Five a week
A weekly digest of key developments impacting investments in the sustainable and resilient future of food, agriculture and forestry.
Backtrack for good – This week the UK reversed on its rather rash decision to close its over-subscribed scheme to pay farmers for their contributions to common goods such as soil health and air and water quality. The Department for Environment, Food and Rural Affairs (DEFRA) abruptly announced the Sustainable Farming Incentive (SFI) scheme had reached its “maximum limit” on 11 March, leaving many farmers who were in the process of applying in the lurch. According to minister Daniel Zeichner, the scheme will be reopened for farmers who had started an application, enabling around 3,000 further applications. His announcement followed the threat of legal action by a group of farmers supported by the National Farmers’ Union (NFU). Its president, Tom Bradshaw, welcomed the decision but said that constraints imposed on the scheme would still leave many farmers “unfairly disadvantaged”. The SFI had been greeted positively when it was launched in 2022 after several years of uncertainty as the UK government sought to replace environmental payments under the Common Agricultural Policy (CAP) following Brexit. According to DEFRA, the SFI scheme has committed £5 billion over two years via 37,0000 multi-year agreements designed to support farmers’ work on sustainable food production and nature recovery. Farmers are still in dispute with the UK government over its inheritance tax plans and are also waiting on details of a proposed 25-year farming roadmap. The need for greater clarity and consistency from policymakers on incentives to introduce sustainable farming techniques was highlighted at a recent conference by Martin Lines. CEO of the Nature Friendly Faring Network. Another likely source of contention between the UK’s government and its agriculture sector is likely to be trade. US agriculture secretary Brooke Rollins this week put chicken and pork on the menu for discussion following the signing of a UK-US trade deal last week that already included beef, raising the prospect of domestic output being undercut by imports with lower production standards.
Omni-shambles - The European Commission (EC) courted more controversy this week with the release of its latest simplification package, aimed primarily at easing the burdens on farmers imposed the CAP’s Good Agricultural and Environmental Conditions. The World Wide Fund for Nature (WWF) argued that this latest ‘omnibus’ will weaken protections to the natural habitats and resources that support the ecosystem services on which agriculture depends – such as pollination and soil health – without offering any meaningful simplification to farmers. The package contains a series of exemptions which the WWF claims will remove the CAP’s remaining environmental safeguards, while the EC insists they will boost competitiveness, also saving farmers €1.58 billion annually. Meanwhile disagreements are continuing about the first omnibus package – designed to streamline sustainable finance rules – with different positions being taken in Berlin and Frankfurt. Last week, new German chancellor Friedrich Merz said he hoped the EC would not just delay but ditch its Corporate Sustainability Due Diligence Directive (CSDDD), which requires large firms to address any environmental and social harms within their value chains. The European Central Bank (ECB) countered that the CSDDD’s disclosure and transition planning requirements are valuable risk management tools for businesses, making the same case for the Corporate Sustainability Reporting Directive’s (CSRD) climate and biodiversity reporting rules. The ECB asserted that well-calibrated sustainability reporting not only supports competitiveness but is “essential for market participants to understand and price sustainability-related financial risks”. The bank also pointed out that its own plans to assess the implications of nature degradation on the European economy and financial system depended on “access to robust data” on biodiversity and ecosystems via the CSRD. Even the firms that politicians are looking to help with their war on green tape are not convinced of the case for reform, with 61% of firms telling researchers they backed the CSRD in its current form and only 7% agreeing that it needs fundamental revision.
Empty vessel - European plans to balance sustainability and productivity face as many challenges on sea as on land. A leaked draft of the European Oceans Pact - the EC’s bid to “foster a broader, integrated and holistic approach to ocean governance” – was criticised this week by ‘blue NGOs’ for lacking failing to propose concrete measures to tackle damaging fishing practices. In particular, they noted the absence of proposals to eliminate bottom trawling in marine protected areas, as well as addressing related issues such as over-fishing, microplastic pollution and funding commitments for marine protection. The NGOs have drafted a Blue Manifesto outlining proposed priorities for the pact, which include tougher enforcement of environmental rules, and the establishment of an EU Ocean fund dedicated to marine restoration and conservation. Pressure to ban or reduce bottom fishing is likely to increase in response to graphic depictions of its impact in Sir David Attenborough’s ‘Ocean’ film, released last week. Rules around fishing rights are also one of the last sticking points in a new EU-UK deal designed to reset post-Brexit economic relationships. The EC is expected to officially release its Oceans Pact early next month, ahead of the third UN Ocean Conference. Co-hosted in Nice by French president Emmanual Macron, the conference is seen as a critical opportunity to accelerate the ratification of the High Seas Treaty. Finalised two years ago, it provides a governance framework for two thirds of the planet’s oceans and seabeds for the first time, enabling legal action against unregulated fishing and other practices that destroy or damage habitats. But to come into force, it must be ratified by at least 60 countries.
