ESG... in Agriculture?
Environmental, social and governance scores are non-financial metrics used to value companies. ESG reports help direct finance into investments that are expected to outperform over the long run.
The purpose of this report is to inform agribusiness stakeholders of the regulatory and investment landscape of ESG, and participation by different leadership entities.
3 examples of ESG in agriculture currently:
Oats buyers are demanding certain environmental practices, for example swathing.
Fertilizer traders are breaking down the social divide by offering regular, clear and transparent market communication to farmers.
Governance in EU member states, according to KPMG under the Corporate Sustainability Due Diligence Directive (CSDDD), would “amend… directors’ duties, adding consideration of ‘human rights, climate change and environmental consequences’ to their existing fiduciary responsibilities.”
Think about that for a moment. What if everyone running agriculture had to consider human rights, climate change and environmental consequences, along with fiduciary responsibilities?
Current Adoption of ESG Reporting
Corporate accountability to investors and society have led public companies to start implementing systems to track Scope 1 & 2 emissions, for years. According to IBM, the majority now see ESG reporting as a business opportunity (not as a cost center).
Recap:
Scope 1 emissions are those that a company is directly responsible for, such as those released from their owned and operated plants and factories.
Scope 2 emissions are indirectly produced by the company, such as the emissions generated by the purchased electricity, heating, and cooling required by the company's own plants and factories.
Scope 3 emissions are all other emissions, most often associated with the company's value chain, such as the upstream emissions from growing crops for the product…”
The SEC is expected to finalize new Scope 3 emissions reporting requirements in 2023. As discussed in more detail here, this could require tracking and reporting nitrogen fertilizer use on crops, since it tends to form the largest portion of a company’s total footprint.
Resistance to Report
Publicly-traded companies are seriously tackling the work. Why aren’t all grain buyers?
High Cost of Internal Change: Incumbents are the most established and deep-pocketed entities in the sector, and according to a report sent to BMO Nesbitt Burns investors, they are struggling to engage supply chain partners to report on Scope 3 emissions.
Brand Risk of External Demands: Grain companies consider farmers as customers, and those customers can get furious when asked to share data on crop input use.
Conflict of Interest: Some grain elevators both purchase farmers’ grain and sell them crop inputs. A vested interest in chemical and fertilizer sales creates a disincentive to comply with new disclosures on use to the crop’s end users.
The vast majority of grain companies are privately-held, not publicly-traded, and as a result they face less pressure to share field-level production data. Farm and trade associations have similar motivations in serving their constituents. Combined, the opposition to reporting represents a formidable lobbying front.
Positioning for the Future as a Farm
Q: What can farmers do now to get to the forefront?
A: Organize data on field activities and environmental impacts (soil health, ground cover, water systems), and move it onto a sharable software platform.
Positioning As a Leader
3 Options
The key to organizational leadership, it would seem, is to know one’s place.
Mostly there are powerful leaders of privately-run companies with enough lobbying clout to slow any changes from being required… until after they retire.
At the same time, conscious leaders - while not early adopters - are moving forward with new ESG initiatives because they know it’s the right thing to do… and the price of admission to trade forward.
Commercializing the ESG space into market share gains is led by individuals who recognize it as the pathway to long term share price outperformance.