investor's guide to commodities - PRI Signatory Extranet - Principles ...

THE RESPONSIBLEINVESTOR’SGUIDE TOCOMMODITIESAN OVERVIEW OF BEST PRACTICESACROSS COMMODITY-EXPOSEDASSET CLASSES

SEPTEMBER 2011AUTHORS: IVO KNOEPFEL AND DAVID IMBERT, ONVALUES LTD.OUTCOMES OF A PROJECT LED BY:onValues Ltd.WITH SUPPORT FROM:• Swiss Federal Department of Foreign Affairs• UN Global Compact• UN-backed Principles for Responsible Investmentwww.onvalues.chwww.eda.admin.chwww.unglobalcompact.orgwww.unpri.orgACKNOWLEDGEMENTSWe are indebted to the many people that through their insights and feedbacks contributed to this report,in particular to the many investors, analysts and stakeholders that participated in our round of interviewsand in different workshops/conferences organised by our project. Special thanks go to Helene Winch (BTPension Scheme), Rob Lake and Katie Swanston (PRI Secretariat), Bernd Schanzenbächer (EBG Capital),Beat Zaugg (Ecofin), Peter Zollinger (Globalance Bank), Rolf Hässler (oekom Research) and Gavin Power(UN Global Compact) for their dedicated support of our work.DISCLAIMERThis publication has been prepared for general guidance on matters of interest only, and does notconstitute professional or investment advice. You should not act upon the information contained in thispublication without obtaining professional advice. No representation or warranty (express or implied) isgiven as to the accuracy or completeness of the information contained in this publication. The authors andsupporters do not accept or assume any liability or duty of care for any consequences of you acting on theinformation contained in this publication or for any based on it.Designer: Nilou Safavieh

ForewordGlobal competition over scarce natural resources will be one of the defining aspects of the 21thcentury. The rapid growth of developing countries, people’s quest for a more affluent lifestyleand growing populations are boosting the demand for vital commodities such as food, energyand metals. Prices will inevitably rise and investors have noticed. In only a decade, investmentsin commodities have increased more than fifty-fold.But investors would be mistaken to consider this a financial asset class like any other. Thesupply of food, energy and other commodities is critical for economic and social development.Without those necessary components, and fair access for all to them, the world risks long terminstability with all the associated threats to the well-being and security of society.Policy makers will accept much needed private sector investment in this area as long as it isseen as positively contributing to the development and stability of our economies and societies.Investors must recognise social sensitivities and concerns, even if they are sometimes perceivedas being unfair and not based on absolute certainty, as in the case of the linkages betweengrowing investment and price volatility. A “license to invest” in these markets will have to beearned and maintained.Investors should therefore proactively implement measures aimed at managing environmentaland social risks related to commodities investments. The present report, the result ofan almost two-year long engagement process with leading investors and stakeholders, presentsa range of best-practices that institutional investors should carefully consider and implementacross different commodity-related asset classes. Given the complexity of commodities marketsand of the interplay with the “real” economy and our natural environment, it is crucial thattrustees and investment managers devote time to these issues and truly understand underlyingmechanisms leading to undesired impacts.To feed and sustain a world of 9 billion by 2050 massive investments in better infrastructure,more efficient use of resources and systems based on renewable resources will be needed.This can be achieved only through partnerships between governments, public and private-sectorinvestors. Investors will be rewarded by considerable financial opportunities. By adoptingvoluntary standards for responsible investment in commodities and infrastructure, investorsare showing that they are also ready to contribute to social goals.Donald MacDonaldTrustee, British Telecom Pension SchemeFounding Chairman, Principles for Responsible Investment

4 The Responsible Investor’s Guide to CommoditiesTable of contents1. Executive Summary 62. Introduction 83. Asset-class overarching considerations 104. Investments in commodity derivatives 124.1 The issues at stake 124.2 Recommendations for institutional investors 134.3 Areas for further research and collaboration 145. Investments in physical commodities 155.1 The issues at stake 155.2 Recommendations for institutional investors 155.3 Areas for further research and collaboration 156. Investments in real assets 176.1 The issues at stake 176.2 Recommendations for institutional investors 176.3 Areas for further research and collaboration 187. Debt or equity investments in companiesor projects providing commodities exposure 197.1 The issues at stake 197.2 Recommendations for institutional investors 197.3 Areas for further research and collaboration 208. Special focus: Investments in agricultureand farmland 218.1 Agriculture: a global challenge 218.2 Investments in soft commodity derivatives 228.3 Investments in farmland 238.4 Debt and equity investments in theagriculture and food sector 258.5 Areas for further research and collaboration 259. Conclusion 26

