Though large agricultural processors generally avoid making significant investment into reducing greenhouse gas emissions, there are examples where private equity ownership has made that type of investment more likely, according to a Bain & Company partner.
Speaking soon after publication of a Bain report describing how agribusinesses can curb emissions, Fernando Martins told Agri Investor it was designed to encourage companies to divert energy currently devoted to creating growth in developed countries towards efficiency and climate action to prepare them opportunities in the developing world.
“Ag processing in the mature economies is a nearly-zero-growth business, looking ahead,” said Martins. “These companies are still looking to try and grow because trying to grow is human nature and economic nature. Growing in a growthless market has been taking a lot of management attention.”
Martins – whose work as a leader in Bain’s Natural Resources practice focuses on agribusiness – said whereas he spent virtually no time with existing or prospective clients on climate change as recently as five years ago, such issues currently occupy about 40 percent of his time.
However, work on behalf of agricultural operators that have hired Bain to help develop sustainability strategies has demonstrated how difficult it can be for them to prioritize climate change-focused initiatives, Martins said. Agribusinesses face pressure on a wide variety of sustainability and health issues, he explained, as investment to address emissions must overcome obstacles including internal incentive structures focused on growth rather than savings, and the fact their customers will not necessarily remunerate them for that investment.
Bain also advises investment funds on how to integrate sustainability into their strategies and supply chains, according to Martins. Though there is some danger that the life-cycle of private equity can make it more difficult to overcome barriers to investment in reducing agribusiness emissions, Martins said he had seen at least one example where the transfer of ownership to a private equity fund had actually accelerated that operators’ ability to implement an energy efficiency program.
“Oftentimes, the value-creation plan of a private equity owner has a lot of detailed performance improvements where they aim optimize labor, optimize inputs, optimize energy and find better feedstock,” said Martins. “And, of course, then they feel good that they did it and once they do it the first time, the chances they are going to pay more attention to this the next time are higher.”
There are many examples, Martins said, of private equity investments where the introduction of a sustainability strategy has been seen as a valuable part of brand-building. Over the long term, Martins said, a growing number of fund managers will likely implement systems that standardize implementation of sustainability programs within their portfolio companies.
Alongside managers’ own efforts, Martins said, the sovereign wealth and pension fund LPs within their vehicles are also under increasing internal pressure from their young employees to address sustainability.
“Those people are going to retire 30 years from today, maybe 40,” Martins said. “On such a long timeframe, sustainability will be related to preservation of value. I’m not going to invest in beef, because the chance there is going to a carbon tax on beef – and that people are going to eat less beef because they are realizing its bad for their heart – in a 40 year timeframe is almost a certainty.”
While there is not yet a consensus among investors as to the likely future price of carbon emissions, Martins said there is a growing acceptance that some mechanism for putting a price on carbon is coming to most advanced geographies, including either federal or state regulation in the United States.
In response, he said, Bain has advised its clients to embed a “shadow” potential carbon cost into each investment decision.
“If at some point we have to scratch the word ‘shadow’ because it’s no longer shadow, you will have known what you were getting into before you got into it,” explained Martins. “It could take another ten years. We could have a sudden swing in the population and then it could happen a lot faster.”