Investors in agriculture need to incorporate the material financial risk of soil degradation into their decisions, according to a report published by the University of Cambridge Institute for Sustainability Leadership (CISL) with contributions from asset manager Robeco.
Farmers operating on degraded land could see their market value decline by 13% following extreme weather, CISL said. On the other hand, those farmers on healthy soils could see a valuation uplift of 6% mainly due to their ability to benefit from crop price rises, the institute continued.
Small, packaged food companies connected to degrading land could suffer a 45% drop in market valuation in the same scenario, CISL said.
In the fertiliser industry small producers would also be likely to be negatively impacted. However, some large fertiliser businesses could see their value increasing as a result of higher global prices for their products following a drought, CISL said.
Trading companies could see a 10% fall in market value should they have full exposure to the farmers working on degrading soil, CISL said. But trading companies with globally diversified operations may see a 4% increase as their risk is mitigated against local events.
"The findings underscore that land degradation is financially material, highlighting the urgency for investors to incorporate factors such as soil health into investment decisions," CISL said in a statement. "They also highlight the need to actively engage with companies in the agribusiness sector to mitigate nature-related risks."
Risks of soil degradation could affect the entire agricultural value chain, with impacts including:
- Fluctuating balance sheets;
- A decline in global crop volumes;
- Working capital implications;
- Increased inflation levels impacting food producer profits;
- And increasing consumer costs.
"Educating and incentivising farmers to invest in soil health is in the interest of all value chain actors," CISL said.
Alongside the release of the report CISL announced it is joining the Taskforce on Nature-Related Financial Disclosures (TNFD) as a member of its 'knowledge partner' group alongside the likes of non-profits CDP and the Sustainability Accounting Standards Board as well as the Global Reporting Initiative (GRI).
Carola van Lamoen, head of sustainable investing at Robeco, said: "We hope and trust the study supports further development of frameworks, such as those of the TNFD, to integrate biodiversity in financial decision-making.
"Integrating nature-related risks in our investment decisions is an important part of our biodiversity roadmap."
The study applied a stress test in which a severe drought triggered immediate yield loss in Brazil. The region plays a key part in global agricultural markets but has some regions of soil degradation due to deforestation and land exploitation.
CISL continued: "The risk posed by land degradation is encouraging value chain consolidation, and some companies are retreating from areas more vulnerable to soil degradation, risking the concentration of degrading land in the hands of smaller and less well-capitalised companies less able to invest in land restoration. This is troubling, as restoring degraded soils is critical for meeting food demand."
The report is part of broader research with the CISL's Investment Leaders Group and Banking Environment Initiative to determine a "common language" for financial institutions to identify and assess nature-related financial risks. In March last year, CISL developed a framework for nature-related financial risks.
Article from: Environmental Finance