5Appendix 1. Overview of key environmental andsocial issues for commodities 27Appendix 2. Summary of recent publications on investors’influence on commodity prices and volatility 28Appendix 3. 17 June 2011 Conference Report:“Agri-investing for the long term” 30Appendix 4. The Principles for ResponsibleInvestment in Farmland 45Appendix 5. Project Timeline 49Appendix 6. Project bibliography and events 50GLOSSARYCBOT Chicago Board of TradeCFTC U.S. Commodity Futures Trading CommissionESG Environmental, social and governanceETF Exchange-traded fundFAO Food and Agriculture OrganizationGHG Greenhouse gasOTC Over-the-counterPPP (People)-Public-Private PartnershipsPRI Principles for Responsible InvestmentUNCTAD United Nations Conference on Trade and DevelopmentWEF World Economic Forum

6 The Responsible Investor’s Guide to Commodities1EXECUTIVESUMMARY“The responsible investor’s guide to commodities” 1 concludes a multi-yearproject sponsored by the Swiss Federal Department of Foreign Affairs, the UNbackedPrinciples for Responsible Investment (PRI) and the UN Global CompactSecretariat. The goal of this work was to improve the understanding ofenvironmental, social and governance 2 (ESG) issues in commodity investmentswith a view to identifying and promoting best practice in this area.The best practice recommendations proposed in this report result fromextensive engagement with institutional investors and other stakeholders thatare active across the spectrum of commodity investments. These recommendationsare summarised on the next page.This report covers the full range of options available to investors to addcommodity exposure to their portfolios:• Investments in commodity derivatives, which can be traded on exchanges orover-the-counter (Section 4)• Investments in physical commodities (Section 5)• Investments in real productive assets, such as forest and agricultural land(Section 6)• Debt or equity investments in companies that own commodity producingassets or related businesses in the commodity value chain (Section 7).The report also includes a special section on investments in agriculture andfarmland, which is a part of the commodities spectrum particularly exposed toenvironmental and social issues (Section 8).Both the issues and the available strategies for responsible investors varygreatly across investment types. Where real asset and debt / equity investmentscreate direct exposure to ESG issues such as mine tailings or labourconditions, physical commodities or commodity derivatives require investorsto consider the “systemic” impact of their actions: physical commodities takenaway from productive use can harm growth and returns in other asset classesand their production leads to environmental and social externalities; excessivespeculation in commodity derivatives can lead to price volatility and ultimatelyharm investors’ “license to invest” in those markets.Further, even in the investment types characterised by direct exposure toESG issues, a distinction must be drawn between manageable and unmanageableissues. A real asset investor can select farm investments on the basis oftheir water and greenhouse gas footprint and a shareholder can challenge thesourcing policy of a listed food company, but the holder of gold bullion cannotknow whether it was mined by slave labour or by a professional miningcompany. The fungibility of physical commodities limits the extent to whichinvestors can identify and manage ESG issues associated with their production.Given these distinctions between commodity investment types, “TheResponsible Investor’s Guide to Commodities” also comments on the choicebetween asset classes (Section 3). Real asset investments and debt / equityinvestments appear preferable when evaluated for the possibility to activelymanage ESG risks and opportunities and contribute to sustainable developmentthrough the allocation of capital. For physical and derivatives investments,the risk of contributing to unwanted “systemic” effects and the limitedpossibilities to mitigate these put responsible investors in a dilemma.Throughout the report, we highlight areas for further research and engagementby investors. While this project has reached its conclusion, theinvestment community is just at the beginning of a period where innovativeapproaches will be needed in the field of commodity investing.1. Responsible investors are investors with a long-term view aiming to consider material ESG issues in the managementof their investments and in their ownership strategies2. The production and delivery of commodities involves a wide range of ESG issues, including the depletion of nonrenewableresources, pollution of air/water/soil, labour and human rights issues. An overview is provided in Appendix 1.

