The signing of the Global Alliance for Climate-Smart Agriculture and other climate-related initiatives are exciting developments but expose a swathe of scepticism in the investment community.
At an agri and timber investment conference I attended on Tuesday, some 150 delegates were quick to pick up on the momentum of the UN Climate Summit, which last week produced some potentially ground-breaking announcements about the world’s approach to climate change.
Most relevant to the agri community was the signing of the Global Alliance for Climate-Smart Agriculture by 46 nations and institutions – a promise to adjust agricultural practices globally to avoid their detrimental impact on the environment.
Jumping on the theme, fund managers speaking at the Global Agro Invest Forum in London were quick to extol the virtues of their 100 percent sustainable projects and display their environmental credentials. Impact funds pitched their ability to combat climate-related problems and the World Bank’s Marc Sadler told scary anecdotes about the agriculture industry’s 70 percent contribution to greenhouse gas emissions by 2030.
The mission to save the planet for generations to come is impossible to ignore and there are plenty of asset management strategies promoting innovative ways to mitigate the risks and lessen agri’s detrimental effect on the climate. But what the agri asset management world must also remember is that several investors out there are still sceptical.
“I have some reservations about all this stuff,” said John Moore-Stanley, chief investment officer of Wimmer Family Office. “I think there is a danger of producing companies that are good at complying and appearing to conform but are not necessarily good companies.”
An investment professional from a US insurance company wondered how an asset management firm would have measured its 100 percent sustainability and questioned the costs involved in implementing environmentally friendly investment strategies. “You only have a few percentage points to play with in agri,” he told me. “There is already a lot of risk and potential movement around predicted returns. And what if you build all these climate-aware principles into your portfolio and then realise a few years down the line that the science wasn’t quite right.”
In the wake of increasing policies and regulation at the national level worldwide – and the UN Summit announcements are not the only initiatives; Brazil’s environmental law is gathering pace and impacts all dealmakers in the agri sector, Flávia Marcílio Barbosa, a Brazilian lawyer, told delegates – investors need to be comfortable with the idea of climate-aware agricultural strategies. They are here to stay, and so they should be.
But many investors need more education and encouragement. Moore-Stanley complained about the costs to entry, the insurance investor questioned the real meaning of frequently-used terminology such as sustainability and even Sadler recognised that there are plenty of bad examples for sceptics to draw on.
So agri asset managers must now show investors some good examples, what it means to be 100 percent sustainable and how they measure it. And what actual returns they can yield under these policies. There is no doubt that much of the agri fund management industry is dedicated to climate-aware and sustainable investment policies, but at the end of the day investors need to produce returns if they are to get paid.
As Milton Friedman said: “One of the great mistakes is to judge policies and programs by their intentions rather than their results.”