Original post dated May 31, 2017, by Tanja Havemann, Kaspar Baumann and Dr Christine Negra is available here.
Agricultural supply chains create financial value as traders, processors and distributors move products towards consumers. While different soft commodity chains may include similar stakeholders, they create very different non-financial value. Depending on the production site, management practices and relationships between the supply chain stakeholders, social and environmental impacts and risks differ vastly. Corporates increasingly seek to quantify these, generating data, which other stakeholders can factor into their decision-making.
Globally, assets of almost USD 23 trillion are allocated to responsible investment strategies as of 2016. This is an increase of 25% since 2014, and is equivalent to 26% of total global assets. Encouragingly, this growth has been driven by client demand. It demonstrates investors increasing interest in the social and environmental impacts of their investments, in recognition of the influence these have on operations and ultimately on financial performance. And, as a result, investor demand continues to rapidly grow for products that incorporate and report relevant metrics. This creates opportunities to leverage non-financial information captured in supply chains to mobilize new capital flows in support of sustainable agricultural practices.
We see opportunities for designing and launching new financial products that address funding bottlenecks across agricultural supply chains. Clarmondial is proactively working with partners – including leading corporates, research institutions, environmental organisations and investors – to design and bring these to market.
Connecting the dots between environmental data and investment
Attempts to link environmental data collected within agricultural supply chains to financial products currently suffer from low interoperability among existing approaches and systems. In agriculture, data on farmers, farm management practices, processing, procurement and logistics are captured in a range of third-party systems, platforms and databases. These include:
- Farm and farmer mapping and management software such as FarmLogic and FarmForce, as well as corporate systems such as Olam’s Farmer Information System (OFIS).
- Certifications, such as the USDA Organic standard, Sustainable Agriculture Network (SAN) standard, Utz Certified and Global G.A.P., as well as industry and corporate standards.
- Reporting initiatives such as the Global Reporting Initiative (GRI) and industry platforms (e.g. Sedex).
- Information systems used by corporates, including provided by companies such as SAP, which provides supply chain management tools.
A precondition for systematically considering such non-financial information in decision-making is the ability to aggregate these data in a robust, standardized manner. Appropriately integrated, non-financial data can then be used in the context of a specific financial product such as a fund, bond, index, or even a “colored coin,”(i.e. a block chain-based claim on an asset).
This challenge is at the core of our work with Wageningen Environmental Research, a leading agricultural research institute, on how to aggregate technical information from different certification systems and information sources. This information, including environmental indicators, will both inform the investment process in a new financial product, which we have developed: the Food Securities Fund. Making the environmental parameters in different investment opportunities comparable will help to achieve better environmental impact, and allow consistent reporting to investors.
We see further opportunities in the aggregation of such information for use in existing products, and in the creation of new ones.
For example, Bioversity International is integrating decades of research on agricultural biodiversity into an Agrobiodiversity Index (and supporting methodology), a decision-making tool for investors, corporates and governments. This is designed to foster a pipeline of replicable, scalable agrobiodiversity-friendly investments with clearer risk-return profiles and reduced transaction costs. Bioversity International has partnered with Clarmondial to ensure that the AgroBiodiversity Index fits the requirements of the financial community, in particular, institutional investors and asset owners.
In summary, we observe greater and growing demand for environmentally sound investments, which requires a translation of non-financial data, gathered by scientists and agricultural supply chain stakeholders, into financial products. There is also an emerging opportunity to leverage non-financial information captured in supply chains to mobilize new capital flows in support of sustainable agricultural practices through standard – and innovative – financial structures.