7HEADLINES OF MAIN RECOMMENDED BEST-PRACTICES(see detailed text in the report)INVESTMENTS IN COMMODITYDERIVATIVES• Define reasonable financialperformance targets for activemanagers• Use multiple investment channels• When investing passively, implementrebalancing proceduresbased on fundamental considerations• Insist on hedge fund managersbeing transparent about theirpositions and strategies• Do not allow managers to takephysical delivery• Limit investment in smaller, moreilliquid commodity markets• Engage with the investmentcommunity to improve marketgovernance and transparency• Contribute to the policydebate more proactively andtransparently• Engage with exchanges and othermarket actors in view of introducingstandardised futures contracts thatinclude ESG considerations. Likewisewith index providers in relationto the construction of indices.INVESTMENTS IN PHYSICALCOMMODITIES• Limit investments to commoditiesfor which competition withindustry is negligible• Support the development ofglobal ESG standards for theproduction of commodities• Support fund managers that areplanning to source “traceable”commodities.INVESTMENTS IN REAL ASSETS• Formalize the assessment andmanagement of environmentaland social risk• Maintain a formal dialog with thelocal community to identify risksand problem areas• Require compliance with local andinternational laws, even wherepoorly-enforced• Uphold high business and ethicalstandards. Introduce policies andsystems to avoid corruption in allits forms, including extortion andbribery.• Stimulate the development of improvedoperational ESG standardsfor various asset types• Regularly monitor and report onthe ESG performance of real assetinvestments.DEBT OR EQUITY INVESTMENTS INCOMPANIES OR PROJECTS PROVID-ING COMMODITIES EXPOSURE• Articulate the case for consideringESG factors as it relates to keybusiness value drivers• Ask independent and sell-sideresearch analysts to provideresearch on ESG issues• Integrate ESG research intoinvestment analysis and decisionmakingprocesses• Evaluate ESG integration capabilitiesin selecting and reviewinginvestment managers• Participate in supply chain initiativesaimed at developing voluntaryESG standards• Exercise voting rights and engagewith companies on ESG issues• Participate in collaborativeengagement initiatives with otherinvestors.SPECIAL FOCUS: AGRICULTURE – ADDITIONAL SECTOR-SPECIFICRECOMMENDATIONSINVESTMENTS IN SOFT COMMODITYDERIVATIVES• Never take physical delivery ofagricultural commodities (or allowmanagers to do so)• Do not participate in smaller,more illiquid markets• Do not participate in marketswhere financial investors’ contributionto increased volatility couldbe substantial.INVESTMENTS IN FARMLAND• Assess the impact of an investmenton smallholder farmers andlocal communities• Support measures aimed atimproving the livelihoods of localpopulations• Avoid investments in crops thatare unsuited to local conditions• Avoid investments in land conversionplays (e.g. forestland turnedto pasture or fields).DEBT AND EQUITY INVESTMENTSIN THE AGRICULTURE AND FOODSECTOR• Educate yourselves about the environmentaland social dynamicsof agriculture• Engage with companies in a strategicmanner, focusing on financialmateriality and—given the complexityof the agricultural supplychain—targeting key interventionpoints to maximize impact.

