situation can see the glass half empty or half full. They can believe that the company’s low valuations and increasing losses are a sign that these models are unprofitable — especially given the current high prices of energy — and choose to stay away from new vertical farming startups. Or they can see the low market caps of vertical farming companies as a symptom of investors’ current unwillingness to back unprofitable companies. The vertical farming companies I mentioned are investing in growth, and spending capital could actually allow them to achieve profitability and economies of scale. 

To Invest or Not to Invest

As an impact investor, I want to know if the technology I invest in has a positive impact in the environment. And now that I am more informed about vertical farming, my conclusions about the technology are mixed. 

I do not think that growing most of the world’s produce indoors makes sense from both an environmental and business perspective. After a decade of testing, many companies are still reporting heavy losses. As long as lettuce and tomatoes are commodities, these companies will have to find ways to radically lower their costs. 

Let’s face it: high-tech solutions are not always the response to mitigating climate change. Lowering our energy usage is essential to stop global warming, and vertical farming is not going in this direction. I can’t help but see some techno-solutionism (the belief that technology can solve everything) in those who believe that vertical farming can solve agriculture’s problems. And if I sound pessimistic, that’s because it’s my job as an investor to do my best to be realistic.

Still, vertical farming may be a good solution in some specific scenarios. In areas with difficult soil and weather, like in the Middle East, and with access to cheap and low-carbon electricity, vertical farming could succeed. After all, the vertical farming market is set to grow. Startups targeting food deserts can also be a good solution to provide fresh produce and employment in underserved communities. Investors interested in the technology might have a better chance backing startups in these niche markets than betting on the entire industry.