Case study by APG

APG provides an overview of the sustainability issues that need managing in farmland investments. They believe that long term sustainability is important beyond ten year holding periods since the selling price that can be achieved will depend on the buyer being certain that the investment will perform for another substantial period of time.

“Our clients’ investments are assessed against clear social, environmental and governance requirements.”

Anna Pot, APG

Key takeaways

  • Farmland is particularly sensitive to environmental mismanagement. However most local managers quickly recognise the business case for sustainable farmland practices.
  • Some issues (water management, soil quality) are common to all farms; others (effluent disposal, local ecological impact) need to be treated on a case by case basis.
  • As a long-term, well-resourced investor it is possible to implement new technologies (such as GPS soil sampling) which significantly improves the productivity of the farmland and thereby strengthens the long term attractiveness of the investment.
  • Sustainable investors with a real awareness of environmental issues can bring about beneficial environmentally sensitive changes with clear benefits to the land, the local people and the investment itself. Such practices support the selling price by ensuring that these investments will perform for another substantial period of time.

Since 2008, APG has been building a portfolio of farmland investments as part of its commodity portfolio on the basis that:

  • farmland assets are complementary to its investments in commodity futures and in some cases provide better risk/ return characteristics;
  • the investment universe is broader and can provide increased portfolio diversification, with comparable inflation hedging characteristics;
  • the long-term global macro-economic and demographic trends appear to be supportive for farmland.

Investments in farmland are normally relatively illiquid, with a five to 10 year holding period. Therefore it is important to ensure that the investment operates in a sustainable way to generate returns over the longer-term. Long-term sustainability is important even beyond the ten year holding period since the selling price that can be achieved will depend on the buyer being certain that the investments will perform for another substantial period of time. There are obvious sustainability challenges and most managers recognise the business case of sustainable farmland practices in terms of the return on investment. 

Livestock in Australia

Investing in livestock farming is attractive due to the global demographic trend whereby more people can afford to consume a protein rich diet. This creates greater demand for livestock and dairy products. Our Australia-based manager has identified and acted on a number of environmental risk issues, including:

  • water use – the water volume supplied to livestock has been reduced by 90% by developing a more efficient method of supplying water and dams are being replaced by piping water directly from bores to stock troughs;
  • native ecology – the free movement of wildlife was disturbed by farming activities; now a wildlife corridor is being constructed that will improve the ecological quality of the land.

Grain and oilseeds in Eastern Europe

The fund manager in question oversees a number of farms used for broad-acre cropping, and environmental impact assessments are a standard part of its ESG due diligence procedures. Recent activities include:

  • actively pursuing green and renewable energy sources in the production of grain and oilseeds;
  • redevelopment of farmland to improve water management and make farming more efficient – with special attention given to local community engagement;
  • using high-end technology (satellite monitoring and GPS soil sampling) to monitor and improve soil performance;
  • clean-up of some legacy farms that were polluted with asbestos and in one case with oil.

Dairy farms in Australia

Livestock and dairy farming in Australia are large scale, with the animals roaming freely on extended acres of pasture, feeding on grass. In this case, the environmental sustainability issues include:

  • soil erosion – regular planting of trees helps to protect gullies and creeks against erosion;
  • effluent disposal – all farms use a two-stage closed loop effluent disposal program designed by the Environmental Protection Authority which recycles grey water and uses solid effluent as fertilizer on paddocks.

Tea plantations in India

Tea plantations are typically found in sparsely populated, hilly regions. The forest area in the tea estates owned by the investee company is earmarked and kept undisturbed. In addition, the company has planted trees in landslide areas and its organic and bio-dynamic practices have helped prevent any major landslides across all its tea estates.

Grain and oilseeds in Latin America

We are invested in a fund owning farmland with a mix of grains and oilseeds grown in Latin America. Environmental issues faced by the local fund managers include:

  • water management – due to the non-tilling system applied on all the fields, freshwater management is more efficient and less water is used and this protects soil from erosion and depletion;
  • pesticide use – the use of pesticides is kept to a minimum and, where needed, only those with low toxicity levels are used. As most operational work is outsourced, workshops and seminars with technicians from the pesticide or machinery companies are organised regularly to update and train staff in the calibration of machines and the correct use of chemicals.