8 The Responsible Investor’s Guide to Commodities2INTRODUCTION“The Responsible Investor’s Guide to Commodities” summarises the resultsof a project by onValues in collaboration with the UN-backed Principles forResponsible Investment (PRI) Secretariat, the UN Global Compact Secretariatand the Swiss Federal Department of Foreign Affairs focusing on environmental,social and governance (ESG) issues related to investments in commodities.The project took place in the period between January 2010 and August 2011and explored the issues at stake, possible actions for institutional investors andareas for further research and collaboration.Responsible investment is a term that has evolved rapidly over the lastdecade and describes the process whereby an investor incorporates ESG considerationsinto investment decisions and ownership practices. The processstands in addition to, or is incorporated into, traditional investment analysisprocesses. The aim of responsible investment is to enable investors to makemore informed investment decisions, thereby protecting shareholder valueand enhancing long-term returns. It is based on the view that ESG trends arebecoming increasingly relevant and material, and can affect investment returns,particularly in the medium and long term. Therefore, like any relevantfinancial metric, these issues should be understood and analysed within aninvestment context. Furthermore, most institutional investors have a fiduciaryduty: a professional duty of care and legal obligation to their clients to take allmaterial issues into account in their investment decisions.The findings in this report are based on a range of interviews 3 and discussionswith leading institutional investors and other stakeholders active in thespace, and on the review of the available investment research and academicliterature 4 . In addition, two investor roundtables were organised at which assetowners, researchers, investment managers and other stakeholders providedinputs and challenged the findings from the project. 5We identified different motives for investors to consider ESG issues whenmanaging their commodities investments:• Long-term environmental and social trends such as the scarcity of finiteresources, climate change, and changes in demographics and lifestyles willinfluence future price levels and investment returns and create new investmentopportunities and risks• A wide range of ESG issues involved in the production and trade of commodities,e.g. local pollution and human rights issues, can translate intoinvestment and reputational risks for investors• At a more “systemic” level, concerns about the role played by investors incommodity markets could lead to new regulations impacting available investmentopportunities and returns, ultimately affecting investors’ “licenseto invest”.Because of their positive contribution to risk-adjusted returns and portfoliodiversification, commodities investments have grown considerably in the pastyears and are expected to continue their growth path in the coming years. Accordingto Barclays Capital, over $400 billion of institutional and retail moneyis currently invested in commodities, compared to only $6 billion a decade ago(see graph below).3. Interviews were conducted with finance professionals active in commodities, including commodity traders, asset owners,asset managers, investment consultants, and company, intergovernmental organisation and NGO representatives.4. See the 13 January 2011 report by onValues: “Responsible investment in commodities”5. onValues organized and moderated a commodities panel at the 2010 “PRI in Person” conference in San Franciscoand also held an all day concluding conference on “Agri-investing for the long term” on 17 June 2011 in Geneva, Switzerland.onValues also moderated a session on commodities investments at the 15-16 September 2011 “PRI in Person”annual event and at the 19 September 2011 International Sustainability Leadership Symposium

9FINANCIAL INVESTMENTS IN COMMODITIES: ASSETS UNDERMANAGEMENT, BY PRODUCT, 2005-2011 ($billions)4504003503002502001501005002005 2006 2007 2008 200920101 st quarter20102 nd quarter20103 rd quarter20104 th quarter20111 st quarterBarcap estimates of indicesETP-industrial metalsMedium term notes ETP-indices ETP-preciousETP-energyETP-agriculturemetalsSource: Barclays Capital, The Commodity Investor, various issues.Financial investments in commodities (from UNCTAD: “Price Formation in Financialized Commodity Markets”,June 2011)An important distinction needs to be madebetween different types of commodity investments:• Investments in commodity derivatives,which can be traded on exchanges orover-the-counter. These investments canbe implemented through index trackingfunds, hedge funds and other strategies.• Investments in physical commodities.Traditionally, these were limited to goldand other precious metals (silver, platinum,palladium, etc.). A new range of physicallybackedexchange-traded funds and structuredproducts will make it easier in thefuture to invest also in industrial metalssuch as copper, tin, zinc, aluminium,lead, etc.• Investments in real productive assets, suchas forest and agricultural land• Debt or equity investments in companiesthat own productive assets, typically in theextractive industries or in the agriculturalvalue chain.The ESG issues at stake and potential responsesby investors vary widely depending onthe type of investment, as we show in the nextsections summarising our findings for differentinvestment types. Some of the identified ESGissues are directly related to the production of acommodity 6 while others are of a more indirectnature, such as the potential influence of investorson price levels and volatility.While the concept of responsible investingis well developed for some asset classes,including public equities, fixed-income,real estate and private equity, the debate onresponsible investment approaches for commoditieshas just begun. The findings in thisreport highlight some of the key challengesand management options for investors andshould be seen more as the beginning of adebate within the investment world on thistopic. More research and discussions betweeninvestors will be needed in the coming yearsto validate and deepen our findings.6. An overview of these issues is presented in Appendix 1

