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Report: Top AgriFund Investors Like BofA and Goldman are Exposed to Natural Capital Risks

(Top 20 institutional investors in 37 AgriFunds. Credit: Planet Tracker)

There is a distinct lack of disclosure of ecological risks by big-name equity funds investing in the food and agriculture sector (AgriFunds) – including institutions such as Bank of America, Goldman Sachs, Morgan Stanley, UBS, State Street, Royal Bank of Canada, and Credit Suisse. This, despite the increasingly material impact that ecological risks are having on the performance of food- and agriculture-listed equity investments. This is according to a recent report by financial think tank Planet Tracker.

Growing natural capital risks (that is, risks to the world’s stocks of natural resources) are increasingly causing local economic disruption, which can lead to significant economic risks, including budget shortfalls, revenue losses, and potential credit downgrades, and expose major investors in the food and agriculture sector to material risk. Yet in a review of a sample of 37 AgriFunds with an aggregated market value of $21 billion at the end of 2019, Planet Tracker discovered that only 8% reference one or more of the natural capital risks that have a direct material impact on food and agriculture production, such as climate change, land degradation, and biodiversity loss. What’s more, only a single fund communicates a commitment to one or more sustainability initiatives and industry guidelines for sustainable investing in the sector in its 2018/19 annual report and related securities’ filings.

This, says Planet Tracker, leaves the top 20 AgriFund investors — who account for approximately 30% of the total assets under management invested by the 37 AgriFunds — materially exposed to natural capital-related financial risks that are not being sufficiently disclosed, thus representing both a transparency risk and reporting failure.

Furthermore, Planet Tracker found that not only have the 37 AgriFunds tended on aggregate to underperform the S&P Global 1200, but also that the more closely exposed they are to upstream food and agriculture production companies, the greater the underperformance. In fact, from 2010 to 2019, the 37 AgriFunds have on aggregate underperformed the S&P Global 1200 by 17%.

The report calls for Agrifund managers, analysts and investors to measure, manage and monitor the natural capital risks of Agrifunds by aligning their management with industry guidelines for sustainable investing in the sector in order to mitigate environmental supply side production risks.

The report calls for public reporting and the adoption on the following recommendations by 2022:

  • Commit to, and report publicly on, natural capital risk mitigation efforts for each portfolio, and align the portfolio with the transition to a sustainable food system.
  • Disclose and fully support a clear set of sector relevant investor principles aimed at eliminating unsustainable practices from fund portfolios. Such principles include the PRI Investment in Agriculture and Food Systems and PRI Responsible investment in Farmland, the FAO Principles for Responsible Investment in Agriculture and Food Systems, and the OECD-FAO Guidance for Responsible Agricultural Supply Chains.
  • Measure, manage and monitor natural capital risk exposure for investments and on an aggregated portfolio basis within pre-defined time-bound natural capital risks that can impact an investment’s earnings. Using industry tools including TRASE, Global Forest Watch–Pro, Forest 500 and SCRIPT to assess deforestation risk at a portfolio level can support this process.
  • Align investments with food and agriculture systems sustainability, including advances in farming technologies, regenerative agriculture, alternative meat proteins, supply chain efficiencies and evolving consumer demand.
  • State publicly that portfolio managers are actively seeking out and screening for opportunities to invest in sustainable food and agriculture systems. Food and agriculture sector companies are embracing these business opportunities by aligning reduction in impact with product branding.
  • Update investment processes or existing funds, or launch new investment funds, targeting sustainability opportunities in the food and agriculture sectors aligned with the EU Farm to Fork and EU Biodiversity strategies, the UN Sustainable Development Goals (SDG), EU Action Plan on Deforestation, and Imported Deforestation and EU Sustainable Finance Taxonomy.
  • Benchmark their investments against indices aligned with the transition to a sustainable food system.

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