PSP Investments on accelerating positive change in agriculture

Incorporating ESG into investment decisions creates value while accelerating change, says PSP Investments’ Marc Drouin.

This article is sponsored by PSP Investments

Since PSP Investments first took an interest in a collection of forests in Canada in 2012, the Canadian pension system has built an impressive global network of agricultural and timber assets.

Marc Drouin, senior managing director, real assets and global head of natural resources investments at PSP Investments, shared some insights into the pension manager’s long-term investment horizon, its model of partnering with local operators in natural resources and why ESG should be a critical component of any responsible fund’s investment strategy.

Could you tell us about PSP Investments’ natural resources business model?

Marc Drouin

Firstly, as a pension investment manager, we naturally take a long-term approach to investing.

Unlike some other investors in the natural resources space, we are not focused on quarterly or even annual return objectives. Our investment horizons are decades long. This is particularly critical in agriculture and timberland, as you need to be able to look past volatility caused by near-term market or weather cycles.

You need to make investment decisions knowing that you’ll have to deal with periods of drought, floods, and everything in between during the lifetime of the investment.

This is one of the many reasons why sustainability plays such a significant role in our investment approach. Acting as responsible stewards of the land and environment and contributing positively to the communities they’re in also drives our social license to operate.

Secondly, while the team has certainly built considerable expertise in agriculture and timber over the years, we are investors, not operators. We rely on our highly skilled and experienced partners and management teams on the ground, which is why we almost always enter new markets alongside top-tier local operating partners who share our values, our investment horizon and our commitment to employee health and safety and community well-being. Often, we find ourselves working with farming families who have cared for their land for generations and who share our vision of being responsible stewards of the natural resources we own and operate.

We are also very clear on what we can bring to these partnerships – capital, scale, stability, global reach, as well as financial and governance acumen. Our multiple platforms help accelerate the identification and adoption of best practices, including in sustainability.

What are the most important factors when choosing a partner?

The first consideration is identifying investment-friendly jurisdictions that provide opportunities for scale; we currently are focused on and have investments in Australia, Canada, Europe, New Zealand, South America and the US. Then we analyze the macro-sectoral trends, such as long-term supply and demand fundamentals, including impact of climate change, to identify target crops within a particular geography.

As mentioned, it is important for us to partner with best-in-class, like-minded, local operators. We want local operating partners who care about the land and water they manage, and the communities they operate in, and who have a shared commitment to ESG, including employee health and safety and sustainable farming.

Consistent with our investment horizon, we are committed for the long term when we invest somewhere. By investing across decades, we can create and nurture personal, strong and trust-based relationships with our partners, as is the case for instance with the Hewitts in livestock, the Moraccis in greenhouse-grown vegetables, the Robinsons in cotton, and the Simonettas in fresh produce. We believe this ability makes PSP Investments a particularly attractive partner, especially when there is competition for capital.

What is your strategy when working with partners?

Unlike the timber sector, where institutional participation is well established, the agricultural sector remains highly fragmented and dominated by small operators. PSP Investments plays a role in helping to bring scale, resources and expertise to the agricultural sector to achieve sustainability while improving yields and returns for both our fund and our partners.

By bringing together multiple small farms or operations into larger aggregations and entities, you can reduce costs through more efficient purchasing, you can make better use of equipment and personnel, and you have greater clout with suppliers and customers. Importantly, you can share expertise and experiences, identifying and deploying the best and most innovative farming practices.

Also, by investing in the same crops across different geographies to the same sustainability and quality standards, you have the ability to offer security and consistency of supply 52 weeks a year, and therefore to be more strategic to key customers who value security and consistency of supply, as well as the dedication to sustainability. For many of our partners, achieving that type of scale would have been difficult without our help.

What role does ESG play in your strategy?

For PSP Investments – and indeed for all investors in natural resources – ESG must be a critical factor in investment decisions. As our president and CEO Deborah Orida puts it succinctly: “Given our long-term horizon, sustainability factors are inextricably linked to our ability to achieve our investment objectives.” In the natural resources sector, as a long-term investor in agriculture and timber, we are highly committed to the continuous improvement of our sustainable farming practices around the world.

