Laguna Bay: Establishing the right ESG framework

This article is sponsored by Laguna Bay. 

As a sector, agriculture plays a critical role in many aspects of wider society, but does it help or hinder the world’s climate crisis?

The importance of global agriculture to the world’s net-zero efforts cannot be overstated. This is because many agricultural enterprises have the ability to not only avoid emissions but actually be carbon positive – to actively remove carbon from the atmosphere.

Qualifying surplus carbon may then be sold into carbon markets, in many cases, increasing revenues and stabilizing the earnings profiles of agricultural assets.

What is perhaps less well understood by capital markets is that investment into well-managed agricultural assets offers exposure to some of the most compelling investment themes of our generation, including decarbonization, food security and inflation.

What are the key ingredients of a good sustainability framework?

A good investment sustainability framework needs to be meaningful to your specific business and situation. If it’s not specific and tailored, it may not have the desired or required impact. At Laguna Bay, we set up our framework to address ESG-related issues in the industries in which we operate and the communities we work in. We then align that with higher-level principles, such as the UN SDGs.

It’s important that sustainability becomes part of an organization’s culture. It should be led from the top in a hands-on manner, not from a corner office. This fosters buy-in from all staff and stakeholders, which ideally leads to shared excitement about the opportunities and value that addressing ESG issues can create. We live in a society founded on capitalist values, so driving ESG-related initiatives via earnings rather than purely as a cost center, is an effective way to give those initiatives momentum. The exciting thing about agriculture is that this is very often the case. Healthy soils and waterways, happy flora and fauna, and strong ecoystems generally make for higher returns in agriculture over the long term.

While it’s true that any framework must tackle high-level concepts and include measurable targets, it must also ultimately deliver practical policies and actions. Balancing the environmental and social parts of any ESG framework is crucial, particularly in food and agriculture. Meeting climate goals while feeding a growing population means recognizing the inherent conflict between these two fundamental requirements. We put a lot of energy and thought into how best to achieve this balance.

Given the average age of farmers is approaching 60 and a large proportion of farms are sub-scale, there is a social responsibility to support the younger generation through succession and for farms to achieve the scale required to be viable and self-sufficient. Debt alone cannot be the answer, innovative equity structures are required to facilitate this. We don’t believe that the majority of subsidy schemes are economically or socially responsible and that ultimately, trade will increasingly favor the most efficient operators rather than the most heavily subsidized.

What do you think are some of the core focus areas concerning sustainability for businesses, governments and investors to be aware of?

We believe that soil organic carbon can make a huge impact. Improved management practices directly increase above and below-ground biomass and so become a core consideration in sequestering carbon that may be classed as additional.

The scale of achievable gains in increased soil organic carbon could grossly outweigh the operational and input emissions on many farming operations. Almost a quarter of the world’s biomass is underground and grasslands disproportionately store carbon in the soil rather than above ground. Healthy and abundant crops and pastures not only produce more food for the world but more soil organic carbon too.

Reducing inputs is important, however, we believe that inputs should always be measured as a percentage of outputs. As inputs are needed to grow good biomass and thereby improve soil carbon, absolute input reduction is not strictly an improved outcome.

Vegetation restoration methodologies also offer scalable direct exposure to sequestration capacity and most often provide a range of ecosystem co-benefits.

The development of natural capital markets may be one of the strongest developments in agricultural sustainability and can greatly enhance the world’s ability to reduce emissions.

Continual improvement of animal welfare is another worthwhile policy for governments (and businesses) to pursue. Happy and healthy animals are more productive. Likewise with soil, water and air, the healthier and happier they are, the more productive they are too. And water consumption is another vital consideration. Water consumption is growing at twice the rate of population growth so conservation of water and clean waterways should be a major societal focus.

What concrete steps can you take to reduce carbon impact?

With regards to farm offsetting, it’s important to understand your entire carbon footprint. This means measuring your emissions, and also the carbon you are removing from the atmosphere and storing in your soils.

