May 31, 2022

By Ben Palen, Ag Management Partners

My recent article about sustainability (Global Ag Investing News, March 17, 2022) addressed several aspects of this complex topic, with one of the focal points being that industry efforts regarding this fundamental part of the agricultural investment space were mostly focused on qualitative measures, self-reporting, and on efficiency of resource use rather than sustainable use. That approach has flaws.   Strictly speaking, it is undeniable that using a finite resource to create a product, without replacing such resource, is not sustainable. This is far more than a matter of academic debate. With global “sustainable” fund assets close to $3 trillion as of the first quarter of 2022 (Morningstar fund reports), this topic of sustainability was bound to catch the attention of financial industry regulators.  Indeed, that is now the case in the U.S. and Europe. The prior article suggested that agricultural interests needed to take the lead on addressing this issue, otherwise, many challenges would ensue as the ag investment world continues to expand at its various levels (grain production, agtech, plant-based protein, non-food uses for crops, organic and regenerative techniques, and so forth).   New capital coming into this space may have a frame of reference with respect to sustainability (based on prior non-ag investments) that is vastly different than in the ag space, and that can lead to misunderstandings, or worse.  

None of the following discussion is aimed at suggesting that because of its reliance on finite resources in some measure or another, agriculture can never truly be “sustainable,” and, therefore, all of us should move back into caves. However, the industry cannot abrogate its responsibility to address this topic in a meaningful way before a top-down regulatory framework is put into place. Making claims about sustainability without data to back them up is nothing more than a recipe for legal entanglements.   Some have suggested that a standardized approach would make sense. Perhaps there is an analogy for that idea with generally accepted financial accounting principles, or in the ways that petroleum reserves are accounted for in the oil and gas industry. On the other hand, some have argued that because agriculture is so diverse, a “standard” that works for an almond grower in California might have no relevance for a Kansas wheat farmer.  To the contrary, that begs the question—how can sustainability mean different things to different people, all of whom are active in the same economic sector?

Another viewpoint is that a 20 percent reduction in water or fertilizer use is not a measure of sustainability, but rather one of efficiency. In other words, such reduction, in and of itself, does not truly address the fundamental issue.

Perhaps the issue ought to be framed in terms of clarity. That is, in some respects, a recognition that using a finite resource to produce something else (without replacing such resource) is not sustainable.  One non-ag example is petroleum-based production of gasoline and diesel. Few would argue that there is increasing global pressure to shift away from petroleum-based fuels and industries. Hence, oil companies report their reserves “in the ground” as a way of giving clarity to investors.  Investors then make decisions based in part on such data.

Suppose an almond grower in California disclosed that the water resources pertinent to its properties had an expected useful life of X years. That is a recognition that a finite resource is being used. That same grower might also state that, based on historical use, certain measures have been put into place to reduce the annual water usage by X percent, thus extending the life of the water resource. Those measures would likely include use of soil moisture sensors from companies such as Aqua Spy, or Tule, so that third parties had some comfort level that the resource use and needs were being measured based on data generated from the soil and the plants.  In other words, data provides clarity with reference to the longevity of the key resource required for the production of the crop. The grower is not just showing that water is being saved, but is providing a point of reference—in this case, available water resources—to show that responsible practices are being used.  

Another example relates to the sustainability of a specific investment strategy, such as producing certain crops in a particular region. In order to provide clarity for investors and other third parties, this approach would use data to take into account the impacts of climate change on the risk/reward picture of that strategy.  Some companies, such as Praedictus Climate Solutions, do modeling based on historical climate data over a period of decades, thus enabling one to quantify the climate risk factor, which is another way of determining the sustainability of a particular investment. Will the impacts of climate change lead to a scenario where the resources used to attain a unit of production do not square with sustainable use of such resources?  In that example, data provides the foundation for an investment decision. There is clarity.

A further example is quantifying the benefits, environmental and otherwise, from, perhaps, a peptide-based crop input, such as that produced by Vestaron (the subject of a recent article in GAI News).  Data clearly demonstrates that the product leaves no harmful residuals, and that it is safe for beneficials, pollinators, fish, and mammals.   The product is financially sustainable because of its efficacy and its cost competitiveness with other products, and is sustainable from the perspective of the ingredients used to make it, along with the benefits noted just above. Again, there is clarity.  

The upshot of these three agricultural examples, and the one from the oil industry, is that they are quantitatively based. Without intending to parse words, they are also a tacit recognition that, yes, sustainability can mean different things to different people.  An investor can then decide whether the product or practice in a particular instance has a material impact on its ESG goals. As my prior article points out, a great deal of the focus on sustainability is on qualitative measures and/or on efficiency of use. At their core, those measures do not speak to the basic issue. They leave open the potential for claims of greenwashing, and they are likely to lead to increased regulatory scrutiny.  

At its essence, our suggested approach uses data to provide clarity to the specific factual situation. Accompanying this data-driven approach would be some standard of materiality. In other words, is there sufficient disclosure of pertinent facts about the resources involved in the production of crops, or upstream products, so that an investor (and regulators) would feel that the situation is described in an accurate way?

It is very hard, if not impossible, to think of a one size fits all approach. That said, there are most certainly some common sense standards for disclosure of data points that go to the heart of the sustainability statements so prevalent these days throughout the ag investment space. As stated earlier, it is of great importance to the ag industry that all sectors are proactive on these topics. A smoke and mirrors approach in light of our use of finite resources will ultimately come back to bite the industry.  For an industry that has been on a roll in terms of investor interest over the past ten years, that scenario will create uncertainty and hesitation, among some capital allocators.   

 This is a topic that is ripe for further thought, and discussion. Given the renewed spotlight on the notion of sustainability, all segments of the ag world must step up to the plate and find ways to quantify the meaning of sustainability.  Just saying that one is sustainable will not be sufficient, nor will claims of reduced use of certain inputs in the absence of quantifiable references to the underlying resources that are being used to grow crops.  The industry needs to walk the walk.  And we need to keep in mind the inherent “tension” between a claim of sustainability, and our reliance on many finite resources to do what we do.

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ABOUT THE AUTHOR:

Ben Palen is a fifth generation farmer with experience in many aspects of agriculture, including projects in the United States, Africa, and the Middle East.  The focus on all projects is sustainable practices based on a mix of boots on the ground work and selected use of agtech tools.

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