Governments in developing nations have a long history of intervention in agricultural markets through trade regulation and farm support policies such as the EU’s Common Agricultural Policy (CAP) and the US Farm Bill. However, these policies are being reshaped to move towards encouraging more sustainable farming systems and to reflect societies priorities for biodiversity, food safety and animal welfare.
The CAP is now subject to a greater focus on climate action and biodiversity protection, with social aims to foster vibrant rural communities and generational renewal. The UK’s post-Brexit Environmental Land Management scheme also places ESG factors at the heart of its policy. As part of a wider push for ESG policy regulation in the US, several proposed new bills will drive climate-related reporting by food producers and suppliers.
Government ESG policy and climate
Governments worldwide have set top-level targets, such as in the Paris agreement, to tackle the global climate crisis and its associated externalities, however, in practice is the private sector guided by government policies, incentives and regulations, that must implement them. To achieve the long-term temperature goals set out in Paris, countries need to reduce emissions as soon as possible to achieve a climate-neutral world by mid-century.
As agriculture accounts for approximately 25% of global GHG emissions, it has become an area of scrutiny in the climate debate, as the sector seeks to reduce its existing carbon footprint. Given agriculture’s potential capacity to mitigate climate change through the sequestration of carbon in soil, ESG investors are increasingly interested in the sector as a means to counteract climate change.
Governments are set to be pivotal in fostering investment through incentives, harmonised standards and facilitation of transparent markets.
Barriers to ESG in Agriculture
Despite growth in ESG investing in the agriculture sector significant barriers remain. Regulations regarding ESG vary with locality, which means companies lack a universal mandate to report ESG information. The scramble to capture market share in the ever-growing ESG investment segment has fuelled a proliferation of voluntary non-governmental standards that have filled the vacuum left by an absence of regulation. It has also led to an entire ESG data and analytics industry springing up to service the needs of the investment community.
Today, one of the largest challenges ESG investors face is the lack of standardized reporting and low transparency in ESG rating methodologies, which limits comparability and the integration of sustainability factors into the review of investment performance.
Currently, regulations mandating corporate disclosure of ESG information vary with location. Corporate disclosure regimes vary substantially in terms of what data must be reported and how it should be calculated. Reporting requirements are usually voluntary and do not set out the methods or metrics to be used. This means that data is incomplete and not directly comparable across companies, sectors, and countries.
Within the EU, ESG regulations ultimately all stem from the European Council’s Sustainable Finance Policy, which sets out the blocks high-level policy ambitions. This ESG policy is complemented by a suite of corresponding European Commission Green Finance Initiatives, the most immediate of which is the Sustainable Finance Action Plan, which has four key elements:
- The Pending Taxonomy Regulation
- The Sustainability Disclosure Regulation
- The Climate Benchmarks Regulation
- A Proposed Green Bond Standard
Regulators themselves need confidence that institutional investors meet the required standards of prudence and care when they include ESG considerations in their portfolio decisions. According to Marcus Björksten of Fondita Sustainable Europe, “Greenwashing is a real problem” referring to companies’ promotion of environmental concerns as an advertising gimmick.
So how can government ESG policy help?
In addition to clearer and stronger regulations on reporting and disclosure. Other potential measures to aid agricultural ESG include public lending, insurance and guarantee schemes to aid the transition to sustainable food systems; financial training schemes; changes to regulations to account for the financial risks of non-sustainable farming; alongside a bolder approach to ESG investment of public funds and steps to expand green and sustainable bond markets.
Government plays a significant role in the farm sector, and further government action will be needed to drive the move towards sustainable farming systems. Measures to encourage and facilitate ESG investing in the sector will go some way to help transform the sector and meet societies environmental and climate goals.
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