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Investing in sustainability

Tuesday, March 3, 2015

Most of my career was spent as an economist with USDA’s Natural Resources Conservation Service (NRCS). One of the things I dreamed of was harnessing the power of markets to drive conservation on agricultural lands, especially cropland. We had hoped that environmental markets would create revenue opportunities for farmers. However, environmental markets are heavily dependent on government regulations and have been slow to develop. Many water quality markets, upon closer examination, are actually variations on traditional “cost-share” incentives.

In addition to the development of environmental markets, I became interested in linking banking and conservation after a visit to Brazil’s soybean production region. In the early 1990s, I met with representatives from the rural banking industry to explore the idea of small reductions in loan rates for farmers who adopt conservation practices that help manage production risks and ensure long-term profitability. Unfortunately, the banking industry wasn’t ready to integrate sustainability into loan rates. Last October I learned about a company that developed a unique market-based approach that may have merit.

David Chen is a finance expert with Northwestern University and Stanford University and co-founder and CEO of Equilibrium Capital. The company was founded to offer “sustainability-driven asset management for institutional investors,” with deliverables that include “intentional positive impact on our community and environment.”

Among the forces considered in the company’s investment strategy are the expected 2.4 billion increase in world population by 2050; expanding consumption in developing nations; increasing financial and environmental risks associated with pollution and climate change; and changes in policy and regulation to manage natural resource concerns.

Institutional investors have long time-horizons, so there is a natural demand for investment opportunities that have low risk, offer protection from inflation, yield solid returns, and serve the public welfare.

Currently, Equilibrium Capital offers agricultural investments in farms that produce permanent crops, with opportunities for vertical integration and improved sustainability. It also invests in wastewater treatment projects associated with agricultural production, and in grass-fed cattle (500,000 head) and sheep (1,000,000 head) production in Australia that is focused on sound environmental, animal welfare and human resources management. The company also invests in “large scale, environmentally sustainable properties and synergistic assets in food, energy and water that restore the land.”

A related on-going institutional change is encouraging the adoption of corporate sustainability goals. Twenty-one states have enacted laws that create benefit corporations, for-profit entities that consider social and environment goals in addition to profit in their decision-making process. This is an important change because under standard corporate laws, shareholders can force a change in corporate leadership and investment strategy if the corporation pursues environmental goals at the expense of maximizing returns to investors. As the number of benefit corporations increases, the number of investment opportunities that target sustainability should increase.

Using investment funds to drive conservation, and the emergence of benefit corporation laws are market-based strategies that I did not anticipate in my years with NRCS. Both approaches may remain a small niche investment strategy. Or, perhaps we really have reached a tipping point where investors finance agricultural enterprises that not only seek to maximize returns and minimize risk over the long-term, but also support sustainable production.


Doug Lawrence Doug Lawrence (doug.lawrence@blackwoodsgroup.com)
President, Blackwoods Group LLC
http://blackwoodsgroup.com
View more posts by Doug Lawrence

1 comment on “Investing in sustainability”

  1. Tim Gieseke
    Posted Friday, January 30, 2015 at 8:19:37 AM

    Thanks Doug - any specific on the investment models/accounting methods?

The views and opinions expressed in AgChllenge2050 blog posts are solely the opinions of the authors, and not those of Farm Foundation, NFP.