Food finance: Founding farmers

IN LAST MONTH’S edition of Euromoney we covered the issue of the land grab extensively. This is the trend for large asset owners, such as pension funds, sovereign wealth funds and other more shadowy investment groups to invest in agricultural land, especially in emerging markets. By some calculations an area the size of France in Africa and Latin America has already been scooped up by these investors since the beginning of 2008. There has been an inevitable backlash to these investments, with luminaries such as Kofi Annan inveighing against the acquisitions. "We have seen a worrying rise in protectionism, unilateral export bans, land grabs and exclusive deals that meet the food needs of the rich but not the poor," the former UN secretary-general said in a speech in June.

Now some of the world’s largest investors have come together to provide a benchmark set of principles for investing in farmland around the world. The group represents some $1.3 trillion of investable assets and includes ABP of the Netherlands, the BT Pension Scheme and Hermes of the UK, and TIAA-CREF from the US. All the signatories of the Principles for Responsible Investment in Farmland are also signatories of the UN’s Principles for Responsible Investment. This programme started four years ago to get asset owners to sign up to principles surrounding environmental, social and governance issues, to which they would hold their asset managers accountable.

There are five Farmland Principles, covering environment sustainability, respecting labour and human rights, respecting existing land and resource rights, upholding high business and ethical standards, and reporting on implementing the principles. What is unclear however is if signing up to the principles will make any real difference to the trends already under way. In particular, the land grab has resulted in indigenous farmers being expelled from land that has been sold from under them, in countries where there are no real property rights anyway. Moreover, the food then produced on that land is exported, rather than being used to feed the local population. Not only does this provide cheap food to certain investors, it brings a good return.

The signatories deny that signing up to the principles will reduce their returns. "The [Principles] and a good financial return do not need to be mutually exclusive – on the contrary," says Thijs Steger at APG, the Dutch pension fund. "As a long-term investor it is in our interest to manage our investments in such a way that long-term value is preserved or maximized. If we would deplete or pollute the soil or alienate the local people, workforce and potential customers, we would not achieve this goal."

At root is an understanding that buying farmland is different from buying equities or bonds. People with few means of redress are affected. "We acknowledge that farmland investments have implications for the people and the natural environment in the places where we invest," says Ulrika Danielson, head of communications and HR at the Second Swedish National Pension Fund (AP2) in Stockholm. It is however unclear if investors, by signing up to a set of principles, can change the overall market. Indeed it is not the behaviour of the signatories that is at question. They are some of the largest and best managed pots of money in the world, which have specific duties to promote social responsibility. It is more a question of whether they can encourage others to behave responsibly. "The PRI for farmland have been created because the founding institutions – like APG – concluded that a new set of principles specific to private-sector institutional investors was needed," says Steger. "Other existing guidelines do not sufficiently cover specific aspects relevant to those kinds of investors... furthermore, one of the three goals of APG’s responsible investment policy is to demonstrate social responsibility. The PRI for farmland help us to do that."

Mirroring the boom in agricultural land prices is a boom in these principles. The Rome-based Food and Agriculture Organization of the United Nations is developing its own investment principles, as are the World Bank and Oxfam. Melding all these into one would reduce dilution. But the real work will come in signing up those investors for which the farmland investments are more about the food than the returns.