Dr Helena Wright, policy director at the FAIRR Initiative, says policy and practice are slow to align with climate risks in the agriculture sector.
Concerns over two major pieces of European legislation have put agriculture firmly on the menu for sustainability-focused asset owners and managers. The prospect of further policy shifts – increasingly driven by biodiversity as much as climate risks – is almost certain to keep it there, according to Dr Helena Wright, recently-appointed policy director at the FAIRR Initiative, an investor network focused on ESG risks and opportunities arising from intensive animal agriculture.
“A lot of investors are now engaging with companies directly, or through initiatives like FAIRR to reduce ESG risks in their portfolios. They’re also engaging with policy-makers about those risks as well,” says Wright.
Established by influential investor Jeremy Coller in 2015, the FAIRR Initiative now boosts 256 members with almost US$30 trillion in assets under management. Asset owner members include the Brunel Pension Partnership, CalSTRS, the Canadian Post Corporation Pension Plan, PGGM and the New York State Common Retirement Fund, while asset manager members include Capital Group, Fidelity International, Federated Hermes, PIMCO and T Rowe Price.
In March, FAIRR backed a call by a coalition of investors, policy experts and business groups for reforms to the European Union’s Common Agricultural Policy (CAP) to go further in their support of the goals of the Paris Climate Agreement. In particular, they urged a more comprehensive and speedier switch of subsidies away from emissions-intensive areas – primarily beef and dairy farming – to more sustainable land uses.
“The group is calling for the EU to reduce its support to high-emitting commodities and to support farmers in a just transition to more sustainable agriculture. Even though the EU has relatively high ambition on climate change, it hasn’t really looked at reforming its agricultural subsidies to align with the EU Green Deal,” says Wright.
According to Greenpeace, as much as 69-79% of CAP payments to farmers (€28.5–€32.6 billion) support livestock farming, directly or indirectly. Proposals to reform CAP subsidies for the 2021-27 period are seen as “a step in the right direction”, because they move away from a system of incentives based on yield and production targets.
But coalition members also call for firm national targets to ensure overall alignment with EU-wide transition toward a sustainable agriculture sector. Some countries, including Germany, are committing to high levels of spending of CAP subsidies on climate, biodiversity and sustainability-related farming activity.
Portugal, which currently holds the EU Council presidency, held a ‘super-trilogue’ on March 26 to reach consensus between governments, MEPs and the European Commission on three issues: rules governing national plans; financing and monitoring; and common market organisation of agricultural projects. The intention is to conclude a deal by May and full sign-off by end of year. Due to lack of agreement to date, currently temporary transitional rules apply.
In such a large and complex negotiation – the CAP accounts for approximately €350 billion of the next seven-year EU budget – there is a risk that trade-offs and compromises will water down green commitments. The Commission and MEPs are at odds with national governments over whether a revised system of payments be voluntary or mandatory. There is also disagreement on how much of the CAP’s direct payments should go toward green projects, with member states wanting less than the 30% seen as the minimum for funding mandatory eco-schemes specified by MEPs.
Although Europe has won praise for initiatives such as its Farm to Fork strategy, which has earmarked €10 billion for research and innovation to support transition to sustainable, healthy and inclusive food systems, fully coordinating policy is an arduous but critical task, says Wright.
“A lot of investors are committing to net zero, but they can’t get there on their own. The investors need the policymakers to also step up to enable the net-zero ambitions they’ve committed to,” she observes.
Taxed by the Taxonomy
As discussions over CAP reforms continue, elsewhere in Brussels, the EU Taxonomy Regulation is also subject to revision, with agriculture the focus of much attention.
According to a revised draft circulated in late March, all agricultural criteria have been removed from the Taxonomy. Previously, perennial crops, non-perennial crops and livestock were all included, with guidelines and thresholds to help investors identify sustainable practices. But under the Taxonomy’s ‘do no significant harm’ restrictions, certain activities cannot be included at any threshold. In theory, this means none of these activities can be invested in by funds or investment products marketed as having ESG characteristics under Level 2 of the Sustainable Finance Disclosure Regulation.
Wright is supportive of the view that livestock farming cannot be included in the taxonomy, due primarily to GHG emissions considerations. But animal welfare and use of antibiotics are also factors. Wright argues that it is appropriate for ESG-focused investors to be directed toward investment in sustainable agriculture.
“It’s quite encouraging that agriculture is not badged automatically as part of green finance, because there are issues in terms of the high missions of animal agriculture. It is important for the taxonomy to consider the significant emissions in the sector and incentivize a transition to more sustainable agriculture,” she Wright.
“There are some difficult issues for the Taxonomy to grapple with. As the latest draft does not include livestock, it’ll be interesting to see how and whether these topics are included later on.”
As Wright suggests, the process of finalizing the EU Taxonomy – which requires the settling of fierce disagreements over nuclear- and gas-powered electricity generation – is far from over. Originally scheduled to be published earlier this year, the final draft is due to be released on April 21, but will still be subject to revision by the EU Council and Parliament.
