Rethinking agriculture – the next frontier of climate friendly investment

Agriculture is one of the biggest contributors to climate change through deforestation, water consumption and methane emissions. How will the industry evolve to maintain growth while easing its environmental impact?

By Bertrand Gacon, Head of Impact Office, Lombard Odier
Monday 27 March 2017

There is perhaps some irony in the fact that Donald Trump’s anti-climate change stance has done more to raise general awareness of climate change than almost anything else. It is difficult to look at newspapers, browse your social media, or even watch a comedy sketch on the television without some reference to going green. You’d be forgiven for thinking that the biggest threat to our ability to address climate change comes from the White House, but, in fact, it comes from the millions of cows grazing our planet.

The threat to our economies and societies associated with carbon emissions has already brought about considerable changes in regulation and financial markets. The commitment by 223 countries in 2016 to adopt the Paris Agreement, which aims to limit global warming to less than 2°C, has been a landmark along the journey towards cutting greenhouse gases (GHG) and has caused a widespread rethink of how we use energy in particular. The impact is already felt in our everyday lives – through the growing use of smart meters for our utilities, or the cost of plastic bags at the supermarket, or bans on children playing outside during breaks because of air pollution levels.

The ripple effects have also been felt in investment portfolios. For instance, the threat of ‘stranded assets’ – such as the oil reserves currently included on company balance sheets that could become unviable as the Paris Agreement is ratified – has sparked a rethink of how fossil fuel extractors are valued. Some investors have gone as far as divesting completely from this highly carbon-intensive sector.

However, even if we never consumed another unit of fossil-fuel based energy anywhere in the world, we could still breach the emissions limits established in the Paris Agreement by 2030. And one of the worst offenders? The humble cow.

The livestock sector accounts for 18% of GHG emissions measured in CO2 equivalent, according to the UN’s Food and Agriculture Organisation (FAO). Other estimates are much less optimistic. A 2009 report from World Watch estimated that, when the life cycle and supply chain of livestock and its by-products are taken into account, they are responsible for 51% of annual worldwide GHG emissions. Deforestation, which has already seen 50% of the world’s forests lost, accounts for around 11% of human-caused emissions, making it comparable with combined total emissions from all the cars and trucks on the planet. The rate at which forests are being cleared continues to increase every year to make way for grazing land and crops to deal with rising food demand.

Animal agriculture is also highly demanding of other vital resources, such as water. According to some estimates, it takes 660 gallons (3000 litres) of water to make a single hamburger. Given the average person should drink around 2 litres of water a day, that burger is equivalent to 1500 days, or 4.1 years, of drinking water.

If, as predicted, the global population grows by another 32% by 2050 , the number of livestock and their associated GHG emissions, is likely to double. As those emissions become increasingly more regulated, and the natural resources required to increase food production – such as water and land – become more scarce, we clearly need to rethink our approach to food and agriculture as a global population.

Transitions on the scale needed to sufficiently cut emissions in agriculture throw up significant opportunities when it comes to private investment. The World Economic Forum estimate that limiting the global temperature increase to 2°C will require up to $700 billion of additional investment every year across the low-carbon economy. De-carbonising agribusiness will be a key part of that opportunity.

The best investments for adapting to, or mitigating the effects of, climate change are those that benefit from economic tailwinds. As we move towards this new order, an innovative set of winners will emerge, particularly where they are able to offer products or services that decrease climate-related risks and increase carbon efficiency, which can help drive down business operating costs and boost revenue. This, in turn, boosts investment returns and decreases the risks associated with creditworthiness, for example. This is as true for agriculture as it is for energy or any other industry.

Because of the economic benefits these new winners create, the impact of President Trump’s anti-climate change stance will be more limited. The global momentum is already gathering in the opposite direction.

Take climate bonds. They exhibit the historical return and credit-quality profile of conventional investment-grade bonds, but ring-fence money for investment in environmentally-friendly projects, such as promoting energy efficiency, renewable energy infrastructure, and sustainable and climate-resilient agriculture. Global green bond issuance reached $80 billion in 2016. China’s demand for green financing is particularly interesting given it is the most populated country on Earth and the largest emitter. Using green bonds as a way to finance improvements in irrigation, integrated pest control and non-polluting farming systems, for example, would promote food security in areas where extreme events and weather are already threatening crops as populations continues to grow.

However, investing in climate bonds requires in-depth and experienced management if it is to offer higher yields relative to their credit quality versus conventional investment grade bonds. To add more value, investment will need to focus on opportunities both within the labelled Green Bonds market, but also the non-labelled market. That places great emphasis on the credit quality of the issuer and verification of the environmental impact. Lombard Odier was one of the first institutions to offer investment solutions that fully integrate clients’ social and environmental values. We remain dedicated to creating impactful, responsible investment solutions, and we can integrate sustainable investment into any strategy. In 2017, we partnered with Affirmative Investment Management, a specialist fixed-income impact manager with market-leading expertise in climate bonds, to offer new high-impact products in this space that meet our exacting criteria. This, after all, is how to bring impact investing from a niche strategy into the mainstream.

If we are going to succeed in limiting global warming to 2°C or less, impact needs to make that transition into mainstream investment.

We need to fundamentally change our approach to the way many sectors of the economy operate to ensure their sustainability. Agriculture is a particular case in point and, given its highly-resource intensive nature, contribution to GHG emissions and the deforestation associated with growing food demand, it is likely to be the subject of significant regulatory and business reform in the coming years. That, in turn, provides a strong sectoral opportunity to private investors to rethink their approach to climate change (and maybe that steak).

1Livestock’s Long Shadow, Food and Agriculture organisation of the United Nations (FAO), 2006
2Livestock and Climate Change, World Watch, 2009
3Conservation International
4World Population Prospects The 2015 Revision, Department for Economic and Social Affairs, 2015
5China Green Bond Market 2016, The Climate Bond Initiative, January 2017

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