Sifiso Ntombela | If farmers want to attract investment, ESG is the key

The
coronavirus pandemic has restored the importance of protecting healthy livelihoods
over and above everything.

Sectors like
agriculture and health, which are essential for daily sustainability of livelihoods,
have gained more popularity during the Covid-19 crisis. Every country,
including South Africa, is designing measures to develop and attract more
investments in the health and food production industries.

The South
African agricultural sector is relatively well developed, with sophisticated
food distribution systems. However, the Covid-19 has revealed some weaknesses
in the food system as some households, both in urban and rural areas, were
unable to afford and access food despite the country having sufficient food
quantities at national level.

This
suggests a need to attract more investments in order to produce food even on
the marginalised areas such as the former homelands. These areas have
relatively large available arable land but production of food is low due to low
investments.

Investments
into the South Africa’s agricultural sector have been growing sideways for most
of the past decade. The gross fixed capital formation (GFCF) as a share of
value-added in agriculture declined from an average of 27{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} in the 1970s to 20{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}
in the 1990s and 16{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} in the last decade.

This can be
attributed to policy changes such as the inclusivity agenda through
promulgation of Broad-Based Black Economic Empowerment Act and the tariff
reforms that exposed industries to international competitors, thus affecting
the competitiveness of industries like sugar and poultry.

Despite a dwindling
investment climate, some industries like citrus have attracted more investments
in the recent period. Investments into fruits and nuts are driven by global
demand and improving compliance to environmental, social and governance (ESG)
production practices by local fruit industries. With the Covid-19 crisis
lifting the need to sustain lives, investors are likely to priorities
industries or projects that promotes ESG values and standards.

Over the
past decade, the fruit industries under the umbrella body called Fruit South
Africa have developed an environmental compliance programme called “Confronting
Climate Change” which seeks to encourage farmers to measure and mitigate
emissions produced by the industry. The fruit industry has also developed
social programs like Sustainability Initiative of South Africa (SIZA) which
strengthen the sustainable and ethical production of fruits in the country.
These programmes are established to ensure that the horticultural sub-sector
improves its compliance to environmental, social and governance practices.

A similar
trend has emerged in the mohair industry, which produces nearly 70{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of global
mohair, supplying it to famous fashion houses such as Louis Vuitton Malletier
and Kering Group. These global fashion houses have encouraged South African
mohair producers to priorities compliance to ESG practices and standards in
order to attract more investments from them.

Professor
Robert Eccles, from the University of Oxford, emphasised that the global
investment community is increasingly interested in industries that shows a
great deal of preserving the ESG principles. Investors are looking into food
industries that protects the environment and social wellbeing of employees and
neighboring communities.

The growing
focus of global investors on ESG-compliant industries is also driven by the
need to achieve global sustainable goals (SDGs). In the fight to reduce global
warming and hunger, food production is effective in sinking carbon, meaning they
can absorb emissions equivalent to almost a third of carbon dioxide emissions
emitted by the fossil fuels industries.

By focusing
on agricultural industries that complies to ESG, the investors are seeking to
promote food security and simultaneously reduce the emissions that causes
climate change. It has been established that climate change affects all four
pillars of food security; that is, availability (yield and production), access
(prices and ability to obtain food), utilisation (nutrition and cooking), and
stability (affordability and disruptions to availability).

The global
phenomenon by investors to focus on agricultural industries that complies with
ESG is also followed by domestic investors. The domestic investors are also
encouraged by the recently promulgated Carbon Tax policy that aimed to incentivise
investors to make environmentally friendly investments decisions.

In June 2019, the South African
government implemented the carbon tax policy at a rate of R120 per ton
carbon dioxide equivalent (R120/tCO₂-eq)
on emissions produced by industries.

Within the agricultural sector,
horticultural products such as fruits were found to be least (not direct)
affected by the newly introduced carbon tax.

However, the livestock industries will
be largely affected by the tax due to their high level of emissions produced
during the production process. This implies that investments in these heavy
polluting agricultural industries might be affected, unless concerted efforts
are made to mitigate emissions.

Such efforts include enhancing
research and development to stimulate innovations in the production processes.

Dr Sifiso
Ntombela is chief economist at the National Agricultural Marketing Council
(NAMC). Views expressed are his own.