Agricultural Investments: Bringing Together Profit

Agriculture is an alternative investment class which is currently gaining traction on account of traditionally strong performance and positive returns to investors, especially in comparison with some other traditional assets. Nevertheless, it is important to think about the impact of agricultural investments in developing countries especially and to consider how to use those investments so as to contribute to sustainable development. Recently, the International Institute for Environment and Development (IIED), an independent non-profit research institute, published an article exploring the purchase of land by agricultural investment funds in developing countries and the actions that might be taken to promote investments that will genuinely support local communities.

The IIED article, entitled “Farms and Funds: investment funds in agriculture paper the global land rush” (published in the IIED Global Land Rush January 2012 news brief), notes the increase in investment funds land and agribusiness purchases in developing countries. Investors (financial players as well as individuals) are expecting high long-term returns due to a range of factors, such as increasing demand for food and rising land prices.

The article points out that even though in many African countries the agricultural sector has historically suffered from a lack of sufficient investment, it doesn’t follow that the investments being made now are ethical per se. The importance is stressed of considering how agricultural investments in developing countries can both benefit the investors and contribute to the sustainable development of the region where they are being implemented.

Among the measures recommended in the IIED article are the promotion of “good” investments and the discouragement of harmful ones by for example introducing disclosure and transparency requirements in the investors’ home countries as well as increasing government and investor accountability. As for the host countries, the article recommends the development of investment models which include local farmers. This is particularly important since in developing countries weak government structures can mean that the rights of local communities are often not sufficiently safeguarded by appropriate institutional measures.

In any event, agricultural investments will benefit local communities only so long as they are used for promoting sustainable agricultural practices. In relation to agriculture, sustainability means that natural resources such as soil or water need to be used at a slower pace than they are replenished, meaning that crop harvesting needs to be synched with necessary replenishment practices. And sustainable agriculture is beneficial for investors as well since it increases land productivity and crop resilience, meaning better returns in the long run.

Another fact not to be overlooked by governments and private investors is that the agricultural sector currently accounts for approximately 14 percent of global greenhouse gas emissions. The corollary is that investment in unsustainable agricultural practices can have serious environmental consequences. In this connection, the United Nations Food and Agriculture Organisation (FAO) has introduced the concept of “climate-smart” agriculture, defined as agriculture that “sustainably increases productivity, resilience (adaptation), reduces/removes greenhouse gases (mitigation) while enhancing the achievement of national food security and development goals”. In addition, the FAO also suggests an “energy-smart” farming model: making the agricultural sector less dependent on fossil fuels and to be achieved through investment in renewable energy sources such as wind, solar, or geothermal power which can be used for farming operations.

In December 2011, the FAO published its paper “Identifying opportunities for climate-smart agriculture investments in Africa”, which highlights the need of the agricultural sector in Africa for substantial public and private sector investments. The paper asserts that, with both agricultural and climate change investments being largely privately financed, investors have both the financial opportunity and the responsibility to contribute to sustainable development in the developing world. That increasing private sector awareness in sustainability is key is also stressed in the IIED article, which asserts that many investors do not actually know much about issues such as sustainable development and poverty reduction.

 

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