Bankrolling systems change. Where are the tools for the transformative investor?
Over the summer, The New York Times published an article on how impact investments, which are typically focused on promoting a social good, have significantly outperformed traditional expectations during the Covid-19 pandemic. Similar articles were also published by S&P Global, J.P. Morgan, Financial Times and Wall St. Journal. Yet, when it comes to acting for the greater good or in support of the natural world, the financial community still has a way to go.
A recent analysis by portfolio.earth found that, in 2019, the world’s largest banks invested more than USD 2.6 trillion — equivalent to the entire GDP of Canada — into sectors which governments and scientists agree are the primary drivers of environmental degradation. The report “Bankrolling Extinction” is a hard read. Yet, it reaffirms my belief that the lack of ability to qualify and quantify the impact of financial decisions on the world around us, especially for those in the agri-food business sector, is effectively masking value extraction, increasing hidden risks, and hindering our ability to act differently.
Wrap your head around this reality: the loss of biodiversity creates the perfect conditions for animal diseases to make the jump to humans; diseases such as Ebola, SARS and Covid-19. Now think about the shock Covid-19 has had on producers and workers tied to global supply chains, and availability of food for marginalized people around the globe. Investments into these supply chains went through due diligence frameworks to identify and assign potential risks. But, there are actually no standardized tools to measure the risk of a potential investment from activities like disease migration as a result of clearing a forest which is usually done for reasons related to food.
This has to change.
Our linear-based tools are not designed for such risk calculations and, without the right tools, we cannot impact generally accepted accounting principles and create systems transformation. Linear-based tools have made it easier to understand how to invest in just one enterprise or fund, and how the investor generates a positive financial return. But, for today’s world, systems-based tools are needed to inform decision-making — tools that are aimed at transforming food systems for both financial and non-financial returns.
Transformational gains can occur when food systems investments properly align human capital for nutrition gains, social capital for fair and resilient values-based supply chains, and natural capital for soil health and all its related benefits for water, air, biodiversity, and the climate.
We believe that businesses and investors can catalyze wide-scale positive change in our food systems; but the extent of this change is being constrained by the structures in which they operate and the tools they currently use, specifically those that measure and manage the returns from various forms of disconnected investments.
Today, representatives from governments, across levels, and non-state actors including cities, subnational regions, investors, companies, and civil society are gathering for the Race to Zero Dialogues on Finance. Some of the key objectives of this day are to understand what action on climate means for the finance sector in practice and how to address the challenges with financing resilience. The climate and food challenges we face today require a systems-based approach to identifying opportunities and risk that use systems-savvy tools to improve investment decision-making.
To truly build financial resilience and to unlock food systems transformation in-line with the Paris Climate Agreement and the SDGs, we need capital markets that properly value inclusive, impactful, sustainable business practices. Investors who do not consider systemic issues that are undermining food and agricultural systems and the impact that climate change is having on this industry are simply exposing themselves to unassigned risks. This makes the need for new tools ever more urgent.
Fortunately, tools and aligned metrics are emerging to fill the gaps in how we manage what we need to measure. The good news is that growing investor demand for integrated reporting tools, like the ESG framework, is both driving innovation among European and US accounting standards and resulting in new efforts to harmonize various standards. But, more is needed to move capital to enterprises that create positive outcomes. For example, tools to aid the front end of investment decision-making such as those from the “true cost accounting” movement that enable business leaders to account for both positive and negative externalities generated by their operations.
Innovative systems-based approaches are also already highlighting cross-cutting opportunities to transform our understanding of positive returns. One of the most promising spaces right now is based on peer-reviewed research that improving soil health, which is about more than just sequestering carbon, can increase nutrient density in food that in turn improves the overall health of an individual consumer.
Additionally, research is showing that increasing nutrient density of plants is necessary to allow them to properly balance the increased intake of carbon/sugar so that plants themselves do not become ‘obese’. Add to that the possibility to align appropriate policy incentives to make healthy food the affordable choice that results in lower health care costs. Who wouldn’t invest in that?
Ultimately, shifting financial flows away from harmful practices in our food systems is one of the most powerful ways to scale needed transformations and to take action on planetary health. We need to accelerate the tools and ways of thinking that enable this to happen.
Transformational Investing in Food Systems Initiative is an allied initiative of the Global Alliance for the Future of Food and partners with the Agroecology Fund, and other aligned partners.
