Food and agriculture systems – responsible not only for feeding global populations but also for contributing $3.34trn, or 3.9% of total GDP, to the global economy in 2018 – are intrinsically tied to the world’s stocks of natural assets, or natural capital.
Increasing risks to these stocks, whether from climate change, land degradation and biodiversity loss, or major events such as droughts and fires in Australia, or health-related crises such as the COVID-19 pandemic, therefore pose a material threat to our global food systems.
These natural capital risks are also increasingly [RM1] likely to be contributing factors in causing food and agriculture listed equity funds (AgriFunds) to materially underperform compared with general listed equities. Yet AgriFunds are failing to report on or disclose these risks to their investors – leaving major institutions exposed to environmental-related financial risk that they may not necessarily be aware of.
In order to ensure that we can continue to feed our growing population, and that their investment returns are protected, investors must therefore work in collaboration with fund managers and analysts to not just encourage enhanced disclosure, but to engage with companies to encourage them to address these risks.
To assess the scale of exposure to such risks, Planet Tracker identified 466 potential AgriFunds, comprising ‘open ended’ funds as well as ‘closed ended listed’ funds, and applied a replicable selection methodology in order to yield a benchmark sample of 37 AgriFunds (the “AgriFund Universe[RM2] ”). We then conducted an analysis of this universe to quantify the impact of natural capital risks on investment performance, principally by focusing on listed funds.
According to our review, the AgriFund universe has underperformed the S&P Global 1200 by an average of 17% within the last decade – and we believe there is a direct correlation between the level of underperformance and its exposure to upstream food and agriculture production companies.
This is unsurprising when taking into consideration the fact that these AgriFunds have, on aggregate, an overweight exposure to the Consumer Staples sector (encompassing companies that produce and sell essential, everyday items), relative to industry benchmarks including the S&P Global Agribusiness Index and DAXglobal Agribusiness Hedged Index. As a result, natural capital risks are more likely to materialise within these funds and impact fund investment performance, relative to funds with less exposure to Consumer Staples.
Investors in the dark
But, despite these risks, when Planet Tracker screened the 2018/19 annual reports and related securities’ filings of each of the AgriFunds within the universe, we discovered that only three funds identify and describe a mitigation action for one or more natural capital risk (see Figure 1).
What’s more, only one of these (DWS Invest Global Agribusiness) communicates a commitment to the sustainability initiatives selected for this review. Here, we looked at the Taskforce on Climate-Related Financial Disclosures, EU Sustainable Finance Taxonomy, the EU’s Action Plan on Deforestation & Imported Deforestation and the UN Sustainable Development Goals. This represents both a transparency and reporting failure. In practice, it means that even if the funds are aware of or, indeed, using these principles within their investment strategies, they are not publicly disclosing this to their investors. As a result, investors are in the dark – not only in regard to the risks that their investments are exposed to, but if and how AgriFunds are meaningfully incorporating these risks and sustainability initiatives in their decision-making processes.
Particularly exposed are the top 20 investors with the largest holdings in these AgriFunds, with total holdings of $6.7bn, or around 30%, of the total assets under management invested by the AgriFund universe. Many of these are institutional investors with highly diversified portfolios, such a Bank of America, Credit Suisse, Citigroup and State Street (see Figure 2), and are therefore even less likely to be aware of the existence of these risks, and the extent of their exposure to them.
A collaborative approach
It is imperative that food and agriculture systems transition to more sustainable practices – but they cannot do so alone. If investors wish to protect the value of their investments, they must actively encourage and work together with AgriFund managers and analysts to ensure that their investments are aligned with sustainability targets, and that there is adequate analysis and reporting on the natural capital risks they are facing.
There are several ways in which this can be achieved.
First, we believe that, by 2022, AgriFund institutions should achieve and publicly report on their alignment with at least one set of responsible investment guidelines, including the PRI Responsible Investment in Farmland, the CFS Principles for Responsible Investment in Agriculture and Food Systems or the OECD-FAO Guidance for Responsible Agricultural Supply Chains.
Second, they should seek investments that support advances in farming technologies, regenerative agriculture, alternative meat proteins and supply chain efficiencies.
Third, portfolio managers should be vocal about actively seeking opportunities to invest in sustainable food and agriculture systems, thereby incentivising companies within the sector to embrace these business opportunities. Indeed, Danone-owned Horizon Organic, for example, committed in March 2020 to a carbon positive supply chain by 2025 by investing $15m in re-equipping its 600 dairy producers, improving soil health, optimising energy and using animal feed additives to decrease methane emissions.
Finally, they should update their investment processes to embed natural cost accounting standards into their assessment models. By putting a price on the value of nature, investors will be able to measure, manage, and monitor natural capital risk exposure for investments within their portfolios.
In adopting such practices, AgriFunds and their investors will not only be supporting the long-term sustainability of the systems that feed the world but ensuring that their own investment returns remain protected.
Mark Campanale is the Founder of Planet Tracker and its sister think-tank, Carbon Tracker