Current patterns of agrifood financial investment fall short
Financial markets have been deeply enmeshed in the agrifood system for hundreds of years. The relationship is two-way. Financial markets have long provided much needed capital for farmers as well as for firms that operate along agrifood supply chains to enable their economic viability. Agrifood commodities, firms, and farmland have also served as lucrative investment opportunities for financial investors seeking a decent rate of return on their capital. While the relationship between food and finance has the potential to be mutually beneficial, it has also been fraught throughout history. Farmers have long expressed skepticism about the role of financial speculators who invested in agricultural commodities, for example, viewing them as forces that drive volatility in commodity prices (Martin and Clapp 2015).
Concern about the impact of commodity speculation on food prices became prominent during the 2008 food crisis. As the crisis unfolded, many analysts pointed to increased investment in financial derivatives such as commodity futures contracts as well as in new types of complex investment vehicles such as commodity index funds. The availability of these new investment products after the early 2000s fuelled investor interest in the sector, which coincided with sharp increases in food prices by 2008, prompting a number of analysts to conclude that speculative investment was a factor in the food price spikes (De Schutter 2010; Ghosh 2010; I ATP 2008). The 2008 food crisis also increased awareness of the extent to which financial actors are also implicated in the global land rush, as pension funds and other institutional investors sought to increase their exposure to farmland through new complex financial instruments such as land investment funds (Fairbairn 2014). What set this new investment apart from previous historical episodes of speculation is that large-scale institutional investors have come to dominate these markets. In other words, pension funds, hedge funds, university endowments, and asset management companies have become large investors in the sector (Clapp 2019).
The growing interest by financial investors who were relatively new to the agrifood sector via new types of investment vehicles has been characterized by some analysts as ‘financialization’ of the food system. Financialization refers to an increased role for financial actors, motives, and institutions in determining and shaping activities in the broader economy (Epstein 2005; Krippner 2011; van der Zwan 2014). Financialization has taken three distinct forms as it has taken hold in the food system: it has transformed a range of activities across the agrifood sector into an arena for financial accumulation by investors; it has encouraged a prioritization of shareholder value within agrifood firms; and it has facilitated the permeation of financial activities and values into everyday food and agricultural provisioning (Clapp and Isakson 2018). This process of financialization within the sector has been associated with a range of effects, including the loss of land rights for many agricultural producers in some of the world’s poorest countries; higher and more volatile food prices; corporate concentration; inequitable distribution of income among owners and workers in the sector; and a loss of autonomy for workers, farmers, and consumers (for an overview, see Clapp and Isakson 2018).
As awareness of the potential negative impacts of financialization in the food system has grown, so too have calls for more responsible financial investment in the sector (Hallam 2011; Clapp 2017). Such initiatives have sought to ensure that investors do not exacerbate potentially negative impacts, such as rising food prices, land grabbing, and environmental degradation. Calls for responsible investment have had some appeal in the agricultural sector, because many of the institutional investors that have a stake in the sector, such as pension funds, have long-term outlooks and passive investment strategies. Responsible investment approaches in farmland, for example, could help to ensure the long-term viability of those investments by ensuring that they are socially and ecologically sustainable, an important consideration given the illiquid nature of land as an asset (Scott 2013). In this sense, making ‘responsible’ investments is in the long-term interest of investors, while also reducing the potential for harm (Carroll and Shabana 2010).
Several prominent responsible agricultural investment initiatives emerged over the 2009—14 period. These include the Principles for Responsible Agricultural Investment (PRAI), led by Japan along with the World Bank, FAO, and UNCTAD, launched in 2010. The PRAI advance seven key principles to guide agricultural investments: (1) recognize and respect existing rights to both land and natural resources; (2) strengthen food security; (3) require transparency and good governance when acquiring land; (4) ensure consultation with and participation of those affected by the investment; (5) ensure economic viability; (6) promote positive social impacts; and (7) support environmental .sustainability. The PRAI targets all types of agricultural investment, including investment from both public and private investors (FAO et al. 2010).
The Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests in the Context of National Food Security were launched in 2012 (FAO 2012; see also Seufert 2013). The Voluntary Guidelines (VGGT) were meant to guide investment in land, fisheries, and forests, with a view to protecting land and resource tenure rights, especially customary land rights for indigenous peoples and smallholders, and to safeguard the environment. The VGGT are relevant to financial investment in that they call on governments to protect tenure rights and request that all involved parties, including private financial investors, be respectful of those rights (FAO 2012). Coordinated by the FAO and overseen by the Committee on World Food Security (CFS), the VGGT were developed through a process largely viewed to be broadly inclusive and consultative (McKeon 2013). As such, the VGGT are widely seen as holding more legitimacy than the PR Al (Margulis and Porter 2013).
The CFS launched further discussions in 2012 with a view to developing yet another set of responsible agricultural investment guidelines that included land, but also encompassed other agricultural investment (Stephens 2013, 190). Adopted by the CFS in 2014, the Principles for Responsible Investment in Agriculture and Food Systems (PRIAFS, also referred to as the CFS-RAI) (FAO 2014), underline the role of small farmers as agricultural investors alongside corporate and financial investors. The CFS-RAI contain explicit language about the need to hold investors to account for any negative impacts of their investments (FAO 2014).
Other responsible investment initiatives have also emerged on the voluntary' responsible investment landscape. These include the G8 New Alliance for Food Security and Nutrition’s Analytical Framework for Responsible Land-Based Agricultural Investments; the UN Principles for Responsible Investment’s (PRI) Principles for Responsible Investment in Farmland; the UN Land Policy Initiative’s Guiding Principles on Large Scale Land Based Investments in Africa; the Global Compact’s Food and Agriculture Business Principles; the OECD-FAO’s Guidance for Responsible Agricultural Supply Chains; as well as numerous standards stylized for investment in specific commodities, including for soy, sugar, cotton, biofuels, etc. (GRAIN 2012; OECD and FAO 2016; World Bank et al. 2017).
These various responsible investment initiatives in the agrifood sector reflect a widespread interest to ensure that investment into the sector is socially and environmentally sustainable. But at the same time, these initiatives, based on the voluntary efforts of institutional investors to seek out responsible investments from the current products available through mainstream investment channels, have at best supported a 'do no harm’ type approach, which maintains a strong motive to maximize financial returns while avoiding negative outcomes. In practice, these initiatives are inherently weak even at avoiding negative outcomes. The responsible investment initiatives in the agrifood sector have tended to be broad in scope and vague with respect to requirements, making it easy to claim adherence without changing much by way of practice. The PRAI. for example, is only one page long, and while the FAO’s Voluntary Guidelines and the RAI-CFS are much more detailed and specific, all three operate only as guidance frameworks and do not have signatories, making it difficult to ascertain how many investors actually abide by them (Clapp 2017). The number of voluntary initiatives in the agricultural investment space has also multiplied rapidly, leading to confusion as they cover overlapping themes. For the casual observer, the differences between the PRAI. the Voluntary Guidelines, the CFS-RAI, and the Farmland Principles are not easily discernible (Margulis and Porter 2013).
The weaknesses of these responsible investment efforts have led some analysts to promote alternative financing initiatives, such as social finance, for the agrifood sector. Rather than banking on a sufficient number of institutional investors acting more responsibly in their global investment activities, these alternative initiatives seek to ground investment in sustainability by appealing to investors to fund specific sustainable agricultural initiatives at the local level.