Case study by AP2

AP2 describes their ESG policy and how they integrate it into due diligence of potential farmland managers. It highlights key questions that asset owners can ask of their farmland investment managers.

“Fundamentally, AP2 is looking for farmland investment managers that have a structural approach to sustainability issues. Not only does this ensure that these issues are given sufficient weight in the management of the farmland, but also it is essential in order to provide good quality sustainability information to investors.”

Chrstine Olivecrona, Senior Sustainability Analyst, AP2

Key takeaways

Farmland provides mankind’s basic needs and is therefore an asset that attracts special attention from stakeholders. Investors should ensure that investments are made in a responsible manner by:

  • selecting fund managers or investment partners that are aligned with the Principles for Responsible Investment in Farmland;
  • performing in-depth due diligence with respect to sustainability both at the organisational level (policies, systems, knowledge, etc) and also with respect to specific sustainability issues for the underlying investments;
  • requiring fund managers or investment partners to integrate sustainability in their reports to investors.

The Second Swedish National Pension Fund (AP2) invests in forest and agricultural real estate in order to diversify the strategic portfolio and thereby reduce overall risk. As a longterm investor in agricultural real estate, AP2 can contribute to increased food production by promoting the introduction of environmentally smart and efficient technology. Investments will be made in farmland suitable for a range of different crops: vegetables, fruit, nuts, cereals and sugar cane. One of AP2’s agricultural investments is a joint venture with US pension fund TIAA-CREF. This joint venture company will invest in the USA, Australia and Brazil, all of which are food exporting countries.

Sustainability integrated into the due diligence process

As a responsible investor, AP2 believes it is important to find fund managers or investment partners who share its views on responsible investment. Therefore sustainability issues must be integrated in the due diligence process.

AP2 has an external management team that is responsible for identifying suitable funds for investment. During due diligence, the sustainability questions that this team considers include:

  • Are the investments in countries with well-defined legal systems and structures?
  • Does the investment manager have suitable sustainability policies and management systems?
  • If the manager has signed up to sustainability principles, such as the Principles for Responsible Investment in Farmland, or the Roundtable of Responsible Soya, how are those principles turned into practice?
  • How much knowledge and experience does the team have with regard to sustainability issues?
  • Is the manager’s investment strategy sustainable (e.g. appropriate choice of crops)?
  • Will the land be leased out, delegated to a specialist operator or operated by the investment manager?
  • If it is leased out, do the operators have suitable sustainability policies, systems, experience, etc?

Fundamentally, AP2 is looking for farmland investment managers that have a structural approach to sustainability issues. Not only does this ensure that these issues are given sufficient weight in the management of the farmland, but also it is essential in order to provide good quality sustainability information to investors. AP2 will ask fund managers or investment partners to include sustainability issues in the regular reporting to investors.

What specific sustainability issues should be addressed in the sustainability due diligence?

The Principles for Responsible Investment in Farmland identify key sustainability issues in the areas of environmental sustainability, labour and human rights, land and resource rights, and business ethics. The relative importance of the different issues depends on the particular countries, crops and operating models. However it is possible to identify four key issues:

Soil quality

  • Fertile land is a limited resource, making it important that those who farm the land do so in a manner that conserves or improves its fertility. It is important that the fund manager has routines in place to control soil quality.

Water

  • Availability of water is directly linked to production levels. Is the land rain-fed or irrigated? How will precipitation patterns be altered due to climate change? What other stakeholders also access the same water supply?

Labour

  • If investments in farmland will be made in regions and/or crops which require extensive use of manual labour, special attention has to be taken to ensure that workers’ rights are respected for both permanent and seasonal workers.

Land ownership

  • In countries with weak legal and/or title systems it is vital to ensure that land acquisitions are made properly.

Reporting

After an investment has been made it is important to follow-up the work that was done during the due diligence process. AP2 receives follow-up information both in the usual investor report but also through regular follow-up sessions - either via a conference call or physical meeting.

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