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Why private capital is a good match for regenerative ag

A USDA-backed report has provided clear direction for private fund managers interested in tapping growing institutional demand for regenerative agricultural investment strategies.

Axios reported last week that the US Federal Reserve had circulated invitations to a November conference that will examine the economic implications of the climate crisis. In addition to improvements in climate measurements and forecasting, the invitations mention innovative financing measures to help organisations adapt to and mitigate the effects of global warming as areas of particular interest.

That news was quickly followed by the announcement of an agreement between four multinational automakers and the state of California to continue increasing fuel-efficiency standards through 2026, despite federal plans to freeze standards at 2020 levels.

Amid the ongoing political crisis in the US – and divisions among the country’s politicians over how, and even whether, to cooperate with governments across the world on tackling the climate crisis – both developments demonstrate how necessity is driving a search for new avenues of collaboration between the public and private sectors.

Agriculture, of course, has long been at the center of such forward-looking efforts.

In fact, if and when the federal government’s network of investors, bankers and climate specialists begins to examine what role agricultural investments can play, it will likely find that many of the most potent ideas will have already been examined in Soil Wealth: Investing in Regenerative Agriculture Across Asset Classes, a USDA-supported report released earlier this month.

The report provides a snapshot of the state of play within one of the most dynamic and competitive corners of the agricultural investment markets: the $321 billion currently managed under the broader “sustainable” label and the $47.5 billion with a “regenerative” approach. It also analyzes 67 potential approaches for bringing catalytic capital into regenerative agriculture.

Though it finds that only one approach – state and federal income tax credits for conservation – is sufficiently established to reach scale, it helpfully categorizes the dozens of others by their relative states of readiness. In short, it presents a starting menu for any interested institution with an eye on the long term.

One of the report’s authors, Delta Institute regenerative food systems lead David LeZaks, told Agri Investor that private sector input played a key role in the three-year research effort.

Last year, LeZaks addressed an NCREIF working group about the influence of regenerative practices on land values. He told us that he was surprised to see that the biggest reaction among managers present was to guidance on how they could present such agricultural approaches to their investors as part of an impact strategy: “To me, that was a sign of – maybe not just that group, but maybe other asset owners are ready to be engaged in those conversations – whereas two, three, four or five years ago, we were just in a different time and at a different maturity.”

Contrary to popular perceptions of “sustainability” encouraging as little change to the natural environment as possible, LeZaks said the report’s focus on “regenerative” strategies highlighted the fact that positive changes to the environment – such as cover cropping and diversification – can also provide opportunities for the private sector to benefit and create related investment strategies.

“In any flow of capital, nature bats last,” he said. “If we try and go against these natural systems, in the short term, we might win, but in the long term, we probably won’t.”

The need to engage with complicated government regulation and support mechanisms has long been among the factors that keep many generalist investors away from agriculture.

As academics, the federal government and investors look to a future shaped by the climate crisis, a key question will be how they expect the roles of government and the private sector to evolve in response.

The agreement between California and the car companies demonstrates how some forward-looking firms are already peering through the fog that has effectively suspended policy-making in the US to a future in which public-private collaborations continue to evolve and deepen.

Though not all of the 67 approaches to financing regenerative agriculture profiled in Soil Wealth involve interacting with state or local government, many do. This suggests that managers who are willing to invest in developing new skills and mechanisms for public-sector collaboration at various scales will be presented with ample opportunity not just to produce returns for their investors, but also to help shepherd the systemic change the Soil Wealth report seeks to advance.