Analysis: Is agriculture/food production the next stranded asset?

Investors start to grapple with the ‘externalities’ of food production

They are both vital commodities with massive ‘externalities’. But while fossil fuel is now increasingly being recognised as a potential “stranded asset”, investors are yet to wake up to similar inherent risks of agriculture and food production more widely.

The stranded assets and unburnable carbon idea was developed by the Carbon Tracker Initiative, the London-based NGO, and brought to wider attention by activist Bill McKibben in a now seminal article in Rolling Stone. In its broadest sense, stranded assets is defined as assets incurring significant unanticipated or premature write-downs or devaluations.

Surely agriculture is completely different and can’t be compared to fossil fuels? But consider this: if agriculture were a country, it would generate the world’s third largest CO2 emissions, after the US and China. And that’s before one considers the huge supply chain risks of the industry, for example human slavery in industrial fishing or pesticide run-off in agricultural land.

Some are now saying the food production sector’s emissions, pollution and diminishing natural capital are not being captured by current food costs in the developed world. They say it suggests a ‘stranded asset’ scenario in the offing.

The Royal Institute of International Affairs think tank (Chatham House) certainly thinks so. It released a report this month Managing the Risk of Stranded Assets in Agriculture and Forestry in which it deals with the issue in some depth.

“Climate change may become a major factor in the creation of stranded assets, and not just in the energy sector. Assets in agriculture and forestry may also be at risk because of physical impacts as well as through regulatory and technological change.” Chatham House argues that in the context of the 2015 Paris Agreement, “it has become clear that it is not just the energy sector that will be affected”.

The report argues that such assets may face stranding, because of physical impacts such as drought and desertification as well as through regulatory and technological change. At risk are the land- or rights-owners, the owners of infrastructure related to the transport and processing of commodities, consumer companies … and investors.

The authors claim that the prospect of asset stranding could be enough to cause those affected to “impede” efforts towards low-carbon development. “But this possibility has not been sufficiently accounted for in the national low-carbon development plans of either developed or developing economies.”

They identified the growing preference for organic, antibiotic- and preservative-free, and locally sourced food in the developed world. On top of this, rising incomes in developing markets is driving growth in demand for animal protein and dairy products – which are resource-intensive and will challenge local supply chains.

Speaking at a recent event organized by Impax Asset Management, the environmental specialist, Patrick Holden of the Sustainable Food Trust pointed out how ‘traditional’ fast food restaurants are no longer frequented by millennials – they’re just not cool.

What does a company such as a Yum! Brands (owner of Taco Bell and Pizza Hut) do when they go out of fashion due to changing consumer trends in favour of organic, fair trade produce?“Farming has been a kind of mining operation,” he said, adding there had been what he called “false accounting for decades”. He said the biggest externality of intensive agriculture is the damage to public health, including higher insurance costs.

Speaking at the same event, Impax’s ESG head Lisa Beauvilain pointed out how following a government push on sustainability, Norwegian salmon has become much more stable in terms of earnings. Incidentally, salmon – which is way better than beef in terms of carbon emissions and water usage – is Norway’s second largest industry, after oil.

An example of a regulatory change that could spark a change are sugar taxes that are springing up around the world. Allied to this, the sector also faces broader challenges over food safety, as detailed in a recent report by the Investor Responsibility Research Center Institute and Cornerstone Capital. They found that few corporate boards have relevant expertise and that CEO compensation is rarely linked to food safety. In addition, food companies often lack disclosure consistency. Reports such as this suggest the issue of the food sector more generally is coming onto investors’ radar screens.

On top of these issues, witness the flak some leading institutional investors have run into over what some claim are ‘land grabs’ of agricultural land.

Some of these issues were thrashed out at a recent conference in San Francisco. The True Cost of American Food featured contributions from Prince Charles, Trucost, the Economics of Ecosystems and Biodiversity (TEEB), the Sustainability Standards Accounting Standards Board and others.

It tackled the reasons why food from the most damaging production systems appears cheap, when its real cost to the environment and public health is very high. Quite simply, it’s because the externalities are externalities. Once this starts to change, investors had best be on their guard.

The Chatham House report cites Bank of England Governor Mark Carney’s reference to the ‘tragedy of the horizon’, whereby impacts beyond a time frame of 15 or so years are often beyond the focus of the financial community.

Not that this is new. Ben Caldecott and others at the Smith School at Oxford University identified the issue back in 2013 with their study Stranded Assets in Agriculture: Protecting Value from Environment-Related Risks. Caldecott – formerly with Climate Change Capital – and his colleagues estimated the total value of investments at risk of stranding in the agriculture sector at up to $11trn.

Maria Lettini’s move from Principles for Responsible Investment, where she was Associate Director of Global Networks and Outreach, to a senior role at Jeremy Coller’s arm Animal Investment Risk & Return (FAIRR) shows how this issue is starting to gain profile with some in the RI community.

The Chatham House report concludes: “There are credible reasons why stranded assets in agriculture and forestry may result from climate change.” The embryonic movement has something of the feel of the early days of the fossil fuel divestment push. It is too soon to tell whether it will filter through to the investment mainstream – but it does indeed seem that you can’t have your cake AND eat it too.