The revolution in farming over recent decades has enabled food production to more than keep pace with the rapidly rising human population. Intensification, mechanization, improved crop varieties and the wider use of fertilizers, pesticides and herbicides have all played a part in the stunning rise in yields.
According to the US Department of Agriculture (USDA), output from US farms almost tripled between 1948 and 2017, even though the amount of land and labor devoted to agriculture both declined. The Netherlands, a leader in many agricultural innovations, managed a tenfold increase in production value over a similar timeframe.
Highly productive agricultural systems certainly helped feed billions of extra mouths as the world’s population more than quadrupled over the past century. But at what cost?
In recent years, there has been a growing realization that many aspects of industrial farming are, quite literally, unsustainable. In a 2021 Chatham House report, agriculture was identified as a threat to 24,000 species (representing 86 percent of all species at risk of extinction). The global food system is also a major driver of climate change, accounting for around one-third of all human-produced emissions, while around one-third of soils globally are classed as moderately or highly degraded.
Farms need healthy soils, water and pollinators, along with many other ‘ecosystem services,’ if they are to continue producing food. Recognition of this reality has given rise to the movement for ‘regenerative’ agriculture.
The concept is intended to be broader and more flexible than, for example, organic standards for farming. “At its heart, it’s about regenerating the damage that’s been done historically by what you might call extractive or degenerative agriculture,” says Carl Atkin-House, senior investment manager at Climate Asset Management, a joint venture between HSBC Asset Management and specialist climate change advisory firm Pollination.
Examples of regenerative practices include: applying chemical inputs more selectively, or eliminating them altogether; using cover crops to protect soils; minimizing soil disruption; and diversifying crop rotations. The ultimate goal is not just to mitigate damage, but to actively improve the health of ecosystems.
“It’s not good enough to just sustain soil carbon and soil organic matter at current levels,” Atkin-House warns. “We’ve actually got to reverse some of that historic decline.”
The logic of taking better care of soils and wider ecosystems so they can sustain food production in the long term is almost impossible to dispute.
Asset managers also believe that institutional investors are ready to make large-scale allocations to regenerative strategies, as shown by the recent launch of several ambitious regenerative agriculture funds. Together with AXA and Unilever, Tikehau Capital launched a €1 billion fund to focus on regenerative farming in 2022.
“Regenerative agriculture is not a niche,” says Laurent-David Charbit, co-head of Tikehau’s private equity strategy on regenerative agriculture. “The market and broader environment has sufficient scale and momentum to facilitate this transformation at scale and at speed.”
But can a strategy focused on long-term regeneration really generate financial returns over a relatively short-term horizon, particularly if measures like reducing chemical inputs might have at least a temporary negative effect on yields?
Charbit points out that most of the world’s leading fast-moving consumer goods (FMCG) and agricultural commodity trading companies have made commitments on regenerative agriculture. They would not have done so, he says, if they expected yields to fall significantly, or prices to materially increase.
In some circumstances, however, he does acknowledge that the yields of certain crops could fall temporarily when regenerative practices are implemented and there will be a transition period while yields are recouped.
Ben Stafford, CEO of Regenerate Asset Management, which launched a Europe-focused regenerative agriculture fund in May 2023, agrees that patience is needed in the sector. “Many private equity investors only invest in agriculture if they can shoot the lights up in years one, two and three and then sell in year four,” he tells us. “We’re looking at it through a somewhat more patient lens in order to really prove some of the regenerative interventions.”
Stafford adds that investors increasingly understand the benefits of regenerative approaches and are supportive of long-term thinking. “When we started out in 2019, we saw providing an education on the benefits of regenerative agriculture as a very big uphill path. Now, going into 2024, we’re seeing a lot more investors are educated and understand the merits of regenerative agriculture. We don’t have to spend hours describing the benefits of regenerative agriculture.”
Threat of greenwashing?
One of the obvious challenges for regenerative agriculture is that there is no clear definition of the term. “I certainly think that’s a problem,” admits Stafford, although he adds that, “actually, the definition is so simple, if you really think about it. You’re either regenerating the soils or you’re extracting. You’re either mining or you’re putting something back on a net basis.”
