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Environmental social governance is a must in agriculture

Estimated reading time: 6 minutes

The drive for sustainability and the concept of environmental and social governance (ESG) have become a global megatrend. This trend is surfacing in multiple sectors throughout South Africa’s economy, including the agricultural sector.

In light of this, Agri SA recently hosted a webinar discussing ESG and its relevance to the agribusiness sector, as this sector will need to adapt to ensure the sustainability of global food systems, especially with the boundaries of available agricultural land fast approaching.

James Brand, senior associate at the natural resources and environmental department at the law firm ENSafrica, said agribusinesses that operate sustainably and are ESG aligned are likely to benefit in terms of attracting sustainable finance, and will also be able to anticipate and better deal with future risks.

Background

Brand said that ESG was identified as an investment concept in 2004 through work done at the United Nations Environment Programme Finance Initiative (UNEPFI). It began as a focus area for understanding risk based on an assessment by investors of potential impacts on the worth of an investment. This outside-in perspective entails considering external factors such as climate change to assess the risks posed inside an organisation.  

Locally, amendments to South African regulations under the Pension Funds Act, 1956 (Act 24 of 1956) came into effect in 2011 and required ESG to be considered as part of the investment analysis for pension funds.

In 2021, National Treasury published a policy paper on sustainable finance and indicated an intention to potentially expand this requirement to consider ESG to other financial sectors including, among others, banks, collective investment schemes, capital markets and the insurance sector.

Principles for responsible investment

Brand said the principles for responsible investment (PRIs) were developed by an international group of institutional investors, reflecting the increasing relevance of ESG issues to investment practices. This gave rise to the PRI’s six principles of responsible investment, which is supported by the UN.

The number of PRI signatories has dramatically increased over the years to close to 5 000 from over 60 countries, including many South African financial institutions. This means that over US$120 trillion of assets should be managed in an ESG-aware manner, which presents opportunities for sustainable agribusinesses.

Planetary boundaries

“A major driver for the ESG enquiry, and potential consequent regulation in the agribusiness sector, is likely to come from the fact that we are operating beyond scientifically identified planetary boundaries,” said Brand. These boundaries include freshwater change, stratospheric zone depletion, atmospheric aerosol loading, ocean acidification, bio-geochemical flows, novel entities, system change, biosphere integrity and climate change.

He added that the physical risks of exceeding these boundaries are not always immediate. However, impacts such as persistent drought already create volatility for the agribusiness sector. In addition to physical risks, regulatory and transitional risks relating to new laws and a decarbonised economy are also relevant.

Regulatory building blocks

To better understand what such regulatory and transition risks for ESG may be, Brand said that it is useful to look to the ESG regulatory framework that is being developed in the EU as a result of the EU Green Deal. These regulatory building blocks include creating an ESG investment obligation, ESG disclosures, ESG supply chain due diligence and ESG taxonomy. “South Africa is following a similar approach to what is coming out of the EU in regulating ESG-related risks, and we are likely to witness a shift from soft law obligations to hard law regulations over time.”

Carbon tax and offsets

ENSafrica tax executive, Mansoor Parker, said the agriculture, forestry and other land use sector is not liable for carbon tax yet. However, government plans to increase the carbon tax rate possibly from 2026, when phase 1 of the carbon tax ends. He said that local carbon consultants are introducing programmes whereby South African producers, who undertake regenerative agriculture practices, can earn extra income through carbon credits either by selling these credits internationally or domestically to carbon tax liable entities (as a result of the carbon offset regulations that were passed under the Carbon Tax Act, 2019 [Act 15 of 2019]).

Holistic management is what we need

Large carbon emitters that are subject to increasing carbon taxes will create a market for the purchase of such offsets to lower their carbon tax payments. Carbon offsets usually trade at approximately 80 to 90% of the carbon tax rate. Consequently, as this rate increases the price of carbon offsets will also increase, creating a potential opportunity for regenerative agricultural practices.

The domestic carbon offset price can be compared with the international carbon offset price, and a choice can be made as to whether to sell the carbon offset domestically or on the international market.

He said to determine potential advantages, producers can compare the costs and administration of the carbon certification process with the benefits.

Producers can follow these steps:

  • Provide a carbon consultant with a background in sustainable agricultural practices and sharing data reports which is submitted to independent auditors. A carbon consultant provides a motivation for carbon credits to be verified, certified and issued.
  • The consultant will tap into the global or domestic market of buyers and secure the highest price for the carbon credits.

Parker pointed out smaller producers may use an aggregator model to obtain economies of scale, and noted that programmes exist in South Africa that allow sustainable agribusinesses to take advantage of these opportunities.

System value business is the new paradigm

Kobus Pienaar, technical manager of food security at Woolworths, said sound ESG is critical for the survival of Woolworths and the planet. It therefore needs to be addressed as a system and not as compartments. This follows a large shift internationally with regard to sustainable development goals moving away from the current sectorial approach.

Economies and societies are now rather seen as embedded parts of the biosphere. System value business, where nothing hinders society’s progress towards future fitness, needs to be embraced. The entire value chain needs to be involved in moving towards this paradigm.

The importance of ESG

According to Pienaar, ESG is critically important to Woolworths because to reduce climate risk and cope with unprecedented situations such as the Covid-19 pandemic, environmentally sustainable governance performance needs to be optimised in order to stay competitive.

More reasons include:

  • Policy makers worldwide and South African investors want to see all businesses accelerate and prioritise their ESG efforts. If not addressed, investments in businesses will be a challenge.
  • Ownership needs to be taken. A well-functioning private sector is needed, not reliance on government to enhance employment creation, equitable growth, protection of natural resources and safeguarding consumers, among others.
  • ESG focus funds have internationally seen an increase – which can also transpire in South Africa.
  • Woolworths’ environmental and social footprint sits mainly in agriculture and the sector is therefore prioritised when the retailer plans its ESG. – Christal-Lize Muller, AgriOrbit

For more information, contact James Brand at jbrand@ensafrica.com, Mansoor Parker at mparker@ensafrica.com and Kobus Pienaar at kobuspienaar@woolworths.co.za.

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