A Pathway to Practical Solutions
Regenerative agriculture’s outcomes-based approach offers strong financial and sustainable returns, says Richard Jacobs, Head of the Farmland Strategy at Van Lanschot Kempen.
Over the past few decades, modern agricultural practices have brought huge gains in crop yields. This ‘green revolution’ has been largely successful in combatting hunger, but it has also had serious unintended consequences: soil health and the nutrient density of foods have strongly deteriorated, and biodiversity loss has reached a critical stage.
Concerns about how to produce healthy food for the world population with finite resources are growing. In its 2022 Global Risks Report, the World Economic Forum (WEF) ranked biodiversity loss as the third most critical threat to the planet over a ten-year horizon. WEF’s estimate is that 50% of the global economy is under threat from biodiversity loss.
Unfortunately, conventional farming must shoulder some of the blame. Agriculture is responsible for about a quarter of global greenhouse gas emissions, 50% of biodiversity loss in freshwater is caused by food systems, while food production is responsible for 70% of freshwater withdrawals.
The problem is that intensive, conventional farming practices typically work ‘against’ nature by disrupting natural processes, degrading soil health and water quality, and reducing biodiversity and pollinator health, all of which inhibit nature’s ability to rejuvenate itself.
By contrast, regenerative farming can help offer practical solutions to the issues that the agriculture sector now faces. Regenerative farming helps restore nature by taking advantage of the natural tendencies of ecosystems to regenerate when disturbed. It can improve soil fertility, water management and biodiversity, thereby increasing yields while reducing negative environmental impacts.
A growing role for farmland
Institutional capital can play a significant role in expediting the transformation of agriculture to a regenerative system, but it is often overlooked as a generator of attractive long-term revenues and capital growth. Alongside portfolio diversification, investments in farmland provide the potential for return from a variety of sources, including higher crop yields, productivity improvements and increases in land value.
There are however a number of factors critical to a successful investment approach. Whether it is engaging with potato growers in the US, organic vegetable farmers in Denmark, or tree nut growers in Australia, it is critical that investors work closely with local farmland experts as well as the farmers themselves.
It is through this close collaboration that farmers and asset allocators can build up a track record to demonstrate that regenerative practices can offer significant benefits financially, ecologically and socially.
Addressing social impact
An important, but often ignored, theme is that regenerative farming goes further than addressing just the ‘E’ of ESG. There is a compelling social lens to consider as well – from farm to forks, regenerative farming not only provides positive environmental benefits but crucially also helps regenerate entire local networks.
Additionally, in many developed agricultural areas, whether it be the US, Europe or Australia, the average age of farmers is around 60 with many readying for retirement. The new, younger generation of farmers, however, understand the importance of changing their conventional farming practices to more regenerative systems, but they often lack the capital required.
Institutional investors, like pension funds that invest for the long term and for multiple generations, are perfectly positioned to provide these young farmers with the capital and longevity to make investments. This can include operational changes such as different machinery, changing inputs and crop rotations or simply the capital required to buy the land to make these investments scalable.
Impactful and measurable
While sustainable agriculture broadly seeks to preserve and maintain the agroecosystem, regenerative agriculture aims to restore and revive it by focusing on practices that rebuild soil health, water quality, and biodiversity, amongst other factors. This subtle difference in the end-goal means regenerative practices should adapt with the evolving needs of the land and often place a stronger focus on carbon sequestration than those of sustainable agriculture.
Regenerative farming is unique among sustainable farming systems in that it focuses on quantitative, measurable outcomes, without prescribing how those outcomes should be achieved.
As a result, regenerative farmers tend to be more outcome or result-oriented – which aligns well with how investors view their own return objectives. For instance, successful farmers can demonstrate how regenerative farming can have a positive impact on bottom-line profitability. Increasing soil organic matter, as an example, can lead to a reduction in synthetic inputs, causing costs of operation to go down and margins to increase.
The wider ecosystem
Whether it is universities, practical schools, research centres, advisors, machine and equipment providers, or manufacturers of seed and plant materials, we are seeing an increase in examples of significant investment in the necessary technology and know-how to enable nature-based farming.
Modern technology is a huge part of the equation. Crops can be managed by observing and measuring variability through satellite navigation, geographical data systems and sensors located on machines or on the land. The data gathered about the condition of the soil, climate and crops can be used to improve decision-making, optimise resource use, and therefore contribute to a more efficient and sustainable farming system which achieves greater yields with fewer resources.
Driving change
While there is no doubt that many farmers are making positive strides forward and are shifting from conventional to sustainable practices however, the ball cannot be left solely in their court.
It is critical that change is also driven by customer behaviour. Encouragingly, we are seeing greater consumer demand for healthier food and that the brands people interact with place a greater focus on protecting the environment. Retailers and food producers are responding in kind. Many big producers have created elaborate regenerative food programmes, with clear targets, where farmers are being compensated for signing up.
Farmland investment is not philanthropy, where returns are secondary. This is a long-term real asset activity, where financial and sustainable returns go hand in hand. However, for this new regenerative ecosystem to be successful, investors need to engage actively not only with farmers but with the most relevant parties and partners up and down the value chain.
The post A Pathway to Practical Solutions appeared first on ESG Investor.