A theme that is becoming more prominent among institutional investors is evaluating investments not only on their return potential, but also how they rate in regards to Environment, Social, and Governance factors (ESG). While some of these metrics are somewhat subjective, the carbon emissions that a company emits or contributes to the environment is starting to be estimated and reported by many companies and there are big institutional investors that are attempting to limit their exposure to companies with high emissions and are rating some companies more favorably if they can speak to ways in which they are limiting their carbon footprint. Companies are beginning to take notice.
As a fiduciary, how can a pension fund justify prioritizing anything except the highest expected returns from their investments? Governance is the most clear as bad governance can lead to bad business practices. However, there are also a few plausible arguments for Environmental and Social factors. The first is that they are both factors that could be headline risks for a company, which could tarnish the brand, public relations, and government or regulatory relationships. The second is that many of the big pension funds are so large now that they own an interest in almost all companies in the world. If a factory pollutes a river, then another company downstream (pun intended) may be affected. Therefore if we get all companies to care more about Environment and Social factors, then it could lead to a better world for all and potentially higher returns for all investments in aggregate.
Bringing this back to farmland, there was recently an interesting Bloomberg article, covering an academic paper, about the supply chain for Corn and the environmental impact depending on where it is grown. This may become a bigger factor for agriculture going forward.
The implications are vast and varied. Locations close to processing facilities and end consumers might start to command an even higher premium. Historically farmland prices close to more populated has always been more valuable. One of the main reasons for this is the potential for development, but access to labor, processing, and transportation also play a role. Now, carbon footprint might need to be considered.