10 The Responsible Investor’s Guide to Commodities3ASSET-CLASSOVERARCHINGCONSIDERATIONSIn the course of the project, several interviewed investors and stakeholdershave challenged us to reflect on this fundamental question: Are investments incommodities at all compatible with the concept of responsible investing? Aswe show in the following sections, each approach to investing in commoditiesinvolves a range of ESG issues that can, to a certain extent, be managed andmitigated. We do not see a fundamental incompatibility with the concept ofresponsible investing if certain best-practices and precautions are followed.Nevertheless, there are substantial differences between various types ofinvestments that do matter to responsible investors. The concept of responsibleinvesting relies on the possibility to analyse and actively mitigate ESGrisks (or manage opportunities) by selecting investments and/or being an activeowner. Because of the fungibility of standardised commodities, this is not possiblefor commodity derivatives and (in most cases) for physical commodities.Many responsible investors also see their role as contributing to the long-termstability/viability of financial markets and to a transition to a more sustainableeconomy. The table below outlines some of the large variations between differenttypes of commodity investments in this regard (see table below).On balance, investments in real assets or in the debt/equity of companiesprovide the greatest positive “ESG leverage” to investors and are best aligned tothe concept of responsible investing. Physical commodities are questionableand many institutional investors exclude them from their investments. Forcommodity derivatives, which are the most frequently used investment type, itis not easy to apply the concept of responsible investing and in this sense thealignment is not ideal. We nevertheless believe that responsible investors canplay a positive role in this investment market by following the best-practiceshighlighted in the next section.“Long-term oriented, responsible investorsshould invest in productive assets and steerclear from investments in derivatives orphysical commodities”—CIO of a Dutch pension fund interviewedin the course of the project

11Possibility tomitigate ESGrisks by selectinginvestmentsPossibility tomitigate ESG risksby engaging withproducers and othervalue chain actorsRisk of damagingthe real economyand returns in otherasset classes**Possibility toactively contributeto sustainable developmentthroughallocation of capitalCOMMODITYDERIVATIVESLow* Low Low-Medium Low*PHYSICAL COMMODITIES Low* Low Medium-high Low*REAL ASSETS High High Low HighINVESTMENT INCOMPANY DEBT/EQUITY Medium-high Medium-high Low Medium-high* Would be higher in case a system to trace the source of commodities and ensure ESG criteria are met could be implemented** E.g. by taking physical commodities away from productive use or contributing to price volatility“I have no doubt: gold is the ideal investment[…]Except, of course, gold is nothing but ashiny metal […]Gold has no financial valueother than that which people accord it,and thus it should have no role in a seriousinvestment program”—Howard Marks, Chairman of Oaktree, December 2010

12 The Responsible Investor’s Guide to Commodities4INVESTMENTSIN COMMODITYDERIVATIVES4.1 The issues at stakeInvesting in commodity derivatives is the main way in which institutionalinvestors seek exposure to commodities. Investments are implemented bymeans of futures, OTC contracts, index tracking funds, swaps on indices, hedgefunds and other active strategies.Financial investors usually sell back (“settle”) their derivative contractsbefore expiry to other counterparties and therefore avoid holding the physicalcommodity. Over the long-term, they therefore have no effect on absoluteproduction levels and related ESG issues. Over shorter timeframes, though,they can create price signals in the futures market that impact producer decisionsand influence prices in the spot market. Increased volatility in commodityprices can make it difficult for society to adapt and, in the case of foodcommodities, can lead to food crises and social unrest. Excessive speculationon futures markets can also potentially disrupt futures markets role as a pricediscovery and risk hedging tool for farmers and producers. When looking atcommodity derivative investments we are therefore dealing with systemic risksof a more indirect nature, compared to other types of investments with moredirect ESG impacts.The G20 has put commodity price volatility at the top of its agenda andmany international bodies and national regulators are dealing with the issue.A heated debate about the potential influence of financial investors on commodityprices is under way with highly divergent opinions being expressed.Academic research on the issue is often inconclusive, in part because it relieson past data that cannot capture the rapidly changing situation with regard tothe nature and scale of investments. In Appendix 2 we summarise findings ofrecent “meta” publications on this issue to complement the literature alreadyreviewed in our interim report.“… what little distortion speculators maycause is soundly trumped by the servicethey provide. In particular, they supplyliquidity and price information that makesfutures markets more efficient”—The Economist, 13 November 2010

