Nature and Net Zero: Investing in agriculture

Award-winning cattle and seedstock producer Prue Bondfield is a pioneer of the responsible investing revolution in agriculture.

Earlier than many others, the Bondfields navigated the commercial implications of institutional investment in their farming business. Determined to share her agribusiness and ESG experiences, she has now turned her strategic focus to implementing ESG, biodiversity, and nature-based investment principles in agriculture.

With board seats at the Regional Investment Corporation, Bush Heritage Australia, LiveCorp, and the agtech startup Black Box Co, Bondfield is one of the influential leaders in Australian agriculture’s transformation into a class of sustainable assets.

In this interview, In this interview, part of a series on Australian Agriculture in Transition, The Action Exchange asks Prue Bondfield about the changing nature of investing in agriculture and how primary producers are adapting to a market looking to capitalise on natural assets.

TAE: Where are you seeing investor interest in sustainable agriculture having an impact on the Australian market?

Prue Bondfield: Initially, the lowest hanging fruit was forestry and now it is livestock and pastoral land that is seen as the first mover. We are seeing corporate and large family-owned agricultural producers with pastoral land, particularly in the North of Australia and some in Western Australia, establishing their carbon and biodiversity baselines for both ESG reporting in response to investor requirements or, more broadly, for selling their products into their supply chains.

What are the opportunities for primary producers to capitalise on the surge of interest in carbon and biodiversity markets?

There are plenty of incentives in terms of the commodity markets. There’s a real opportunity for good producers who are doing the right thing environmentally to look at different supply chains and see opportunities for a premium if they can get their products certified. Rather than commodity production, we can differentiate ourselves and how we produce.

Of course, everyone wants to know what premiums will be paid. And ‘premium’ is a big word, but ‘discount’ is a bigger word. The discount factor will start to come into play a whole lot more in the next couple of years. Buyers will say, ‘I haven’t been able to source products within our supply chain guidelines, and if we have to get them from you, we’re going to get them from you at a discount.’

Once the biodiversity market settles and policymakers get the right frameworks in place, the potential for credits and payments to become an added income stream is also an incentive. But I don’t think many farmers are going to look at revenue in isolation, it will be more likely to appeal to impact investors. Farmers will need our biodiversity ‘story’ to remain competitive in the supply chain. And I think that’s probably going to happen with carbon eventually, too.

How does attracting investment capital from a large, institutional investor change how agricultural producers operate?

Five years ago or so, agriculture was all about land valuations and how much assets were going to cost. There has been a real shift. Competitors are no longer just large corporate agriculturalists looking at agriculture as a standalone business. There’s now lots of interest in agricultural investment as a key asset class—for example, as part of an investor’s responsible investment portfolio.

We experienced part of that shift on our farm [Palgrove] when we entered into partnership with the New Zealand government’s superannuation fund. From then on, we were in corporate expansion mode. This meant competing not only with large-scale family farming operations that had sizable equity in their land but also with institutional investors keen for a piece of Australian agriculture’s environmental assets.

Being in competition with international and national funds and investors who could see the potential for returns in agriculture was a big shift. And now what I’m seeing from a farm perspective, is family producers looking more closely at their returns and balance sheets and starting to define their natural capital values. Their banks and lenders now have ESG and financial disclosure requirements that agricultural clients will have to report on. In this regard, the playing field levels out again. No matter what your size or financing arrangement, natural capital will be part of agriculture’s future.

As natural capital and biodiversity impacts and opportunities are incorporated into markets, how will agricultural asset owners and investors determine valuations?

Unlike carbon, it’s really difficult to identify and put a value on biodiversity. For example, if I’m saving a species that is near extinction, I’ve got to have a lot more credit than someone looking after grass that’s growing all over Australia. To begin to put a value on nature credits, you can do a baseline, there are agreed methods to measure improvement. That’s the easy bit. Putting a dollar value on that change over time is harder. The respecies population might not be secured for 20 years, so the increased value in natural capital assets must align with the cost of removing production from the landscape during that period. It’s really hard to put dollar values on those timelines.

What I’m seeing in investment, particularly among pension and super funds, which are the most active responsible investors, is that many funds are setting money aside now to invest in natural capital as a core business. But I believe they’re going to find it difficult. Their expectations are that they’ll get an extra one or two percent every year on top of farm revenue via their investment in biodiversity or nature. But I’m sceptical as to how that return will happen.

Historically, many super funds steered clear of agriculture because the five- or seven-percent IRR returns mandated in their investment criteria were not achievable. Now, they’re trying to achieve that and an added one percent plus from biodiversity credits. I think the absence of good financial data relating to natural capital is a concern.

How can the market bridge that information gap?

Organisations like Bush Heritage have a role to play in ecological species, flora and fauna identification and assessment. But resources are scarce in all not-for-profit organisations. The extension offices of the various State and Territory Departments of Primary Industry and Landcare will also play a part. But resources in those areas have really declined in the last five years or so. I think many producers are looking to research and development organisations and industry bodies such as Meat and Livestock Australia and Australian Wool Innovation for capacity here.

Do you think the market needs to shift its view of natural capital from a standalone asset to a combined asset bundled with agriculture?

Yes, absolutely. That means getting the productivity and profitability of the agricultural asset right first. There’s no point in buying land that isn’t capable of producing profit and expecting to just get the one and a half percent without additional costs. No one has really crunched the numbers for a long-term outcome, but there’s a lot of talk about potential.

One of the biggest challenges in ESG investing is a lack of investible data. There’s an assumption in the discussion about natural capital that technology will solve this. Do you see this solution emerging?

We’ve seen a lot of agtech come and go, and anything related to climate monitoring and climate management that translates into farm management will be really valuable. Providing data is one thing, but it doesn’t necessarily provide a solution at present. 

How that technology changes our behaviours is what’s crucial. If I’ve got data on my highly efficient, high-producing, low-emissions herd, how does that plug into my management and reporting systems? How can I demonstrate to my financier that we’re doing the right thing or have a good environmental footprint? That’s the problem agtech needs to solve.

Big picture, how do you think biodiversity disclosures and natural capital markets will change the agribusiness sector?

Being seen differently is a huge thing. Our role is not just producing food, which we’ve always been proud of, but there’s another role for producers now—we’re looking after ecological environments. We’re looking after waterways, airways, and a multitude of ecosystems, so we’ve got a massive responsibility on our shoulders. The broader community and policymakers will need to view agriculture in a different way.  It’s important that the government, regulators and the financial sector work with industry organisations to achieve better outcomes for both agriculture and the environment. I think that will be a real positive if we can close the knowledge gap across all sectors.

 * Some answers have been edited for length and clarity.