ESG is embedded in our model. It informs how we select the geographies in which we invest, the types of partners we work with, and the relationships we seek to develop with local communities. Our ESG priorities encompass health and safety, climate change and emission reduction commitments, community investments, and a commitment to sustainable farming based on sound reporting and active ownership of the businesses in which we invest. For natural resources, that means working with our partners and operating platforms to consider their environmental and social impacts.

An example of this approach is our Mahi Pono farming operation on Maui where we’re redeveloping an old sugar cane plantation into a diversified agricultural hub. A core tenet of the investment strategy has been to maintain and enhance our social license to operate through responsible, long-term stewardship of these assets. This encompasses health and safety, community engagement, economic development and opportunities, sustainable farming practices and water management.

How do net-zero goals impact this further?

Last year, PSP Investments launched a climate strategy centered around using our capital and influence to facilitate the transition to net zero. At the portfolio level, our natural resources team is involved in two significant endeavors that will help us meet our goals.

Last year, we announced a partnership with WSP, an engineering and climate consultancy group, to conduct a detailed climate review of our global natural resources portfolio. The analysis, which is being conducted alongside our local operating partners, covers more than three million hectares of farmland and timberland on more than 400 individual properties across six countries. In parallel, we have also been involved in spearheading initiatives at the asset level, including some significant carbon sequestration projects, primarily within our forestry investments.

The first objective of this analysis is to establish a portfolio-wide baseline of our natural resources’ greenhouse gas emissions (Scope 1 and 2) using farm-level data. This information will support the development and implementation of a decarbonization roadmap to reduce greenhouse gas emissions and establish science-based transition plans for operating platforms. The second objective will be to determine the sequestration capabilities of our properties’ different carbon pools, such as biomass carbon and soil organic carbon.

The WSP analysis will integrate into PSP Investments’ participation in Leading Harvest’s sustainability standard, which standardizes sustainability verification and reporting across the industry, resolving inefficiencies faced by farmers, producers and customers in providing sustainability assurances that the market demands. The standard addresses 13 sustainability principles and helps set farm-by-farm targets for continuous improvement and progress tracking. Furthermore, given the nature of the assets in which we invest, we recognize the critical importance of the communities in which they are embedded. Through concrete actions, we are striving to be an active contributor to the development and well-being of these communities.

At its heart, sustainable farming practices – from better management of the land and water to careful care of the communities around – help create shared value by enhancing returns while accelerating positive change at the same time. That’s the power of integrating ESG in our investment decisions.

How important is the Asia-Pacific region to investment?

PSP Investments’ Asia-Pacific exposure is focused on investments in Australia and New Zealand. Our first natural resources foray outside of Canada was an investment in forestry assets in New Zealand in 2012, and the investment remains among our single largest. In 2014, we made our first investment in Australian agriculture and, since then, we have continued to grow our agriculture footprint in the country through new acquisitions and the expansion of existing platforms. Australia and New Zealand currently represent about half of our natural resources’ assets under management.

These two countries are important for several reasons.

Firstly, they benefit from: i) being easy places to do business; ii) farms with exceptional scale; iii) robust and vibrant farming communities; iv) advantageous logistics to growing Southeast Asian markets; and v) multiple climates enabling the production of a large variety of crops with varying seasonalities.

Secondly, since Australia is known for its sophistication in agriculture, particularly in relation to its stewardship of the land and sustainable farming practices (no till, controlled traffic, water use efficiency, development of drought-resistant livestock etc), there are opportunities to share best practices with our other partners around the world.

Thirdly, we see significant opportunities to move beyond the farm gate further up the value chain, bringing our global expertise to support the development of new markets and products. That is why, for instance, we increased our investment in Perfection Fresh Australia’s food business in the past year and supported the company’s push into Southeast Asian markets.