If farmers want to attract investment, ESG is the key
FIN24 / 26 MAY 2020 - 06.01 / SIFISO NTOMBELA
The coronavirus pandemic has restored the importance of protecting healthy livelihoods over and above everything.
Sectors like agriculture and health, which are essential for daily sustainability of livelihoods, have gained more popularity during the Covid-19 crisis. Every country, including South Africa, is designing measures to develop and attract more investments in the health and food production industries.
Dr Sifiso Ntombela
The South African agricultural sector is relatively well developed, with sophisticated food distribution systems. However, the Covid-19 has revealed some weaknesses in the food system as some households, both in urban and rural areas, were unable to afford and access food despite the country having sufficient food quantities at national level.
This suggests a need to attract more investments in order to produce food even on the marginalised areas such as the former homelands. These areas have relatively large available arable land but production of food is low due to low investments.
Investments into the South Africa’s agricultural sector have been growing sideways for most of the past decade. The gross fixed capital formation (GFCF) as a share of value-added in agriculture declined from an average of 27% in the 1970s to 20% in the 1990s and 16% in the last decade.
This can be attributed to policy changes such as the inclusivity agenda through promulgation of Broad-Based Black Economic Empowerment Act and the tariff reforms that exposed industries to international competitors, thus affecting the competitiveness of industries like sugar and poultry.
Despite a dwindling investment climate, some industries like citrus have attracted more investments in the recent period. Investments into fruits and nuts are driven by global demand and improving compliance to environmental, social and governance (ESG) production practices by local fruit industries. With the Covid-19 crisis lifting the need to sustain lives, investors are likely to priorities industries or projects that promotes ESG values and standards.
Over the past decade, the fruit industries under the umbrella body called Fruit South Africa have developed an environmental compliance programme called "Confronting Climate Change" which seeks to encourage farmers to measure and mitigate emissions produced by the industry. The fruit industry has also developed social programs like Sustainability Initiative of South Africa (SIZA) which strengthen the sustainable and ethical production of fruits in the country. These programmes are established to ensure that the horticultural sub-sector improves its compliance to environmental, social and governance practices.
A similar trend has emerged in the mohair industry, which produces nearly 70% of global mohair, supplying it to famous fashion houses such as Louis Vuitton Malletier and Kering Group. These global fashion houses have encouraged South African mohair producers to priorities compliance to ESG practices and standards in order to attract more investments from them.
Professor Robert Eccles, from the University of Oxford, emphasised that the global investment community is increasingly interested in industries that shows a great deal of preserving the ESG principles. Investors are looking into food industries that protects the environment and social wellbeing of employees and neighboring communities.
The growing focus of global investors on ESG-compliant industries is also driven by the need to achieve global sustainable goals (SDGs). In the fight to reduce global warming and hunger, food production is effective in sinking carbon, meaning they can absorb emissions equivalent to almost a third of carbon dioxide emissions emitted by the fossil fuels industries.
By focusing on agricultural industries that complies to ESG, the investors are seeking to promote food security and simultaneously reduce the emissions that causes climate change. It has been established that climate change affects all four pillars of food security; that is, availability (yield and production), access (prices and ability to obtain food), utilisation (nutrition and cooking), and stability (affordability and disruptions to availability).
The global phenomenon by investors to focus on agricultural industries that complies with ESG is also followed by domestic investors. The domestic investors are also encouraged by the recently promulgated Carbon Tax policy that aimed to incentivise investors to make environmentally friendly investments decisions.
In June 2019, the South African government implemented the carbon tax policy at a rate of R120 per ton carbon dioxide equivalent (R120/tCO2-eq) on emissions produced by industries.
Within the agricultural sector, horticultural products such as fruits were found to be least (not direct) affected by the newly introduced carbon tax.
However, the livestock industries will be largely affected by the tax due to their high level of emissions produced during the production process. This implies that investments in these heavy polluting agricultural industries might be affected, unless concerted efforts are made to mitigate emissions.
Such efforts include enhancing research and development to stimulate innovations in the production processes.
Dr Sifiso Ntombela is chief economist at the National Agricultural Marketing Council (NAMC). Views expressed are his own.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER