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Agriculture is the new frontier of green investment
If we are going to succeed in limiting global warming to 2 degrees celsius or less, environmental impact needs to make the transition into mainstream investment.
5 May 2017 | Bertrand Gacon
Bertrand Gacon is head of impact office at Lombard Odier
Bertrand Gacon is head of impact office at Lombard Odier

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 any positive concerted effort.

It is difficult to look at newspapers, browse social media, or watch TV without some reference to going green. You’d be forgiven for thinking that the greatest threat to the earth’s climate comes from the White House, but, in fact, it comes from the millions of cows grazing our planet.

The commitment by 223 countries in 2016 to adopt the Paris Agreement – which aims to limit global warming to less than 2 degrees celsius – has been a landmark along the journey towards cutting greenhouse gases (GHG). The impact is already felt in our everyday lives – from the growing use of utility smart meters, to the cost of plastic bags at the supermarket, to 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, we would 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 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 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 scarcer, 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 estimates that limiting the global temperature increase to 2 degree celsius will require up to US$700 billion of additional investment every year across the low-carbon economy. De-carbonizing 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. 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 US$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.

If we are going to succeed in limiting global warming to 2 degrees celsius 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…).

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