Australia emits about 1 percent of global emissions. However, it has about 8 percent of the world’s land available for sequestration. A large component of this is productivity. We use evolving technology and practices to increase our yield per acre, which reduces the carbon intensity per unit for everything we produce.

Additionally, we seek to integrate new solutions such as variable-rate technology to allow inputs like fertilizers, chemicals, and lime to be applied at different rates across a paddock, again maximizing the input conversion ratio. We’ve also planted trees, particularly around riparian corridors, to stabilize the ecology in those areas and improve each asset’s carbon profile.

What steps are you taking to handle effluent management?

Several years ago, we upgraded and redesigned all the effluent systems at our dairies to protect waterways and improve water use efficiency. We are also recycling the effluent through our pivot irrigation systems, creating a circular system.

How can fund managers help tackle habitat loss?

We suggest doing your research and working closely with local communities and farm managers – they will know the areas affected and have ideas on how to create the highest positive impact. There is no use locking up areas in the wrong spots, reducing productivity and failing to improve habitats.

If it makes sense, there are opportunities around converting non-arable areas into wildlife zones to enhance biodiversity, but this is contingent on understanding the habitat you are trying to improve and grow – again, through stakeholder engagement. Fund managers may also be effective in supporting and expediting the establishment of non-carbon natural capital markets, which will ultimately facilitate change on a wider scale.

Are there any initiatives that you have worked on that you are particularly proud of?

We’ve focused on understanding the industries and areas we operate in and selecting initiatives that will create the greatest positive impact. We have committed to taking action to reduce our carbon impact across all our investments and are verifying this through an independent carbon assessment.

Results suggest that some of our asset aggregations are not just net-zero but are now carbon positive. They are sequestering surplus carbon which may be sold to emitters. As these are whole-of-farm assessments and remain in their infancy, we do not want to overstate these achievements but they certainly represent some hugely exciting developments.

What are the key elements of safe work practice?

Every day we reinforce that working safely must be part of the day-to-day culture. The mindset is not one of a trade-off between production and safety – it’s recognizing that ‘safe production’ is the most efficient form of production. A safe work culture also needs to be driven from the top and has to work on implementing the right policies, procedures and training to ensure you have understanding and buy-in from all employees.

We invest in providing a safe environment, equipment, training and making sure everything is closely managed and monitored. This is part of taking our safety culture seriously. We set clear targets, including around leading indicators, and follow through with strong reporting.

In 2021, a dairy in our Tasmanian aggregation won the Dairy Australia Safety Award for Tasmania – an example of industry recognition for our achievements in safety.

How has the conversation around sustainable investing changed in recent years?

Our focus on sustainability as a firm has actually not changed all that much over the years. In nearly every case, investing in sustainability is just good farming. In 1995, we converted overhead sprinklers on viticulture to drip irrigation and installed sub-soil moisture monitoring systems and computer-controlled irrigation which halved our water use and lowered the water table, therefore, reducing salinity and producing more higher-quality, consistent fruit. This was not just a more sustainable improvement; it was good farming!

Today, there is undoubtedly a lot more focus on sustainability and the industry is developing more ways to explain and measure it. A greater number of sustainability commitments are being made all the time. We are really supportive of this as it brings all stakeholders along on the journey. It means that investors, consumers, suppliers and service providers all gain visibility into the positive impact investing in sustainability can deliver.

 

Although ESG goals are recognized globally, how important do you think being an Australian company is to your outlook?

Australia has many unique ecosystems and as a landowner, it’s a privilege to be a steward of our country’s natural environment. Australia is also a world leader in sustainability initiatives and produces high-quality, high-integrity, traceable food. In between the produce and the ecosystems is a resilient farming community that operates without the support of government subsidies, unlike many other countries. Farmers here must work smart to maintain low costs of production, deliver competitive products into international markets and derive profit. To keep producing in this manner year-in-year-out requires sustainable operating practices. In our view, protecting our natural resources and preventing depletion is vital to those sustainable practices and ultimately Australia’s market success.