13Based on our discussions and interviewswith investors and on the literature reviewed,we have identified the following mechanismsthat can lead to investors impacting pricelevels and volatility:• In many futures markets, financial investorshave become the leading players (comparedto commercial investors)• Financial investors increasingly decide toinvest based on factors that are unrelatedto fundamentals, such as herding arounda price trend (which might initially bejustified by changes in fundamentals butthen becomes self-reinforcing) or wantinga certain exposure for portfolio diversificationreasons (which, if manifested in anindex strategy, leads to obligatory “rolling”of futures contracts to maintain exposure,without regard to fundamentals)• By piling into commodities markets at suchscale, and in a manner that is largely insensitiveto fundamental drivers, financialinvestors have in fact eroded their originalcommodities investment case of uncorrelatedreturns. Partly as a result of this,more sophisticated investors have begun toseek commodity exposure through investmentsin real assets such as farms, minesor forests.• The advent of highly liquid exchangetradedfunds makes it relatively easy formomentum-driven investors to move largeamounts of money in or out of commoditymarkets• All of this can lead to increased volatility infutures markets, and as a consequence alsoin spot markets 7• Some observers also point to the fact that astructurally higher volatility will also leadto higher physical commodity price levels.This is explained by the following relationship:increased volatility in futures marketsleads to increased margin requirements,making it more expensive for farmers tohedge their production risks. This cost iseventually passed on to the end consumers.4.2 Recommendations forinstitutional investorsThe main responsibility for dealing withthese issues clearly rests with regulators.US and European regulators have alreadyintroduced a range of measures aimed atincreasing transparency and limiting excessivespeculation (these include measuresto increase transparency of both regulatedand “over-the-counter” markets, centralclearing requirements, regulation of significantparticipants, position limits, etc.).Investors nevertheless have an importantrole to play. Based on our discussionsand engagement with investors, a seriesof voluntary measures that investors canimplement with the goal of avoiding negativeimpacts and actively contributing towell-functioning markets were identified.These include:■■Defining reasonable performance targetsfor active managers to avoid themhaving to chase momentum and takeexcessive risk■■Using multiple investment channels,avoiding that single investment managersor funds attain a dominating positionin the market with a higher risk ofcontributing to volatility■■When investing passively, implementingprocedures aimed at rebalancing portfolioallocations for different commodities(e.g. when prices exceed levels justifiedby fundamentals). This has the effectthat the investor is a seller of futureswhen prices go up excessively (and viceversa)which tends to stabilise prices.■■Insisting on hedge fund managers beingtransparent about their positions andstrategies■■Not allowing managers to hold positionsinto delivery period or taking deliveryso as not to affect the price-buildingmechanism■■Setting limits on investment in smaller,more illiquid commodity markets wherelack of market sophistication / liquiditycoverage could lead to investors havinga big influence on prices■■Engaging with commodity futuresexchanges, investment managers, indexproviders, etc. with the goal of improvinggovernance and transparency ofcommodity and OTC markets■■Contributing to the policy debate moreproactively and transparently, in view ofbalancing short-term interests with theneed for ensuring the long-term sustainabilityof derivatives markets and investors’access to them.7. Given today’s size of futures markets and the observed contangoeffect, price discovery is usually happening in the futures market“Investorsthat believemarkets arebroken shouldlobby for betterregulation,in particularbettertransparency”—Head of Commodities of apension fund interviewed inthe course of the project

