Agricultural activities make up about 11% of US greenhouse gas emissions, making it a prime target in the fight to combat climate change. Despite the industry’s high contribution to carbon emissions, there are options – such as switching to organic and regenerative agriculture techniques – that can cut these emissions in half. Yet less than 1% of all farmland in the United States is certified organic. The absence of these agricultural techniques stems in part from the considerable costs and challenges associated with switching traditional acres to organic farmland. Now, ESG funds and investors are helping to support farmers who make this transformation.
Creating Organic Farmland
Transforming to sustainable agriculture and organic farming is no simple task. The United States Department of Agriculture has an extensive list of requirements that includes forgoing harmful chemical pesticides and practicing crop rotation to preserve the soil.
The process in switching from traditional methods may provide further barrriers. Farmers must go through a three-year transition period to properly cleanse their farmland. They cannot label their crops as organic during this stretch, even though they may be following organic practices. Transitioning to this new system will often lead to an initial drop in crop yields. This may make it more difficult to offset new expenses, such as adding physical labor to remove weeds and pests rather than wiping them out with chemicals.
It takes about four years for a farm to break even after making the switch. Soon after, organic famers become profitable due to the higher prices that they are able to charge for their crops. However, many fail during these early years due to initial losses in income. Though there has been a rise in the demand for organic products, as organic food sales more than tripled between 2008 and 2019, these barriers have prevented a similar expansion in the number of organic farmers.
Filling the Financing Gap
Several ESG investment funds have stepped up to fill the financing gap as farmers move into regenerative agriculture. Farmland LP, the largest manager focused on converting conventional farmland to organic in the US, announced in March it had raised $130 million for a real estate investment trust (REIT) to aid Oregon and Washington farmers during the early stages of the transition period.
Iroquois Valley in Illinois operates a REIT with similar support for transitioning farms. The organization helps them to go even further than the USDA standards require, such as encouraging tillage techniques that control weeds without destroying the soil. This may become especially crucial as the amount of arable land shrinks. Dirt Capital Partners offers another fund to support farmers with numerous goals, including switching to more sustainable techniques.
Impact investors can help advance this cause by investing in similar funds and seeking out companies that finance organic farmers and sustainable agriculture. For example, Nestlé has pledged to invest $1.3 billion over the next five years to train farmers and provide higher payment for products coming from farms going through regenerative agriculture transformation.
A Better Way to Farm
Technology has pioneered more environmentally friendly and ethical ways to put food on the table. However, transforming to organic farming is not as simple as flipping a switch. Farmers need support to make the change. By supporting funds, organizations, and companies focused on this issue, impact investors can help them get there sooner.