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Sustainability within the food value chain is a business imperative

Branding Could Drive Sustainability in Food and Agriculture

Branding Could Drive Sustainability in Food and Agriculture

The Food and Agriculture sector has work to do in deciding how to define and integrate a framework of ESG and sustainability standards into operating structures if it’s to fully embrace its roles and responsibilities in a low-carbon world.

From Capitalmarkets.bmo.com

Agriculture, forestry, and other land uses account for just under a quarter of all greenhouse gas emissions, but the sector has been slow to adopt the kind of sustainability innovations we are seeing in other parts of the economy, such as electric vehicles.

According to a panel at the 17th Annual BMO Farm to Market Conference in New York, Investing in Sustainability – Private Capital in Agriculture and Food, a large part of that has to do with making the cost of sustainability viable to farmers.

The panel, moderated by Jonathan Hackett, Head of Sustainable Finance with BMO Capital Markets, saw panelists Yogesh Mago, Partner at Ospraie Management, Jonathan Belair, Managing Partner of Power Sustainable Lios and Marc Khouzami, Managing Director of the BMO Impact Investment Fund, enjoin the sector to better define sustainability and ESG for their customer base.

At least one of the paths to that, and to more sustainable agriculture, lies in something as simple as branding. It also lies in determining, as a sector, the real difference between sustainability and ESG, and looking for definitions of both terms that aren’t subject to the interpretations of either public figures or the general populace.

Branding for Sustainability Premiums
One of the biggest challenges facing the agriculture world today is the cost of sustainability. If a sustainably produced product is presented as interchangeable with a traditionally produced product, most companies can’t get away with passing on that extra cost to the consumer.

“When you think about the downstream consumer, they want the world to be perfect – at the same price or lower,” noted Yogesh Mago. As a Partner at Ospraie Management, Mago is focused on investing in AgTech that helps farmers become more profitable, but in a way that also reduces agriculture’s negative environmental impact.

He added that the current buzz words that most consumers use to guide their purchases – whether that’s organic, natural, local, or some other descriptor, actually signal sustainable actions taken at different stages in the production and processing of goods. You add sustainable practices to each step your product takes from farm to market, so any premium a consumer would currently accept would not be sufficient to recoup the extra cost. Said differently, once you have paid for improvements in areas like processing, shipping and packaging, you’ve spent most of the farmer’s profit margin.

However, one way to reverse that, said Jonathan Belair, who invests in North American mid-market companies in the food and agriculture industry that have a positive and sustainable impact, is to look to branding.

When a sustainable product is differentiated sufficiently, he said, through packaging or marketing, that premium can be successfully charged to the customer.

“Are people willing to pay more for the exact same product? That’s nonsense, they would never do that,” he told the panel. “So then it becomes a question, ‘Can you differentiate the product so it’s actually not a comparable product?’ A piece of fish that comes from 5000 miles away versus a piece of fish that’s raised 150 kilometers away, that’s fully traceable, that is completely clean is not the same piece of fish.”

Ultimately, panelists noted, that differentiation is a branding exercise which, if executed well, said Ospraie’s Mago, can make the incremental costs associated with making a product sustainable result in incremental gains for the producer.

Different People, Different Definitions

Panelists also drilled down in the spirited discussion on a lack of clarity in the industry around what exactly ESG and sustainability mean, noting how the general population, investors and business leaders are constantly defining each term differently, or even using them interchangeably.

“You ask three people, you get three definitions. That’s one of the challenges of the impact space or sustainability – generally, there are no definitions or standards,” said Khouzami, adding that companies need to explain very clearly to investors THEIR definitions of ESG/Sustainability/Organic and how they’ll use capital to achieve those outcomes.

Mago noted an inherent contradiction in agriculture between the ‘E’, the ‘S’ and the ‘G’ and sustainability, especially for an industry that is very founder-led and where companies can be strong on the environmental component of ESG but be traditionally lacking when it comes to governance.

“When you think about agriculture, on the ‘S’ side, if social includes diversity in any form or function, five percent of farmers today identify as non-white in the United States. Two-thirds of them are male. The age diversity is not there, either – the median age is in the 60s.”

The bottom line is that work still needs to be done, both in how ESG and sustainability are defined and how they are implemented as a framework for helping companies improve.

Moving into the Future

Another challenge for Ag and Food sector companies is how fast the world is changing.

Whether it’s the ongoing pandemic or recent geopolitical events like the invasion of Ukraine, no one is looking at sustainability today in the same way as they did even two years ago.

But that isn’t necessarily a bad thing.

More than anything, the last two years have brought us back to focus on the basics, according to Mago.

“What’s nice about investing in agriculture is there’s an embedded defensiveness and sustainability factor that’s involved here. And because of the way it affects all of us, when things get really bad, people come back to the basics: we need to eat, and hopefully it’s environmentally friendly and not creating harmful externalities.”

There is reason for optimism, however, with a significant widening of interest in, and acceptance of, sustainability in the investment space.

Khouzami noted that over time sustainability as an investment theme will become more mainstream, pointing to what has happened in energy investing as an example, “Investors today are making less of a distinction around renewable versus traditional energy. They’re just investing in energy and what’s most applicable and what’s most economic. While that’s not everybody, you’re starting to see that more and more across investment funds. And I think that will be the case going forward, as sustainability becomes more economically viable and embedded in everything we do.”