Pressures from investors, expectations from customers and the need to reduce operational risk are pushing food and beverage companies to find more sustainable ways of operating. For agricultural value chains dependent on smallholder farmers, there is good reason to believe that the low-carbon agricultural solutions may not be high-tech.

Harvesting the Commercial Benefits of Low-Carbon Agriculture

“There’s an incredible amount of innovation” said Al Gore responding to my question about sustainable agriculture at a recent Climate Reality Training. While Al Gore is most well-known for his climate advocacy, he is also co-founder of $19bn sustainable investment fund Generation Investment Management alongside former Goldman Sachs Asset Management head David Blood.

Gore is not the only person involved in finance talking up the commercial opportunities of delivering low-carbon agriculture. Tidjane Thiam, CEO of Credit Suisse said in a report by McKinsey's Center for Business and Environment that "The continuing disappearance of Earth’s last healthy ecosystems is sadly no longer news. What is news is that saving these ecosystems is not only affordable, but profitable… [an] emerging private sector investment opportunity of major proportion." And the $1 trillion fund Natixis Global Asset Management has created a responsible investing subsidiary Mirova, which recently became the investment partner for the UN-convened Land Degradation Neutrality Fund, an impact investment fund in support of sustainable land management and land restoration projects.

Momentum seems to be building and there are undoubted commercial incentives driving sustainable agriculture. Mirova’s recent acquisition, Althelia Funds, says “[agricultural] production techniques that emphasise environmental and social sustainability and provide security of supply and [protect a buyer's] licence to operate are becoming more entrenched.” The resilience of security of supply to climate change is something that the Task Force for Climate-related Financial Disclosures (TCFD) explicitly encourages investors to take into account when evaluating their portfolios (1).

In addition, the TCFD recommends that investors look at how a $30 carbon price would affect businesses (2). Mars, for example, estimates that 75% of its full value chain’s carbon emissions are from agriculture and land use change emissions. So reducing the carbon footprint of the agricultural supply chain helps companies look more favourable to institutional investors. 

But it is not just the investment community pushing food and beverage companies into more sustainable agriculture. They are feeling pressures to fight off challenger brands with a strong sustainability story. Danone’s Global Nature & Climate Senior Director Eric Soubeiran talked about food companies seeing the environmental footprint of their products as a crucial part of their proposition to customers going forward. Reflecting on how important it is that consumers trust companies to responsibly source or produce their goods at the recent Grow To Zero conference, he said “We need to build this trust … If we don't, we don't have a business in 30 years’ time.” 

And finally, in an era where data is increasingly valuable, establishing data collection practices among smallholder farmers can open the door to farmers and to companies to access further (non-carbon-related) commercial benefits of collecting other data points. For example, it could lead to better insurance profiling and – through remote sensing – better knowledge of what inputs have what impact not just on yields but also soil health to help improve performance. 

So, if the commercial drivers – of increasing security of supply, of becoming a less risky investment for institutional money, of improving value proposition to customers, and of initiating data collection practices – are there, how can companies make sustainable agriculture happen in reality? 

Let’s focus on smallholder farming rather than medium- and large-scale/industrial farming. Smallholders (farms that manage less than five hectares) make up roughly 30% of the agricultural land but produce more than half of the food calories produced globally (3). They are spread across 380 million farms, most of which – because most are counted among the world’s extreme poor (4) – have very little access to capital to invest in new methods. This makes it very difficult to implement new technologies. Companies with new products struggle to build a commercially-viable customer acquisition strategy, given the market is so fragmented and requires a big sales investment to make a significant volume of customers, given each farm won’t have a lot of money to buy it, and given that many are in countries with high political and financial risk, all adds up to means that it is difficult to make an investment case in the first place.

We have worked with project developers in Sub-Saharan Africa to use small-scale, local enterprises to reduce the carbon emissions of smallholder farms and simultaneosly provide opportunities to improve livelihoods. One business sells efficient cookstoves to farmers with the help of microfinance products. The cookstoves reduce the amount of fuel wood households need in order to cook, therefore reducing local deforestation and freeing up time. Another business works with farmers to encourage conservation agriculture and the planting of native trees on their land, with the farmers receiving payments for surviving trees. These solutions have each been developed for at least a decade through close work with communities on the ground so that the solutions work for smallholders and their specific cultural, lifestyle and local environmental needs.

The project benefits the smallholders by increasing their land’s resilience against extreme weather events and, through the provision of training, they improve crop productivity and diversify their income through produce from fruit and nut trees and beekeeping. This means the solutions have local support and the project is therefore able to expand in the area through existing  networks such as cooperatives and through word of mouth.

All of this in turn benefits the businesses buying from the farmers; tea in this case. They are reducing the risks to their businesses from decreased production capacity as a result of climate change impacts and extreme weather events – which smallholders are disproportionately impacted by (5). Plus, they build a status as a favoured buyer from their smallholder suppliers. And that’s all on top of the carbon emissions reductions which help to rebuild trust with customers as articulated by Danone. This approach is often referred to as “insetting” reflecting the fact, like with “offsetting”, an emissions reduction does not take place within the company’s four walls, but it does take place in the supply chain. All offsetting and insetting projects should use the well-established offsetting standards to certify the emissions reductions.

This may seem a comparatively low-technology option. It certainly doesn’t compare to the shifts that have driven the de-carbonisation of energy and mobility referred to by Al Gore to demonstrate how businesses are moving quickly to seize the commercial opportunities in tackling climate change. But it’s worth remembering that one reason Elon Musk named his Tesla electric car Model S was a nod to the fact that the first electric car was built before Henry Ford rolled off the first Model T from his Ford factory. And when de-carbonising a large chunk of agriculture, involving hundreds millions of farmers in places very different to the offices of the businesses they supply, it may well be that the solutions that commercially scale are already well-understood by those people.

 

(1) TCFD, Final Report, 2017 https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Report-062817.pdf, Table 1: Examples of Climate-Related Risks and Potential Financial Impacts
(2) Ibid
(3) Samberg, Gerber, Ramankutty, Herrero, West, Subnational distribution of average farm size and smallholder contributions to global food production, 2016, http://iopscience.iop.org/article/10.1088/1748-9326/11/12/124010/pdf, Page 2
(4) World Bank, Taking on Inequality: Poverty and Shared Prosperity, 2016, https://openknowledge.worldbank.org/bitstream/handle/10986/25078/9781464809583.pdf page 5
(5) IPCC, 2012, Summary for policymakers, in Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation, https://www.ipcc.ch/pdf/special-reports/srex/SREX_Full_Report.pdf

 

Read more about how our work to build supply chain resilience through results-based carbon finance with Taylors of Harrogate and Marks & Spencer here. Or get in touch to discuss how it could bring value to your business.

We are working with Ethical Tea Partnership to convene a roundtable discussion in October to explore ideas to accelerate progress towards net zero in the smallholder-farmer-dominated value chains of tea, coffee and cacao. The discussion is by invitation only to ensure that we have representation from major players across the different stages of these food & beverage value chains. Find out more here and if you are interested in taking part or hearing about the final report, please email awatson@naturalcapitalpartners.com.