14 The Responsible Investor’s Guide to Commodities“It’s not a casino;we’re nottrying to shootthe lights out”—Donald MacDonald,Trustee, BTPS, quotedat Agri-investing for the longterm, 17 June 20114.3 Areas for further research andcollaborationIn our work, we were surprised by the relativelack of academic research going beyondsimple regression analysis to actually modeland understand the complex mechanismsbehind price building in futures and spotmarkets. This is particularly true for certaintypes of commodities and for behaviouralphenomena and herding effects. There certainlyis a need for more and better researchin this area.Furthermore, while a general consensus hasformed around the idea that that the financializationof commodities markets has increasedvolatility, there is only a basic understandingof the consequences of such increased volatility.Research should closely examine howthis will impact market function, commercialparticipants, and society at large.In the course of our discussions withinvestors, the possibility of engaging withexchanges and other market actors in view ofintroducing standardised futures contracts thatinclude provisions for minimum ESG qualitystandards was mentioned several times. Thepossibility of launching a contract on “sustainablepalm oil”, given the broad support for aglobal standard facilitated by the Roundtableon Sustainable Palm Oil, was mentioned. Webelieve sooner or later such contracts will beintroduced and that engaged investors couldpush for their early introduction.At the same time, investors could engagewith index providers in view of designingindices that better reflect market fundamentalsof the different commodities and thatincorporate ESG factors in the design of theindices. Given the importance of commodityindex investing, this would be an importantconduit for helping markets become moreESG-savvy.“[… fundamental] factors alone are notsufficient to explain recent commodity pricedevelopments; another major factor is thefinancialization of commodity markets”—UNCTAD: “Price Formation in Financialized Commodity Markets:The Role of Information”, UN New York and Geneva, June 2011

155INVESTMENTSIN PHYSICALCOMMODITIES5.1 The issues at stakeHolding the physical commodity provides the purest form of exposure to commoditiesbut is often impractical because of the high storage costs. Traditionally,investors have held considerable amounts of physical gold and otherprecious metals because it is possible to store them at a reasonable cost. Forthese commodities, investors account for an important part of global annualdemand and therefore substantially influence prices 8 .Investments in precious metals are easily accessible through a range ofphysically backed exchange-traded products/funds on these metals. Recently,similar funds on aluminium, copper, lead, nickel, tin and zinc have beenlaunched. Investing in these industrial metals (arguably also in some of theprecious metals) brings investors in direct competition with industrial demand.The issues at stake are both of a direct and of an indirect nature. On onehand, when demanding physical commodities investors create an additionaldemand whose production and delivery is associated with a whole range ofESG issues 9 . Because the source of the commodities is usually not known, investorscannot choose between different proveniences or engage with producersin view of minimising ESG risks (an option that would be available wheninvesting in the equity of producers).Potential indirect effects are two-fold. Strong growth in physical investmentscould lead to higher commodity prices and price volatility, with similarnegative effects on producers and society already discussed in Section 4 (inrecent months, for example, strong investor demand for silver and copper isthought to have contributed to increased volatility). In addition, physical investmentbrings investors and industrial consumers into direct competition forsupplies in already tight markets, especially in emerging markets. This risksconstraining economic growth and potentially hurting the returns of equitiesportfolios. In our interviews and discussions with investors, many pointed tothis potential “zero-sum game” as the reason for having introduced policiesnot to invest in physical commodities.5.2 Recommendations for institutional investorsBased on our research and discussions with investors, we have identifiedthe following actions that investors in physical commodities can undertaketo minimise negative impacts:■■Limit investments in physical commodities to commodities for whichcompetition with industry is negligible (e.g. gold)■■Support supply-chain initiatives aimed at developing global ESG standardsfor the production of these commodities■■Support fund managers that are planning to source “traceable” commoditiesfrom producers and suppliers that have been certified accordingto environmental and social standards. Such examples already existfor gold and could in the future emerge also for other precious metals.5.3 Areas for further research and collaborationInvestors in physical commodities must have a good understanding of thesemarkets, including the interplay between different actors and effects of growinginvestment on the wider economy, and of the stocks and flows of the commoditiesunder consideration (incl. the possibilities to increase recycling). In8. E.g. according to the World Gold Council, investors currently account for over 30% of global annual gold demand.That share is about 9% for platinum and 8% for palladium.9. See Appendix 1