Don’t bank on it – The global banking industry watered down its commitment to addressing climate risk this week, but not as much as some had feared. After meeting on Monday, the Group of Central Bank Governors and Heads of Supervision (GHOS) said they would push forward with plans for a voluntary disclosure framework for banks’ climate-related financial risks, as well as analysing the impact of extreme weather events on financial risks. This disappointed groups that believe tough mandatory disclosures are needed to ensure banks act to reduce the climate risks stemming from their services to the wider economy. Some also criticised GHOS for ignoring transition risks arising from the planned decarbonisation of business activities and assets. But this was offset by relief that the statement made no mention of its Task Force on Climate-related Financial Risks (TFCR), following warnings that US-based members would try to sideline the initiative. GHOS wields significant but indirect influence over banking regulation worldwide as the oversight body of the Basel Committee on Banking Supervision, which sets standards for bank capital, liquidity and funding. In the run-up to the meeting, several GHOS members had increased efforts to ensure banks under their supervision stepped up action on climate risk. The UK’s Prudential Regulatory Authority updated its guidelines for the first time since 2019, which now include regular and structured risk assessments, warning banks and insurers that “more needs to be done”. Separately, the Network for Greening the Financial System (NGFS) recently boosted efforts to quantify climate risks via four short-term climate scenarios which highlighted the climate-related losses that could be suffered by financial institutions in the next five years. The NGFS, a group of central banks and financial market supervisors that no longer includes the US Federal Reserve, noted the agriculture sector could be badly hit under its two bleakest scenarios, with dry weather events “causing high productivity losses and driving up cost of capital and default probabilities”. US efforts to deprioritise climate risk supervision are in line with its supervisors’ prevarication over full adoption of the Basel III supervisory framework, and plans to dilute rules introduced following the Global Financial Crisis. Overall, both on climate risk and other aspects of regulation, we should expect less consistency across banking markets, mirroring policy developments more broadly.
Reform or Reform? – This week’s big reveal on UK pension funds’ renewed commitment to British growth left open questions about the industry’s continued support for the country’s climate and biodiversity goals, including highly impacted sectors such as food and agriculture. Unveiled on Wednesday, the Mansion House Accord saw 17 defined contribution workplace pension providers pledging to invest 10% of portfolios in private assets by 2030, with 5% reserved for UK investments, which is estimated to release £25 billion into the British economy over the next five years. But there is no detail on eligibility beyond ‘UK growth sectors’, reflecting the caveated remarks of signatories that much will depend on government policy enabling a project pipeline that meets the schemes’ fiduciary duties. Chancellor Rachel Reeves saw things differently, commenting “never say never” when asked whether the upcoming pensions reform bill would give ministers the right – known as mandation – to force pension funds to meet minimum targets. The UK’s pension schemes have taken big steps to assess the climate and nature risks in their portfolios, investing in firms and assets that prioritise more sustainable models and techniques across food, agriculture and forestry. But while this accord might represent a missed opportunity for schemes serving private-sector workers, spare a thought too for their public-sector counterparts. The aforementioned pensions bill is seeking to drive consolidation across both sectors, but risks undermining some of the local government pension scheme (LGPS) pools that have over-delivered on their mandates. One public sector provider which has had its business plan rejected by ministers took the opportunity this week to point out its record not only in private markets allocations but also in supporting renewable energy transition and nature conservation. While the government’s reforms might appear to threaten demonstrably successful responsible investment strategies, a bigger threat could be the influx of new trustees to LGPSs’ administering authorities following the anti-net zero Reform party’s success in last week’s local elections.