Perspective: what investors can do to improve our soil

And why they should care

Investors need to care about the state of our soil globally. It's not a problem just taking place 'over there'. It impacts us directly, via the food we grow on the soils in our home region, and indirectly, through the food we import. It’s already impacting the supply chains of all companies in the food industry.

But it can feel like an almost intractable problem. The good news is that solutions are known, we just need to find ways of implementing them. Fortunately, finance-based innovation is something we are good at.

The market for food is a global one.

According to the UN Food and Agriculture Organisation (FAO) the monetary value of food exports globally reached US$1.4 trillion in 2020. Fruit and vegetables accounted for 20% of the total, followed by cereals and preparations (14%). Fish and meat each were 10–11%.

The bottom line is that ex the US, most regions of the world are reliant on food imports, and some are very reliant.

Climate change & biodiversity loss are already impacting agriculture

The impacts of climate change are increasing in frequency and intensity around the world, particularly life-threatening heatwaves, floods, storms, and droughts - leading to further and longer-term impacts such as food insecurity, entrenched poverty, and economic losses. Climate change has already reduced global agricultural productivity growth by 21% since 1961, and by up to 34% in Africa.

The experiences of the last year or so, the surge in food prices, and more recently ongoing shortages, have been a wake up call. Food security isn't about 'can we get the food we want cheaply?' It's more about 'where will our food reliably come from in five, ten and twenty years time?' The FAO estimates that one third of world soils are degraded and are losing health and fertility and, based on current trends, this could reach 90% by 2050. The situation with regard to water is no better.

These two facts, global food markets and increasing global soil degradation, taken together mean that companies need to build resilient supply chains that can cope with the food production volatility that is our new normal. This is as much a financial value creation issue as it is a sustainability one. Change is only a risk if we are not prepared for it.

In a recent Quick Insight, we looked at how Europe is exposed to the global soil degradation issue through the food it imports to eat, and the raw materials it buys to process and export.

If we accept that investors should care about soil degradation, because its a supply chain resiliency issue, the next obvious question is what can they do ? How can they act to make a difference and help the companies in which they are invested create long term financial value?

Our starting point is the understanding that the people we want to make the greatest change, the farmers, are the ones with most to lose and the least to gain. They are financially the weakest link in the food supply chain. If they try new farming practices, and they don't work, they could end up losing money. They have limited financial resilience, so a year or two of losses could push them into financial distress.

So, if the farmers cannot do it on their own, then who can help ?

The answer to that question is easy - it’s the food producing companies and the food retailers. This is not as extreme an idea as you might think. I used to be what is known as a 'food staples analyst', which meant that I got to know the financial investment cases for companies such as Nestle, Danone, Unilever and Tesco. They understood the need to build supply chains that were stable and sustainable. It’s not only in their best interest, it’s in their power.

But we should always remember what happened at Danone

Understanding both the opportunity and the risk, should help inform not just investing decisions, but also engagement. Because this is a challenge that needs informed and focused engagement. The good news is that the technology to fix this challenge is already well understood - our role is to assist in it's roll out at scale.

You can read more on this topic in a recent Perspective

Perspectives are our personal take on the solutions to some of sustainability finance's most pressing challenges - all based on close to thirty years experience in the finance industry.