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How is agriculture impacted by ESG investing?

Highlights

Agriculture is implicated in multiple aspects of environmental, social, and governance (ESG) investing.

Industrial agriculture can affect the environment, with particular risks from deforestation and the use of pesticides. Yet the agricultural sector can also have a positive environmental impact, such as the creation of alternative fuels — when plant products are used in biofuels, gasoline, or diesel that is mixed with oils from certain agricultural products as a way to reduce the total consumption of fossil fuels.

Considering agriculture’s impact in social risks and opportunities of ESG, trade tensions can often strain agriculture sectors, alongside unpredictability and shifting prices causing potential damage to the industry.

The global agriculture industry is implicated in a variety of risks and opportunities related to ESG investing, primarily within the environmental factors of ESG.

Analysis by Trucost, part of S&P Global Market Intelligence, shows that industrialized farming practices cause $3 trillion per year in environmental impact worldwide. Notably, the effect of corn production on the environment is equal to 170% of its production value — highlighting how the cost to the environment is greater than the price of the corn itself.

Agriculture can in some ways be environmentally beneficial. Using biofuels--when plant products are used in biofuel, gasoline, or diesel and mixed with oils from certain agricultural products--helps reduce the total consumption of fossil fuels. New biofuels, specifically those with a greater proportion of plant oils, have been suggested as a cost-effective way to raise the octane rating of gasoline sold in the U.S. Higher octane ratings could improve fuel efficiency (and potentially performance), but the effort is expensive using gasoline alone. Some industry observers have expressed concerns that certain biofuels might not actually provide significant environmental benefits when the effects of growing the crops are factored into the equation. S&P Global Platts analysis shows that palm oil, for example, is commonly used in biodiesel, yet its growth has often been linked to deforestation in Southeast Asia.

Trade tensions and the volatility that accompanies them yield uncertainty for farmers and the rest of the agriculture industry, in which decisions are made months or years in advance. In the ongoing trade dispute between the U.S. and China, the Chinese government has been able to dictate the amount of soybeans imported from the U.S., even beyond the use of tariffs. Given the American soybean industry’s reliance upon Chinese markets, this has led to lower prices and a growing stockpile of unsold soybean stock. As such, the uncertainty associated with trade tensions and recently adopted import rules or procedures can have a chilling effect on agricultural trade.

Technological innovations in the fourth industrial revolution might turn agriculture into a more transparent industry, which could increase trust and accountability in the sector. One example of this transition has been the use of alternative financial technologies in agribusiness. Blockchain software was developed for anonymous cryptocurrencies, but additional potential lies in its ability to maintain an unalterable distributed ledger of transactions. An agricultural purchase was made using blockchain for the first time in 2016. Continued use of blockchain within agriculture could decrease transaction fees, reduce processing times for payment, and eliminate additional risks in transactions. S&P Global Platts reported in November 2019 how this is already improving the “data integrity” of agriculture shipping and trading in the world market.

The environmental and social factors of ESG and agriculture can often be intertwined. S&P Global Platts’ analysis of the challenges faced by sugar beet farmers in the U.K. during Brexit is one example. New rules implemented during the Brexit uncertainty prohibited the use of neonicotinoid pesticides, which are cheaper to use than other pesticides but pose a danger to bee populations. But far beyond farms, the negotiations over Brexit threaten profit margins as well. The lack of a clear plan for Brexit has made it difficult for farmers across the U.K. and Europe to know whether they will face tariffs, and if so, how much of a burden these potential tariffs might put on their businesses.

Those seeking environmental and social sustainability within agriculture, and engaging in ESG investing overall, are motivated by more than moral concerns. Ten major corporations and nonprofits with agricultural interests, including McDonald’s, Cargill, General Mills, and the Nature Conservancy, joined together in 2019 to create new initiatives to promote environmentally friendly agriculture and soil health. A private equity fund designed to invest in technologies around sustainable agriculture raised more than $300 million a few months later. Overall, many companies appear to have come to the conclusion that they will need to adopt new and less damaging agricultural practices for future success.

 

 

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