In April 2010, Secretary-General of the UN Conference on Trade and Development (UNCTAD) Supachai Panitchpakdi said: “There is an urgent need to invest more in agriculture both to ensure food security and as the basis for long-term economic development.”
In addition, the FAO Principles for Responsible Agricultural Investment (RAI), which are currently under consultation, state that investments are crucial in managing many social and economic challenges that we face: “Investing in agriculture and food systems is one of the most effective strategies for reducing poverty, hunger and malnutrition and promoting sustainability.”
According to the UN World Urbanization Prospects, 2011 Revision report, by 2030, the world’s farmland will need to support a population of more than eight billion people—an increase that will require a 25% boost in agricultural productivity. Further, increases in demand for agricultural products, fuelled by changing eating habits and growing use of agricultural products such as biofuel, need to be considered alongside competition for arable land and clean water supplies. On the other hand, agricultural productivity is close to its limit of expansion. There is finite stock of suitable productive land and arable land per person is declining (see Chart: World population and arable land 1960 – 2020). Much of the arable land available is already being used while a significant amount is lost every year due to issues such as deforestation, poor agricultural practices, human expansion, declining water tables and climate change.
To address these challenges there is a need to use land more efficiently. Investments from large institutional investors like pension funds can help to finance agricultural projects and boost liquidity in these markets. For pension funds, access to these markets can provide investors with exposure to new and growing economies as well as an opportunity to diversify their portfolio. However, farmland investments are particularly sensitive to environmental, social and governance (ESG) issues and it is important that these investments are made in a responsible manner.
Endogenous environmental issues such as soil quality, biodiversity loss and water availability can affect the profitability of an investment. Additionally, social issues, especially those associated with land grabbing such as land ownership rights or human rights of workers, can impact the security of tenure and stability of productivity which in turn may impact profitability and the reputation of investors. Such issues require specific expertise to recognise and manage. Land and resource rights are especially important in countries with weak legal frameworks. In these situations, investments have to be made prudently and with consideration of international standards of best practice in order to respect existing land and resource rights and to avoid any negative impacts on the local communities and the environment. When investing in farmland, pension funds need meticulous due diligence processes which go above and beyond traditional compliance tick boxes.
The United Nations-supported Principles for Responsible Investment (PRI) Initiative is an international network of investors working together to understand the implications of sustainability for investors. The Initiative supports signatories to incorporate ESG issues into their investment decision making and ownership practices. Signatories recognise that paying more attention to these issues in their investments can affect both the long term performance of their portfolios and align their activities with the broader objectives of society. Since its inception 7 years ago, the initiative has grown rapidly and currently embraces more than 1250 signatories managing over US$35 trillion.
In 2011, as a specific response to ESG issues associated with farmland investments, a group of PRI Signatories came together to set up ‘The Farmland Principles’. The PRI fully supports this initiative and encourages its signatories to implement them in a wholly transparent way (see box below for more detail on the Farmland Principles). Since the Principles were developed, investors such as TIAA-CREF, UFF and RaboFarm, have detailed reports of their activities publicly available on their website.
|The Principles for Responsible Investment in Farmland “As long-term investors we believe that the interests of our beneficiaries and clients will be best served by farmland operations that respect the environment, adhere to responsible labour practices and maintain positive stakeholder relations. Where feasible we will invest in technology and infrastructure to improve productivity and enhance environmental performance. These investments may contribute to local development and relieve pressure for farmland expansion.” The five Principles are:1. Promoting environmental sustainability2. Respecting labour and human rights|
3. Respecting existing land and resource rights
4. Upholding high business and ethical standards
5. Reporting on activities and progress towards implementing the Principles and promoting the Principles
Source: The Farmland Principles
Current signatories include: AAG Investment Management (Australia), ABP (Netherlands), Adveq Management (Switzerland), AP1 (Sweden), AP2 (Sweden), APG (Netherlands), Aquila Capital Green (Germany), Insight (UK), PFZW (Netherlands), PGGM (Netherlands), Rabo Farm (Netherlands), Southern Pastures Management (New Zealand), TIAA-CREF (US), Treetops Capital (US), UFF Asset Management (South Africa), Valiance Advisors (UK)
Visit the PRI website for more detail.
The challenge of the coming years is to produce enough affordable food to meet the needs of the growing global population, while preserving and enhancing the natural resource base so as not to compromise the quality of life of future generations. Our signatories recognise this challenge. Recently, we have seen many different initiatives emerging, aiming to provide guidance on sustainable business activities and responsible investment in the agricultural sector. The FAO Principles for Responsible Agricultural Investment and the UN Global Compact Agriculture Business Principles are two examples. The PRI Initiative and its signatories are working to ensure activities are aligned and complimentary while providing practical guidance to investors on how to invest in farmland around the world in a way that delivers good returns for pension beneficiaries and stimulates socio-economic development.