Move to Regenerative Agriculture Requires Investor Mindset Shift
Increased investment and reframing of sector risk assessments will aid transition to a more sustainable global food system.
Institutional investors need to broaden their support for the food and agriculture industry’s transition to regenerative and sustainable practices, according to climate and nature investment firm Pollination.
“Given the baseline operations for agriculture are massive carbon emitters, we need every arrow in the quiver to take aim at solutions – regenerative agriculture is one of those arrows,” Kyle Rudzinski, Executive Director at global climate and nature investment firm Pollination, told ESG Investor.
Regenerative agriculture focuses on rebuilding soil health, enabling biodiversity, and improving water quality, while simultaneously supporting better farmer livelihoods.
Following Pollination’s publication of a roadmap for adoption of regenerative practices in global food systems, Rudzinski said institutional investors needed to look beyond providing investment to the development of sustainable solutions.
He said asset managers and owners investing in agriculture also need to update their risk assessment inputs and frameworks, replacing outmoded yield data with information more likely to predict both returns and impacts.
“The data used to move money to the agriculture system is based on decades of historic data on yields. Those yields, however, have occurred in a climate-stable regime,” Rudzinski explained.
Historic data is becoming a less valuable tool for institutional investors to predict future cash flows and farm performance as the climate crisis worsens.
Instead, institutional investors should be procuring and analysing data demonstrating the impact of regenerative agriculture, such as tracking soil health, he suggested. “The healthier the soil, the more resilient and stable the yield and the more predictable cash flows become,” Rudzinski added. “Investors can either continue to operate on using outdated data or they can push for more stable farms that focus on regenerative agriculture.”
Rudzinski also said investors needed to take a more proactive approach to monitoring how their land is farmed to protect against falling yields and valuations. In the US, around 40% of farmland is rented or leased, with owners of that land – typically institutional investors – expecting returns that match historic trends. As the negative impacts of climate change worsen, he said, the land is becoming less valuable, and output is decreasing.
“Over time, rents will decrease and, when it comes time to sell the land, returns will suffer further,” said Rudzinski. “Any farmland asset owner should be very concerned about what their tenants are doing to that land and how they are farming it. The asset is not just the physical land, it’s what the land can produce that matters and investors need to pay more attention to that.”
Increasing engagement and disclosure is helping to increase oversight, with asset owners able to draw on stewardship-focused initiatives like the Principles for Responsible Investment’s Spring or reporting frameworks like the Taskforce on Nature-related Financial Disclosures to improve insight of transition progress across their agricultural assets. Extended supply chains can make it difficult to secure granular, farm-level metrics, particularly through public equity holdings, but less so for private equity funds with direct holdings.
Moving up the agenda
Interest and investment in regenerative agriculture has increased in line with a growing awareness of soil degradation, water stress and other symptoms of over-exploitation of natural resources through food production, compounded by climate change.
Last year, the non-profit Sustainable Agriculture Initiative (SAI) Platform launched a global framework to increase standards and consistency in the adoption of regenerative agriculture. The framework is designed to be used practically at a farm-level to measure regenerative agriculture outcomes across arable, dairy and beef.
On the global stage, the UN Food and Agriculture Organization issued its first of a three-part roadmap at COP28 that outlines a strategy to eradicate chronic hunger by 2030 and transform agriculture and food systems into a net carbon sink by 2050.
In February, a white paper published by SLM Partners argued regenerative agriculture is an attractive investment opportunity, with the potential to deliver superior risk-adjusted financial returns to farmers and investors, should food companies embrace it as a solution to the climate transition.
The growing range of investment vehicles targeting regenerative agriculture include private equity firm Folium Capital’s Folium Fund III, which is investing US$500 million in regenerative forest and agriculture assets. In March 2021, asset manager Kempen launched the SDG Farmland Fund, designed to contribute to UN Sustainable Development Goals 2, 6, 12, 13, and 15 through investments promoting a shift towards more sustainable food production.
On 24 September, shareholders strongly supported a proposal filed by As You Sow which called on UK-based food company General Mills to disclose its progress in reducing pesticide use through regenerative agriculture practices.
Change along the value chain
According to the Pollination report, the three main barriers to the transition to regenerative agriculture practices are complexity, scale and cost. Only 4% of climate finance is currently directed to agrifood systems, despite the sector representing 33% of global emissions, it added.
The report laid out steps for companies across the agriculture supply chain to facilitate a rapid transition to regenerative agriculture across their operations, including specific on-farm interventions.
These include seeking deep insights from activities in the value chain and ensuring data access, aligning brand narrative with sustainability-related targets, and integrating regenerative agriculture into business strategies.
In 2019, US food giant General Mills committed to advancing regenerative agriculture on one million acres of farmland by 2030, in a bid to achieve its target of reducing emissions across its full value chain by 30% by the end of the decade. The company’s approach includes creating voluntary programmes to partner with farmers in key regions where it sources wheat, oats and dairy.
The food industry more widely has not been effective at attracting and mobilising transition finance, the Pollination report said.
Analysis of 79 global food producing and retailing companies collectively worth more than US$3 trillion found that nearly two-thirds mentioned agriculture initiatives in their disclosures – yet fewer than 10% had allocated capital to support transition finance needs and incentivise the uptake of more sustainable agriculture practices across their supply chains.
As such, there is a “pressing need for creativity and collaboration in identifying and assembling blended finance stacks”, the report said.
The paper builds on a foundational guide published by Pollination, The Rockefeller Foundation and Transformational Investing in Food Systems earlier this year, which focused on mobilising and scaling capital for regenerative agriculture.
“To decarbonise food and agriculture will take significantly more attention, more investment, more innovation, more hyper-local transformation than [other] sectors,” said Rudzinski.
“We must build and develop the financial tools, mechanisms, and structures that align the pace of finance with the pace of nature to enable farmers to transition successfully to regenerative agriculture.”
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