Seafood has an important role to play to achieve a sustainable food system that provides healthy food to a growing world population. Future seafood production will be increasingly reliant on aquaculture where feed innovation is essential to reduce environmental impacts and minimize feed and food competition. This study aimed to investigate whether a novel single cell protein feed ingredient based on Paecilomyces variotii grown on a side stream from the forest industry could improve environmental sustainability of farmed rainbow trout (Oncorhynchus mykiss) by replacing the soy protein concentrate used today. A Life Cycle Assessment including commonly addressed impacts but also the rarely assessed biodiversity impacts was performed. Furthermore, feeding trials were included for potential effects on fish growth, i.e., an assessment of the environmental impacts for the functional unit ‘kg feed required to produce 1 kg live-weight rainbow trout’. Results showed that the best experimental diet containing P. variotii performed 16–73 % better than the control diet containing soy protein concentrate in all impact categories except for energy demand (21 % higher impact). The largest environmental benefits from replacing soy protein with P. variotii in rainbow trout diets was a 73 % reduction of impact on biodiversity and halved greenhouse gas emissions. The findings have high relevance for the aquaculture industry as the production scale and feed composition was comparable to commercial operations and because the effect on fish growth from inclusion of the novel ingredient in a complete diet was evaluated. The results on biodiversity loss from land use change and exploitation through fishing suggest that fishery can dominate impacts and exclusion thereof can greatly underestimate biodiversity impact. Finally, a novel feed ingredient grown on side streams from the forest industry has potential to add to food security through decreasing the dependence on increasingly scarce agricultural land resources.