Measuring, managing, and monitoring natural capital risk

Measuring, managing, and monitoring natural capital risk

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By Matthew McLuckie, Director of Investor Relations, Planet Tracker

Risks to the world’s stocks of natural capital – such as soil, air and water – are putting increasing pressure on the investment performance of food and agriculture listed equity funds (AgriFunds). Natural capital related risks, in certain cases, are contributing to underperformance of the food and agriculture industry and more specifically AgriFunds relative to their benchmarks.

Growing for Profit, Planet Tracker’s latest food and agriculture industry report analyses 37 AgriFunds and finds that natural capital risks are rarely addressed in their annual reviews and investment updates. As a result, all institutional investors in these AgriFunds are not necessarily aware of and, therefore, are unable to measure natural capital related risks to their investments.

For ESG (environmental, social and governance) aligned investors in particular, deeper insights reveal that most AgriFunds assessed in Growing for Profit are furthermore not disclosing portfolio alignment with sustainable food and agriculture production targets set out by science based organisations such as the EAT-Lancet Commission on Food, Planet, Health; Food and Land Use Coalition (FOLU); and Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) together with market based targets such as Sustainable Development Goal (SDG) 2: End hunger, achieve food security and improved nutrition and promote sustainable agriculture.

In order to support a global food and agriculture industry capable of feeding a population approaching 10 billion by 2050, and at the same time reduce natural capital related food and agriculture supply side volatility, AgriFund managers and all their investors have a joint responsibility to ensure investments are aligned with science based and social targets set out by these organisations.

Fragile food and agriculture systems

Science based evidence highlights a growing frequency and intensity of global natural capital risks - including deforestation, soil depletion, and overfishing – impacting food and agriculture production. In 2019 /2020 examples include droughts and fires in New South Wales, locusts in East Africa, the COVID-19 and African Swine Fever pandemics, and ‘mega drought’ in California.

The localised economic disruption caused by such events not only exposes short-term risks to supply and demand of the world’s global food systems, but can highlight wider financial risks, including budget shortfalls, revenue losses and potential credit downgrades to companies along the supply chain.

Transparency and disclosure risks abound

To assess the exposure of AgriFunds to such risks, and to quantify the impact of this on investment performance, Planet Tracker identified 466 private and public thematic food and agriculture investment funds, ETFs and other investment vehicles using research from Valoral Advisors. From this list we applied a replicable methodology filtering funds only targeting public equities. This yielded a benchmark sample of 37 AgriFunds with an aggregate market capitalisation of $21 billion (£16.3bn) at the end of 2019.

Analysing this sample Planet Tracker found that these AgriFunds are, as would be anticipated, overexposed to the Consumer Staples sector (relative to their benchmarks including the S&P Global Agribusiness Index and DAXglobal Agribusiness Hedged Index). The result: a greater likelihood that natural capital risks could materialise and impact both company financial performance and fund manager investment performance.

In order to adequately manage and mitigate these risks, asset managers can as a starting point identify and measure natural capital risks faced by individual companies within their portfolios. This can be achieved by following industry guidelines such as the UNEP-WCMC Natural Capital hierarchy, PRI Responsible Investment in Farmland, CFS Principles for Responsible Investment in Agriculture and Food Systems and the OECD-FAO Guidance for Responsible Agricultural Supply Chains.

Of the 37 AgriFunds analysed in Growing for Profit, only three – DWS Global Agribusiness, DWS Invest Global Agribusiness, and Janus Organics Thematic ETF – identify and describe how they mitigate natural capital risks (at least partially) within their 2018/19 annual reports and related securities’ filings. And only one fund – DWS Invest Global Agribusiness – references alignment with one or more of the global sustainability initiatives including for example the SDGs within their 2018/19 annual reports and related securities’ filings.

Measuring, managing, and monitoring portfolio risk - cause for concern

For investors, this raises the question: how meaningfully and consistently are AgriFunds factoring in natural capital risks or sustainability commitments in their decision-making and ongoing performance analysis?