“One of the problems is that lack of standardization makes it less appealing as an investable asset”
Transformational Investing in Food Systems
Even if the basic premise of regenerative agriculture might be intuitively understood, the lack of an accepted definition or standardized way of measuring performance clearly leaves the door open for greenwashing.
“Probably my biggest concern about the whole regenerative agriculture movement is it could get tainted by greenwashing,” echoes Atkin-House. “There only needs to be one or two scandals where somebody says [a project is] regenerative and then you go and look and it’s not, and that could undo the standing the word has and all the great work that those of us who are really committed to it are doing.”
Rex Raimond, director of the non-profit Transformational Investing in Food Systems initiative, adds that while outright greenwashing is at the extreme end of the spectrum, the absence of a clear definition could make regenerative strategies less attractive for investors.
“One of the problems is that lack of standardization makes it less appealing as an investable asset. Because it’s not clear what really is regenerative and what isn’t, it doesn’t allow for standardization in the financial products that are created.”
Key players in the regenerative agriculture movement are responding to these concerns. In September 2023, the Sustainable Agriculture Initiative Platform, which represents dozens of major food system actors, launched its ‘Regenerating Together’ program. This aims to define regenerative agriculture and provide a framework for assessing and verifying regenerative practices.
While the program has been endorsed by a series of large-scale FMCG companies, it remains to be seen whether it will succeed in bringing greater clarity and transparency to the regenerative space.
Despite growing pains, there is little doubt that regenerative agriculture benefits from fundamental tailwinds.
“Long term, weaning ourselves off at least a proportion of artificial inputs and making the natural system more resilient has to be the right thing,” says Atkin-House. “That underpins, obviously, long-term value in the land.
“We hope that in 10-15 years’ time the vast majority of farmers are farming regeneratively. Logic would suggest once it becomes the norm, it then becomes the baseline.”
Tikehau’s Charbit also emphasizes the importance of regenerative practices in adding to the value of agricultural land. “Farmers are also often asset owners,” he says, noting that no farmer wants to be in the position where their land becomes sterile and loses its value.
Meanwhile, regulators are increasingly supportive of regenerative farming and, in many cases, are tying subsidies or incentives to practices that enhance ecosystem services. The EU’s ‘Farm to Fork Strategy,’ first unveiled in 2020, sets a range of targets for making the continent’s food system more sustainable (although some of the measures intended to implement this vision have since ran into legislative difficulties).
On the other side of the Atlantic, the USDA is investing $3.1 billion in its Partnerships for Climate-Smart Commodities scheme. This is designed to incentivize practices such as the use of cover crops, no-till techniques and better management of nutrients.
Charbit is among those who are optimistic that regenerative agriculture can play a key role in combating the climate and nature crises. “We are at the beginning of a new era with regenerative practices,” he says, noting that many different interest groups are coming together in support of regenerative farming. “All the stars are aligning to push in the right direction.”
Carbon credits – A bonus revenue stream?
It’s not just the environment and biodiversity that stand to benefit from regenerative agriculture.
Managers of regenerative agriculture funds are, of course, focused on raising land values and improving long-term productivity.
However, the tantalizing prospect of an additional revenue stream lingers at the margins of the regenerative agriculture movement.
Carbon credits (or the even more nascent market for biodiversity credits) could be “very significant” to the growth of regenerative agriculture, says Rex Raimond from the Transformational Investing in Food Systems initiative. He notes that there are multiple projects in sub-Saharan Africa where smallholder farmers are incentivized to help restore degraded lands with agro-forestry systems. The farmers can earn some revenue through carbon credits, while also selling fruit yielded by the trees that they planted.
Raimond says that agro-forestry schemes may be particularly well-placed to earn revenues from the carbon markets, compared to projects that are designed to maximize soil carbon. “We’re further along in being able to measure the carbon sequestered in trees planted than in soils,” he explains, adding that is still “quite challenging” to measure soil carbon in a way that can result in payments for carbon sequestration.
Given that the voluntary carbon market is still a recent phenomenon, few large-scale managers are likely to put carbon revenues at the heart of a regenerative agriculture strategy. But Tikehau’s Laurent-David Charbit says that carbon credits could bring additional benefits. Carbon revenues could in some cases help to “compensate” farmers in cases where regenerative practices bring lower yields during transitional periods.