By Debbie Carlson
The original green sector – agriculture — hasn’t been on the radar for environmental, social and governance investors, given industrial agriculture’s heavy dependence on pesticides, fertilizers and genetically modified seeds.
But ESG investors are turning their interest to agriculture as a way to fight climate change. In November, the US SIF, an organization that follows sustainable investing, said sustainable agriculture was an important investing issue for money managers, the first time this issue cracked the top five specific criteria. Of the $17 trillion invested in ESG issues, money managers said they devoted $2.38 trillion to sustainable agriculture while institutional investors devoted $2.18 trillion to the theme.
It’s a harder investment for individual investors; there are no targeted mutual funds or exchange-traded funds for sustainable agriculture and just a handful of stocks to choose from.
Investing in sustainable agriculture is still in early stages, not unlike where the renewable energy sector was in 2007 as far as ESG investor interest, says Erin Fitzgerald, CEO of USFRA, a national network of farmer and rancher-led organizations that’s working to expand ESG investment in sustainable agricultural technologies. USFRA recently released a report about how ESG investors can think about public or private investments in agriculture to mitigate climate change by improving soils.
That could mean a money-making opportunity for investors, especially if the valuation premiums usually given to ESG companies aren’t priced in. But given that it took renewable energy years to become profitable, there could be stumbles. Plus, some ag companies may be improving their environmental record but also have other aspects that ESG investors find distasteful, such as researching genetically modified organisms or poor worker policies.
Promising ag technologies
U.S. agriculture contributed 9.9% of total U.S. greenhouse gases in 2018, according to the Environmental Protection Agency. But scientists say that could shrink, and agriculture could even become a carbon sink — more than offsetting its carbon emissions — with new technology and some changes to production, such as more widespread use of cover crops and compost, reduced tillage and more precise fertilizer management. That excites some ESG proponents. One idea Biden administration is eyeing is creating a carbon bank that would pay those who return carbon to the soil.
Levi Stewart Zurbrugg, a portfolio manager at Saturna Capital, a sustainable asset manager that has agriculture investments, says one reason sustainable agriculture hasn’t see a lot of ESG investing is its complexity.
Sustainable agriculture doesn’t necessarily equal small, organic farming, says Zurbrugg, who has written a report on ways to cut carbon and increase food production . “It’s really a host of different and sometimes even competing practices.”
Notions that farmers are uninterested in sustainability may be hampering outside investors. Farm lender Federal Agricultural Mortgage Corp. /zigman2/quotes/208060867/composite AGM -8.42% , known as Farmer Mac, says one in 15 farms generated some form of renewable energy in 2017, such as through wind turbines on their land.
“There’s a large myth that farmers are industrially oriented and do not care about the land. I would say that, in practice, the inverse is true. The No. 1 asset that farmers have is their soil,” says Carter Malloy, founder of AcreTrader, a farmland-investing platform for accredited investors.
One promising technology to increase crop yields without using GMOs comes from Danish firm Novozymes /zigman2/quotes/210424003/delayed DK:NZYM.B +1.13% /zigman2/quotes/200067804/delayed NVZMF -1.07% , a spinoff of Novo Nordisk, Zurbrugg says. It uses enzymes as a seed treatment so plants can intake nutrients more efficiently.
When it comes to animal agriculture, cutting enteric fermentation – cow, sheep and goat farts and burps – would be a big win since they contribute significantly to agricultural production emissions, Zurbrugg says. Those farts are a byproduct of ruminant animals not properly digesting their food. Dutch firm Royal DSM /zigman2/quotes/205433811/delayed NL:DSM -1.42% is creating a feed additive to reduce ruminant methane emissions.
Cindy Bohlen, research analyst at Riverwater Partners, an ESG investing firm, says the firm recently started investing in Farmer Mac. Some of Farmer Mac’s loans allow farmers to build on-farm renewable energy systems, and it is extending broadband internet services to rural areas.
Farmers — particularly smaller farmers — need high-speed internet to more efficiently analyze their farm data and become more competitive. But now, extensive digital farm-management systems that allow farmers to get extensive data are limited and often only available from companies such as Bayer AG /zigman2/quotes/206842998/delayed XE:BAYN +0.41% /zigman2/quotes/203424967/delayed BAYRY +0.86% and Corteva Agriscience /zigman2/quotes/212512039/composite CTVA +0.93% , a spinoff of DowDupont /zigman2/quotes/203606582/composite DD +1.78% . (Both companies also do GMO research, a potential disqualifier for some ESG investors.)