DISCUSSION The future of food and energy – investors hold the key as much as any other player

by Mark Goyder _______29th June 2015
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A new strain of MRSA in the food chain is worrying. Guardian Sustainable Business has recently reminded us of the threat to health posed by the industrial use of antibiotics in food production creating antibiotic resistant strains of bacteria that are a threat to animals and also, potentially, humans: “Antibiotic use by the farm sector in the US increased by 17% between 2009 and 2013, according to the Food and Drug Administration, which estimates that 80% of all antibiotics consumed in the country are used for livestock”.[i]

Despite the routine use of antibiotics being banned under EU law, an estimated 50%[ii] of livestock in the UK are treated with such drugs regularly. Animal welfare campaigners attribute this overuse to intensive farming systems that rely on antibiotics to keep livestock alive in squalid and overcrowded conditions – leading to growing concern about their routine and illegal use.

Meanwhile, in the Tomorrow’s Capital Markets report, soon to be published by Tomorrow’s Company, we will point out that a total investment of $83bn a year is estimated to be required for the agricultural sectors of developing nations. According to the UN Food and Agriculture Organisation, this amount must be met if there is to be enough food to feed the world’s population of 9.1 billion in 2050. This is an estimate of the “level of investment required to meet growing demand for food in 2050 – not to eliminate hunger”.[iii]

Balancing the desperate requirement to produce vast amounts of food with the long-term necessity to maintain a sustainable food chain and healthy population is the dilemma facing society. By analogy, a similar balance needs to be preserved between the energy requirements of a growing and developing world, and the sustainability tribulations posed by climate change and diminishing resources. These are challenges of leadership for major companies and investor institutions; challenges of stewardship for the boards of companies, as well as the asset owners and asset managers who are setting mandates. It is a challenge of governance.

A few years ago, Tomorrow’s Company’s Good Governance Forum featured a presentation of the Pharma Futures project.[iv] This is a good example of leadership and stewardship, bringing together companies and their investors with other stakeholders to re-examine the business model of their industry and to engender change. Some people who ought to know better, however, still cling to the idea that we can treat the investment system as a black box – not needing to critically examine how the box is creating value and what the risks of failure are within its dark confines.

I am an admirer of Simon Walker at the Institute of Directors, but was horrified to read his column this month in Director Magazine in which he attacked the Guardian Sustainable Business “Keep it in the ground” campaign.[v]

Walker says:

“But the trustees of the Gates and Wellcome foundations are not there to impose personal preferences on the charities they administer. Their obligation is to their beneficiaries: victims of polio, Aids, malaria and tuberculosis.

Their job is simple: to maximise income on a sustainable basis. The analysis here is straightforward. Put aside a certain embattled supermarket chain and the best dividend payers in the FTSE are oil companies – Shell and BP. A little further down come BHP Billiton, Scottish and Southern Energy, Anglo American, Centrica and Petrofac.

If the trustees genuinely believe holding oil and energy shares poses a medium-term revenue risk, they should sell them. Evidently they don’t: the Gates Foundation has a stake in BP and ExxonMobil.”

Perhaps Simon is correct in asserting that trustees should not be bringing their personal ethics to bear on investment decisions; however, he has ignored two fundamental factors:

First, focusing solely on current dividend revenue cannot be deemed to benefit the long-term financial returns of the fund, where there are clear questions as to the sustainability of the performance of such companies. For example, a recent paper from the Generation Foundation makes clear[vi] that the carbon budget – intrinsic to limiting carbon release and mitigating climate change – points inexorably to the conclusion that major oil companies must not empty their reserves[vii]; in which case, it must be short sighted in the extreme to value such companies based upon the total levels of their reserves. Furthermore, the report reviews the business case for corporate sustainability and its link to stock price performance. The study concludes that: “it is in the best economic interest for corporate managers and investors to incorporate sustainability considerations into decision-making processes”. Specifically, their findings suggest that companies that lead in sustainability have better operational performance and are less risky[viii], and that investment strategies incorporating sustainability issues outperform comparable non-sustainability strategies[ix].

Secondly, even if the first point remains contentious to some, the UK’s Law Commission made it clear that trustees can take into account purely non-financial considerations into their investment decisions (i) to the extent that the relevant values are shared by the beneficiaries of the fund; and (ii) where such decisions do not cause significant financial detriment to the fund (with even more leeway where the beneficiaries, by the very nature of the fund, share a certain moral or political compass). If the beneficiaries of the Wellcome and Gates foundations are, as Simon puts it, charities established to assist the victims of polio, AIDs, malaria and tuberculosis, there is a solid argument that such charities would also be inclined to support investment policies that protect and preserve the environment, as well as, in the context of food production, long-term food sustainability and public health.

Admittedly, these are real judgment calls for trustees, which may provide a salient case for fiduciary duty reform, codification or clarification. However, taking an approach that fails to see the bigger picture and the full remit of options available to trustees is akin to a “head in the sand” approach – where that sand is rapidly and relentlessly hardening.

The issues surrounding the futures of food and energy represent undeniably large challenges. These challenges concern both the quantity and the quality of the investments that institutions make in companies and that companies make in such industries. This is one of those classic “Triple Context” problems that we described years ago in our Tomorrow’s Global Company report – not to be solved by one company alone; not by one company’s investors; and not simply by governments or NGOs. However, if we mobilise activity that spans across all of these actors, to: (i) create long-term wealth and shareholder value; and (ii) deliver practical solutions to global issues, then great things can be done.[x]

If we fail to act on these issues we jeopardise the dividends for our children, let alone our grandchildren.

[i] “Is it time for an antibiotic-free label on our food?” by Tom Levitt – Guardian Sustainable Business, 18 June, 2015 (http://www.theguardian.com/sustainable-business/2015/jun/18/is-it-time-for-antibiotic-free-label-on-our-food?CMP=new_1194&CMP=)

[ii] With no accurate record of antibiotic use kept by either industry or government, this can only be an estimate based on previous sales data

[iii] “The State of Food and Agriculture 2012: Investing in Agriculture for a Better Future” by Food and Agriculture Organisation of the United Nations- United Nations, 2012 (http://www.fao.org/docrep/017/i3028e/i3028e.pdf)

[iv] “What is Pharmafutures?” (http://pharmafutures.org/what-is-pharmafutures/)

[v] “Charitable Trusts” by Simon Walker- Director Magazine, 2 June, 2015 (http://www.director.co.uk/simon-walker-charitable-trusts-should-invest-for-income-opinion-2-june-2015/)

[vi] “Allocating Capital for Long-Term Returns: The Strengthened Case for Sustainable Capitalism” by The Generation Foundation – Generation Investment Management, May, 2015 (https://www.genfound.org/media/pdf-genfound-wp2015-final.pdf)

[vii] The same report also looks to a meta-study conducted by the University of Oxford that was released in September, 2014 in partnership with Arabesque Partners. Their report investigates and collates findings from over 190 premier academic papers, industry reports, newspaper articles and books. (“From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance” by Gordon Clark, Andreas Feiner and Michael Viehs – Smith School of Enterprise and the Environment, Oxford University, 5 March, 2015)

[viii] A finding supported by 88 percent of reviewed sources

[ix] A finding supported by 80 percent of reviewed sources

[x] For example, heralded through the development of initiatives such as the Marine Stewardship Council

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