By Tanja Havemann, Christine Negra, David LeZaks, and Jos Lemmens
In April 2019, the report “Environmental Impact Reporting in Agriculture (EIRA): Creating a link between agricultural investments and environmental impact” put forward a collaborative roadmap toward dynamic, globally-relevant benchmarking of environmental impacts in agriculture.
Recognizing that the growing number of sustainable agricultural investment initiatives were not adding up to a coherent system, we saw the need to take a ‘blue sky’ look at the fundamental data and information constraints to better integration of agriculture in sustainable finance. Rather than focusing on indicator and metric wish lists and ‘looking under lampposts’ for the limited pool of readily available data, the EIRA approach seeks to connect demand and supply for environmental impact information in agriculture, including stimulating greater investment in data development.
Appropriate information would allow investors, asset managers, and corporate decision makers to direct capital toward agricultural operations with better environmental performance and lower risks. Yet, we are not seeing meaningful efforts to build the data and information systems that are necessary to deliver on risk management and ESG reporting.
Since publication of the EIRA report, interest in sustainable agriculture investing has only intensified. We received interest from leading investors, research organizations, asset managers, companies and farmers organizations.
This has been a tumultuous year both politically (e.g. US farmers being impacted by US-China trade issues) and environmentally (e.g. with fires in Brazil and Australia, droughts and floods in Southern Africa and South Asia, and record heat waves in Europe). It is clear that investors are increasingly taking a stance on ESG issues in agriculture. This manifested in a variety of ways from coordinated investor consortia (e.g. the Cerrado Manifesto), banks innovating on credit facilities linked to green outcomes with leading companies (e.g. Louis Dreyfus Company, Starbucks, and COFCO), and new sustainability focused funds being launched for agriculture. Leading asset managers are increasingly positioning themselves based, in part, on sustainability credentials both as a response to investor interest and in recognition of the value-driving fundamentals.
In the US, there is increasing interest across agricultural and financial value chains to better understand and manage risks. The marketplace is flush with new standards, financial instruments, insurance products, and risk reports that are being developed and launched. Investors and their proxies are using a range of tools to assess and balance risk, return, and impact, and we are observing reporting that extends beyond traditional boundaries to incorporate more elements of True Cost Accounting. Looking outside the agriculture sector, there are proposals to stress test banks for climate risks and credit rating agencies are increasingly using climate risk and other ESG factors in their ratings. It is only a matter of time before financial transactions in the agricultural space are subject to the same type of fiduciary scrutiny.
Adding to the welter of sustainability reporting guidance for agriculture, the European Commission’s Technical Expert Group on Sustainable Finance (TEG) recently proposed an EU Taxonomy that includes guidelines for sustainable investment in agriculture focused on perennial crops, annual crops, and animal husbandry. The taxonomy presents an array of criteria for essential management practices and climate change mitigation as well as Do No Significant Harm guidance for other environmental objectives. It also calls specifically for data providers (including companies) to disclose adequate information in order to guide investors towards compliance.
While the value to the agriculture sector of a global data architecture would be enormous, the business case for any single entity to take this on is weak. The need is greater than ever for an international consortium of investors, companies, scientists, and technical partners to design, build, and test a methodology and tools for improved and meaningful environmental impact information. Such a sectoral approach would not be unique given efforts underway in aviation, artificial intelligence, and education. Data Trusts and Data Trust Frameworks can offer useful insights. There is a general model to follow, but it requires dedicated leadership across the agriculture sector for collaborative investment by multiple parties.
Climate change, biodiversity collapse, and resource (e.g. water) scarcity are all intrinsically linked to producing food (i.e. agriculture) for a rapidly growing population. It becomes increasingly clear that a smarter way of farming will not only reduce direct costs, but can also mitigate these harrowing effects. However, collaboration, transparency and consensus on KPIs and data are necessary so that all parties are clear what the goals are. It has to start somewhere.
We will continue to look for ways to collaborate with interested parties on this. Please reach out if this is an area that you’d like to discuss.