From symptom to cure
FAIRR’s recent white paper, ‘Aligning agricultural finance with the Paris Agreement’, highlights the current lack of coordination in the environmental policies in large jurisdictions, including subsidies, taxation and other areas of regulatory activity.
Almost 15% of anthropogenic greenhouse gas emissions derive from livestock supply chains, according to the Intergovernmental Panel on Climate Change. Further 70-80% of all agricultural land is used either for animal pasture or to grow crops for animal feed. Thus, unlike many other sectors, agriculture has the capacity to be transformed from symptom to cure.
The FAIRR report cites several studies pointing to the power of reforestation and similar changes to land use to mitigate climate risks, including one which found that a switch in global food production to plant-based diets by 2050 could allow sequestration of 332–547 gigatonnes of CO2 if the land was freed up to restore ecosystems. Thais is equivalent to 99–163% of the carbon budget and would offer a 66% chance of limiting climate change to 1.5 degrees centigrade.
Despite continuing misalignment, there is increasing evidence of change in agricultural policies in developed markets. Both the UK and US governments, for example, are investing in new approaches, building on recent political changes.
In the US, the new Biden administration is prioritising regenerative as well as other types of sustainable agriculture, in parallel with broader efforts to incentivise carbon capture through the proposed development of a carbon market. Regenerative agriculture essentially means restoring the health and resilience of the soil, typically through methods such as reduced tillage, more careful crop selection and reduced fertiliser use, with the aim of handling extreme weather more effectively, as well as increasing carbon capture.
The US Department of Agriculture has been asked to direct US$30 billion from its Commodity Credit Corporation, which will effectively serve as a ‘carbon bank’, to incentivise farmers to implement sustainable practices and capture carbon in their soil, as part of the new administration’s broader plan to become net zero by 2050.
Meanwhile, the UK is using its exit from the European Union to plough its own furrow, aiming to switch subsidies and policy away from animal agriculture more quickly than the EU-27.
Although the UK’s new policy is still being mapped out, it is likely that it could phase out subsidies to livestock farmers by 2028, replacing it with a system which reflects a wider range of common goods from land use.
FAIRR’s Wright also points to other examples of innovation, such as New Zealand becoming the first country to including agriculture in its emissions trading scheme.
“This could be an example of good practice, in terms of leading the the way into integrating the cost of agriculture and climate change,” she says. “But it’s quite it’s quite an emerging area so we need to see more results and more innovation.”
Counting the cost
Alongside climate risks, there is a growing appreciation of the investment risks of biodiversity loss and potentially irreversible damage to ecosystems, particularly since the release of the Dasgupta review. Rising concerns are taking a number of forms, from the increasing efforts of investors and companies to quantify risks and costs, to growing pressures on politicians to provide protection through legislative measures.
“The Task Force on Climate-related Financial Disclosures is a new and emerging area for many investors. For climate change we already have quite a lot of understanding of the types of data and metrics to use. But for biodiversity the lack of data and disclosure is much more difficult. That’s going to be an important priority in the run up to the Kunming biodiversity conference because a lot of investors are really getting involved with this now, trying to understand the risks at play,” says Wright.
With biodiversity risks become more apparent and quantifiable, many firms in the food and agriculture sector are still failing to meet regulators’ and investors’ expectations with regard to the managing and disclosing climate risks in their supply chains.
FAIRR analysis shows that 86% of meat and dairy firms are failing to declare or set meaningful reduction targets on GHG emissions. Last November, FAIRR published new data from its Coller FAIRR Protein Producer Index, which analyses the ESG performance of 60 publicly-listed animal protein producers, showing that several firms supplying household names like McDonalds and Nestle were not declaring emissions and had no public plans to reduce them.
Wright says firms involved in the food sector, and animal agriculture in particular, are less advanced in developing a pathway to net zero. “Our research suggests the food sector is probably behind the energy sector in terms of its disclosure on climate change. But we are seeing better disclosure over time,” she says.
But Wright is positive overall on the impact of investor engagement on the behaviour of firms in the food and agriculture supply chain, noting the success of FAIRR’s campaign to reduce use of antibiotics in response to concerns about microbial resistance.
Ongoing dialogue with investors can take some of the credit. But Wright argues that the pandemic has also given pause for thought. Although it is the original source of Covid-19 is not proven beyond doubt, its widespread impact has made many more aware of the risks of human encroachment into nature.
“There is a lot of vulnerability and risk in the food system. Our Protein Producer Index last year also showed that 73% of animal agriculture firms are at high risk of fostering future pandemics caused by zoonotic diseases such as Covid-19,” she says.
“The Covid-19 health crisis has shown there is a high level of risk in the global food system, antibiotics being one of the major risks. It is not the cause of the current crisis, but it could be the cause of future crises.”