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Profits that Don’t Cost the Earth

Generating returns from regenerative agriculture is positive for the planet but entails a different risk profile for investors, says Paul McMahon, Managing Partner at SLM Partners.

Climate change impacts are “stressing agriculture, forestry, fisheries, and aquaculture, increasingly hindering efforts to meet human needs”. In parallel, “Biodiversity loss and degradation, damages to and transformation of ecosystems are already key risks for every region due to past global warming and will continue to escalate with every increment of global warming.”

These warnings, highlighting the interaction between climate and nature risks, were published in the second part of the Intergovernmental Panel on Climate Change’s (IPCC) sixth assessment report in February. The report, titled ‘Impacts, Adaptation and Vulnerability’, also says current efforts to adapt agricultural – specifically livestock practices – are insufficient to meet UN Sustainable Development Goal (SDG) 2: zero hunger.

Given that achieving food security is critical to human survival, there will need to be a concerted effort to invest in what the IPCC calls: “Feasible and effective options [including] cultivar improvements, community-based adaptation, agricultural diversification, climate services, adaptive eco-management in fisheries and aquaculture.”

Developed world focus

SLM Partners, a sustainable asset manager investing in ecological farming and forestry systems, is attempting to drive capital towards projects that deliver long-term returns while providing positive environmental impacts.

Paul McMahon, Managing Partner at SLM Partners, says: “We use investment capital to scale up more regenerative farming and forestry systems. We try and create a positive impact on soil health and biodiversity, and carbon capture and climate change as well.

“We also look to generate good financial return for investors typically investing in real assets like land and trees, and in the production of a sustainable food and other commodities.”

Founded in 2009 and with US$200m in assets under management, SLM concentrates solely on the developed world and has operations across Europe, the USA and Australia.

McMahon says: “We’ve got three different strategies covering Australia where we invest in pasture raised beef cattle. In the US, we have a strategy working with local farmers to scale up organic farming. We acquire land and enter to long-term leases to help farmers convert that land to organic certified production. In Ireland, we have a forestry fund, and we’ve just launched a new broader European fund strategy investing in a range of tree crops.”

McMahon says the decision to concentrate on the developed world rather than emerging economies – which are responsible for two-thirds of global greenhouse gas emissions – is based on a need to get richer countries’ “own house in order”.

“It’s not all about what happens in developing countries; we need to get our own house in order to achieve the best possible outcomes for the environment and for society in these geographies as well. There are plenty of opportunities in developed geographies to improve land management and to make a positive impact.”

McMahon also notes that SLM Partners does not wish to take ownership of land in developing countries which could create a host of new socioeconomic inequalities that are neither welcome nor helpful.

“We’re investing deeply in real assets and in land itself. In many developing countries that’s not possible nor, for me, is the right thing to do. We’re only really operating geographies where we think we can have a positive impact economically and socially and as well as environmentally.”

Achieving scale

In March 2022, SLM Partners completed its most recent acquisition – a 300-hectare property in Murcia, Spain that will grow organic almonds, pistachios and olives – which forms part of the new closed-end SLM Silva Europe Fund.

The fund acquires or leases land in the EU and “introduces ecological and organic management practices, and forges relationships with local operators who specialise in ecological management practices and wish to expand”.

McMahon says the overarching objective is to develop a “climate positive” portfolio of assets that will deliver on net zero targets, while having measurable impacts on biodiversity and soil health. The target fund size is €250 million.

That target, McMahon says, creates opportunities for more asset owners to allocate to the notoriously competitive sustainable forestry and agriculture sector.

“We started quite early when there wasn’t a lot of money flowing to natural capital and real assets, but I think that it is getting more traction now. We definitely see the ability to grow what we are doing,” he says.

However, McMahon is realistic about the amount of investment institutions will allocate to real assets, and within that, how much will make it to sustainable agriculture specifically.

“An investor’s real assets book typically includes infrastructure, real estate, energy, but we are now seeing more investment in carbon allocations to natural assets, such as agriculture and timberland. That may only be 1 or 2% of a total portfolio, but given the size of some institutions, that can still be quite a large investment in terms of dollar size.”

He also admits that the agriculture and forestry sector lack the scalability available to other real assets such as renewable energy where investors can commit billions of dollars to global projects. For example, in 2020 there was €80 billion of financing activity in the wind energy sector in Europe, including €43 billion for the construction of new wind farms.

“That level doesn’t tend to work for agriculture, partially because you’re dealing with a more fragmented asset bases. You work with small farmers and forests creating partnerships in very localised markets. You can’t just flip a switch and say, we’re going to put 100 billion or a trillion dollars into the sector quickly. It has to grow and evolve at the right pace.”

Food crisis

McMahon says asset managers attempting to attract investors to sustainable agriculture and forestry still struggle to prove a demonstrable long-term track record.

“As an asset class, agriculture and timberland has not got a huge track record; it’s only picked up in the last 20 years. For agriculture it is over the last 10 years that you’ve seen the emergence of professionally managed funds. As that becomes more established, we will see more growth in investment.”

And where returns are demonstrable, McMahon concedes that these are typically single digit, but he argues the dual objectives of making an impact alongside delivering performance give sustainable investment some added appeal.

He adds: “We must be realistic. [The funds] offer a mid to high single digit internal rate of return. It’s not double digit, but it’s also much different risk profile.”

McMahon argues that there is significant price transparency from the land projects in which SLM invests, and he argues that as food prices increase – driven by climate change and Russia’s invasion of Ukraine – there is significant income opportunity.

The latest ONS figures show UK food prices increased 6.2% in February, marking the highest rate since December 2017, mainly driven by preserved meat and meat products for domestic market. The World Bank has forecast a 37% jump in food prices, with President David Malpas warning this week that the world is facing a “human catastrophe”.

When it comes to progressive policies that enable more investment in sustainable agriculture and forestry, McMahon says corporate commitment to net zero, particularly through carbon capture, is creating notable momentum.

He says: “Corporate commitments and ambitions on climate change are almost outstripping many governments. When it comes to agricultural and forestry carbon management, it’s private sector actors driving change by buying carbon credits.”

He points to Microsoft which in January 2021 committed to purchasing 1.3 million carbon offsets credits, of which 1.1 million were linked to forestry projects while a further 193,000 came from soil carbon sequestration projects.

McMahon also welcomes legislation such as the EU’s Sustainable Finance Disclosure Regulation (SFDR), but notes SLM Partners funds’ green accreditation aims to go far deeper than the ones required in the regulations.

“What we’re doing is quite specific. If we’re investing in a forest in Ireland converting from clear-felling to a more sustainable form of management known as continuous cover forestry, we need to capture the very detailed impact that has on biodiversity.”

Sustainable agriculture and forestry are yet to achieve the scale and track record of other ESG sectors, but as investors seek new opportunities in markets able to demonstrate positive impact, SLM Partners and investors like them may yet be the future.

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