Tom McKeon, head of portfolio oversight for farmland investment at Insight Investment, examines the case for farmland when looking through a responsible investment lens.
Key points
Institutional investors’ appetite for farmland has been rising over the past few years and will likely continue to increase over the long-term
An area where the importance of responsible investing has been brought into sharper focus has been in real assets such as farmland
The asset class has characteristics that require a comprehensive understanding of responsible investment considerations, well-developed principles and methodologies for managing its implications and complete transparency of approach
The importance of responsible investing has been brought into sharp focus in real assets such as farmland.
Institutional investors’ appetite for farmland has been increasing over the past few years as the search for income, desire to protect from future inflation and the benefits of portfolio diversification to smooth the effects of market volatility favour the asset class.
The asset class has characteristics that require a comprehensive understanding of responsible investment considerations
The nature of the activity, however, has resulted in investors and their advisers looking for reassurance that the approaches are consistent with their responsible investment guidelines.
Tradition and technology
A well-designed approach to responsible investing in farmland is essential as it serves to not only reduce the downside risk but also potentially enhance investors’ financial returns.
In other words, it is possible to maximise value creation without compromising responsible and sustainable investment principles.
This can be achieved by embedding responsible investment considerations throughout the process, from the investment selection phase, through to day-to-day management and execution.
A holistic approach to sustainable farming combines the best of traditional methods with beneficial modern technologies and global 'best practice' to achieve high productivity and minimal environmental impact.
When operating on a global basis, it is important to have a process for adapting approaches across a multitude of farming systems.
This can be achieved by continually seeking to identify best practice on a global basis, taking input from local management and working with independent specialists.
Formalised guidelines
Institutional investors and asset managers have been proactively looking to formalise guidelines for investing in farmland in a global framework.
The main motivation for this has been to foster greater transparency and to encourage investment in an asset class which is deemed to be of long-term interest to institutional portfolios.
The effort has now been incorporated within the UN Principles for Responsible Investment and has five broad guidelines on farmland:
Promote environmental sustainability
Respect labour and human rights
Respect existing land and resource rights
Uphold high business and ethical standards
Report on activities and progress towards implementing and promoting the principles
Institutional capital committed to farmland will be increasing over the long term, as the rationale for its inclusion in portfolios is very strong.
The asset class has characteristics that require a comprehensive understanding of responsible investment considerations, well-developed principles and methodologies for managing its implications, and complete transparency of approach.
The industry has made great strides, even though more needs to be done, and is on the right track for creating the basis for many more investors providing much-needed capital to a sector that is critical to our well-being.
Tom McKeon is head of portfolio oversight for farmland investment at Insight Investment