Planet Tracker’s research did identify certain asset managers with robust environmental risk management processes, investor stewardship commitments and ESG policies. Our research however  highlights the majority of these asset managers are failing to communicate how these commitments and policies, in this case related to natural capital, are applied to the management of individual AgriFund portfolios. Investors are therefore only able to accurately measure natural capital related performance risk and volatility for AgriFunds disclosing this information, ideally in line with one or more of the standards mentioned above.

The top 20 investors with the largest holdings in these AgriFunds, managing $6.7 billion – or approximately 30% – of the total assets under management invested by the 37 AgriFunds, are particularly exposed.

What’s more, due to the lack of natural capital risk reporting among AgriFunds, these investors – including Bank of America, Credit Suisse, Goldman Sachs, Morgan Stanley, UBS, Barclays, Bank of Nova Scotia and Royal Bank of Canada, to name a few – are left unclear as to how such risk assessments and stewardship commitments are actively applied and monitored at an AgriFund level, where their capital is invested.

Safeguarding natural capital is financially material for all companies and their investors

Growing for Profit highlights that it is in the interest of all investors and AgriFund managers, not only those ESG aligned, to safeguard natural capital because it is directly material to the performance of their investments.

In this light, there is an immediate need for asset managers and the AgriFunds they manage to report more accurately on how natural capital risks impact investment performance. By doing so, AgriFunds and the food and agriculture industry they finance can improve sustainability reporting standards and alignment, better mitigate nature capital related supply side production volatility and support a transition towards future global food security.


Walter Willett, Johan Rockström, Brent Loken, Marco Springmann, Tim Lang, Sonja Vermeulen, Tara Garnett, David Tilman, Fabrice DeClerck, Amanda Wood, Malin Jonell, Michael Clark, Line J Gordon, Jessica Fanzo, Corinna Hawkes, Rami Zurayk, Juan A Rivera, Wim De Vries, Lindiwe Majele Sibanda, Ashkan Afshin, Abhishek Chaudhary, Mario Herrero, Rina Agustina, Francesco Branca, Anna Lartey, Shenggen Fan, Beatrice Crona, Elizabeth Fox, Victoria Bignet, Max Troell, Therese Lindahl, Sudhvir Singh, Sarah E Cornell, K Srinath Reddy, Sunita Narain, Sania Nishtar and Christopher J L Murray. Food in the Anthropocene: the EAT–Lancet Commission on healthy diets from sustainable food systems. The Lancet, Volume 393, Issue 10170, 2019, Pages 447-492, ISSN 0140-6736, ttps://

Food and Land Use Coalition includes BSDC, the EAT Foundation, Sustainable Development Solutions Network, the International Institute for Applied Systems Analysis, the World Business Council for Sustainable Development, and the New Climate Economy (housed at World Resources Institute).

IPBES (2019): Summary for policymakers of the global assessment report on biodiversity and ecosystem services of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services. S. Díaz, J. Settele, E. S. Brondízio E.S., H. T. Ngo, M. Guèze, J. Agard, A. Arneth, P. Balvanera, K. A. Brauman, S. H. M. Butchart, K. M. A. Chan, L. A. Garibaldi, K. Ichii, J. Liu, S. M. Subramanian, G. F. Midgley, P. Miloslavich, Z. Molnár, D. Obura, A. Pfaff, S. Polasky, A. Purvis, J. Razzaque, B. Reyers, R. Roy Chowdhury, Y. J. Shin, I. J. Visseren-Hamakers, K. J. Willis, and C. N. Zayas (eds.). IPBES secretariat, Bonn, Germany.

See as one example: Hoegh-Guldberg, Jacob, Taylor, Bindi, Brown, Camilloni, Diedhiou, Djalante, Ebi, Engelbrecht, Guiot, Hijioka, Mehrotra, Payne, Seneviratne, Thomas, Warren, and Zhou (2018). Impacts of 1.5ºC Global Warming on Natural and Human Systems. In: Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty.

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