How ESG Farmland Investing Principles Help Rural America Prosper

March 5, 2018, Trust in Food by Nate Birt

The investment community can support rural U.S. communities desperately in need of attention by providing farmers with comfortable salaries and sharing business risk, says Shonda Warner, founder and managing partner of Chess Ag Full Harvest Partners.

Chess Ag implements environmental, social and governance (ESG) practices into the farms it operates by using conservation practices where they make sense, precisely applying fertilizer and water  and adopting technology that adds efficiency.

In the following Q-and-A article, Warner shares her thoughts the role of investors in the rapidly changing food system.

Ag capital is attempting to provide access to better food. What makes it better? What are the criteria used to determine food quality currently on the market?

Institutional investors and investment funds are providing an additional source of capital into our farm economy. While small compared to family ownership–varying between 5% and 10% of cropland–institutional investors provide an additional source of much-needed capital, contributing to healthier rural communities and food diversity and quality.

Do ag investment firms look for anything particular when looking for investing prospects? Internal or external reporting? If so what frameworks are preferred?

Ag investment firms consider a wide range of factors when assessing the quality of a farm or agribusiness investment. We look at the potential for returns, consider the risk and how to manage those risks using various mitigation tools as well as the potential length of the investment. We are continually monitoring financial and agricultural market trends and are aware that each farm and situation is unique.

Are you implementing or requiring conservation practices on the farms you manage? And if so what practices and why? Are they profitable?

We implement conservation practices on all the farms in our portfolio. We use a wide variety of conservation practices and have fertility requirements depending on the crop and geographic location. It can be anything from fertility replacement to cover crops, no-till, NRCS partnerships, irrigation monitoring and metering, among other practices. Each farm and crop is looked at as its own ecosystem within the context of the region and the appropriate practices are adopted. Our experience is that conservation practices are critical for long term viability and profitability.

Do any of the panelists represent foreign investors? And does that foreign investment create a threat to food sovereignty/security?

Chess Ag Full Harvest Partners has had some foreign investors. We have discovered that these investors can have interesting ideas and farming practices they have utilized in their respective countries, and they have shared them with us. These practices, in turn, have informed our agronomy and conservation practices. We see this cross-fertilization as providing an opportunity for improved food security.

To be clear, are you loaning money to farmers or actually owning farmland?

We own and lease farmland, and we are farmers. All of our permanent cropland is farmed directly by the Chess Ag Full Harvest farm team. This allows us to make significant, long-term investments in farmland with higher-value growing operations and high returns. Where we have growers leasing our land, we share the risk through unique leasing arrangements. This innovative approach to leasing aligns our incentives and allows us to attract excellent growers.

What are the most exciting companies/technologies you have seen in this space?

From the local and organic food movement, we know consumers want to know the farmers growing their food and the farming practices we use. Technology is nearly to the point to allow us to provide field-to-table transparency. Technology that creates transparency is good for food safety and food nutrition. We are optimistic transparency will be good for farmers, rewarding and incentivizing us to improve nutritional quality and environmental stewardship.

Do you foresee the trend of acres being rented rather than owned continuing? Is that positive or negative?

We expect to continue to see a mix of acres being rented and acres being directly farmed by landowners. Both models can be beneficial to farmers and rural communities. Farmers working for Chess Ag and other investors in farm land earn comfortable salaries. They also no longer have to carry the risk of the whole farming operation, which has been a relief for some families. Farmers earning excellent and stable salaries are good for rural communities. Many rural communities in the U.S. are in desperate need of attention, development and investment. Intelligent, caring, passionate investors can contribute to rural stability through the jobs we create, the taxes we pay, and philanthropy improving education and addressing important social issues in rural America.

What are the panelists thoughts on the Sustainability Accounting Standards Board (SASB)?

SASB is moving in the right direction. Until it has monitoring teeth, its effectiveness will be uneven.

How do environmental, social and governance (ESG) principles like transparency into welfare/sustainability drive investment when compared to EBITDA or traditional financial performance metrics?

ESG practices and traditional financial performance are not exclusive of each other. At the end of the day, any business including farms must make money to be financially sustainable. Investors understand this and are looking for strong financial returns. At the same time, investors understand we can only maintain returns long-term by following sound environmental, social and governance practices.

Is the investment community only interested in environmental sustainability, or does it include the other pillars of sustainability: social and economic?

We strongly believe that rural economic security equates to food security. All aspects of sustainability–environmental, social and governance–must be addressed to have healthy rural communities. All of Chess Ag Full Harvest Partners’ investments are in rural areas. By incorporating ESG principles into our operations, we aim to deliver long-term investment returns and promote economic development in the communities where we work while creating a healthier environment.

Are your investment models only around real-estate investments, or are you also investing in sustainability technologies or ecosystem services?

Our core investments are in farmland. However, through our local networks we see investment opportunities in adjacent businesses and have taken private equity stakes that complement our farm operations. We are particularly interested in investments providing upstream and downstream infrastructure to support higher-value growing operations in rural communities. These investments typically require creative thinking and structuring but often are the most exciting and can be the highest-value for our portfolio. In this way, we are contributing to improving the economic well-being of rural communities.

I don’t understand: everyone is talking about ESG and certifying farmer best practices, but how do they figure out those standards? Are those any good?

During the past 10 years, there has been tremendous momentum to improve the sustainability of the food we eat down to the farm. In addition to traditional guidelines for soil health, there is now an array of standards-setting activities. Our approach is to carefully track our inputs, use the most environmentally friendly chemicals that we can, employ appropriate conservation practices and seek continuous improvement on the lands we farm.

As reporting mechanisms mature and are integrated into our IT suit of farm tools in a way that protects the confidentiality of growers, we look forward to the transparency this will bring about the nutritional content of the food we grow and for food safety.

Why does ESG matter when investing? Is it a differentiating factor, or does it show up in financial performance?

When thoughtfully implemented, ESG practices have a positive impact on financial performance. Many practices, such as optimal use of fertilizer, provide direct savings. When we are good stewards of the land, our yields are better and farmland values are more attractive. Furthermore, when we work in partnership with our growers, we get consistent returns and a valuable relationship that can provide other investment opportunities or areas for partnership. By bringing more investment into rural communities, we are contributing to improved food security and rural prosperity.