16 The Responsible Investor’s Guide to Commoditiesall these areas, additional research is needed.The considerable environmental, socialand human rights risks involved in extractingand producing these commodities canlead to reputation risks for investors. Becausecommodities are usually fungible, investorscan manage these risks only indirectly, bycontributing to the development of globalenvironmental and social standards for theproduction of the commodities and by engagingwith investment managers, ETF providers,exchanges and commodity traders in view ofthem implementing these standards as muchas possible in their activity.The development of methodologies andsupply chains allowing investors to sourcecommodities from producers and suppliersthat have been certified according to environmentaland social standards is another areafor further research and collaboration amonginvestors.“For metals such as copper and tin, withdemand already outstripping supply, a freshsource of demand from investors could sendprices soaring from current record levels”—Jack Farchy, Financial Times, 29 November 2010

176INVESTMENTSIN REAL ASSETS6.1 The issues at stakeProductive assets such as farmland and mines have emerged as an increasinglyattractive means for institutional investors to gain exposure to commodities.Real assets provide stable income streams and a certain hedge against inflation.Long-term investors also find real assets attractive as the illiquidity ofmulti-year investment periods reduces competition for properties.Real asset investments require a high degree of management capability.Only investors with sufficient in-house expertise can make these investmentsdirectly. Other investors access real assets indirectly via specialist fundmanagers.Whether investing directly or indirectly, as ultimate owners, financialinvestors in real assets are responsible for the full range of ESG issues relatedto the commodity production process, including issues around environmentalmanagement and the respect of human rights. These issues will vary based onthe type of commodity produced and the geographical location 10 .Direct or indirect ownership, however, will determine how investorsinfluence ESG outcomes. A direct investor will have control over the transactionand operation of an asset, while an indirect investor will only interfacewith their asset manager. An indirect investor can exert their influence in anumber of ways, from formalizing best practice requirements in contractualagreements to offering informal suggestions. In general, we would recommendthat investors formalize their ESG performance expectations to thegreatest extent possible, to command maximum attention and avoid misunderstanding.6.2 Recommendations for institutional investorsIn our discussions with investors we have identified the following recommendedactions for institutional investors:■■Prior to a transaction, require investment managers and operators toconduct an environmental impact assessment identifying the relevantenvironmental impacts and risks of a planned investment. Develop andimplement a best practice environmental management plan for everyasset purchased.■■Prior to a transaction, require investment managers and operatorsto identify relevant labour and human rights risks and impacts of aplanned investment. Develop and implement best practice mitigationand management measures to address social risks appropriately.■■Prior to a transaction, consult with the local community to identifyrisks and problem areas. Continue communications with communitiesthroughout the life of the investment and formalize processes to takeaccount of their feedback.■■Require that operators and managers comply with local and internationallaws, even where they are poorly-enforced, and require them toimplement policies avoiding corruption in all forms, including extortionand bribery.■■Where existing best practice standards are inadequate, stimulate thedevelopment of improved standards for various asset types■■Regularly monitor and report on the ESG performance of real assetinvestments.10. Appendix 1 illustrates the full range of ESG issues by commodity type

18 The Responsible Investor’s Guide to Commodities6.3 Areas for further research andcollaborationThere are already efforts to research anddefine best practices across the spectrum ofcommodity producing real assets. Examplessuch as the Extractive Industries TransparencyInitiative, the Roundtable on SustainablePalm Oil or the Principles for Responsible Investmentin Farmland 11 demonstrate that theprivate sector is committed to developing andimplementing voluntary ESG standards forvarious types of assets. These efforts shouldbe continued for all permutations of geographyand commodity type.Efforts to involve a full range of stakeholdersare critical. The perspectives and roles ofinvestors, managers, operators, governmentsand civil society clearly differ. Collaborationbetween these actors and also a clear delineationof responsibilities will enable futureguidelines to be more effective and actionablein addressing ESG issues.11. See Appendix 4. The Principles for Responsible Investment inFarmland were developed within the remit of this project.

197DEBTOR EQUITYINVESTMENTSIN COMPANIESOR PROJECTSPROVIDINGCOMMODITIESEXPOSURE7.1 The issues at stakeDebt or equity investments in companies active in the commodities space 12represent another way for investors to gain exposure to the underlying commodities.This includes investments in sectors such as oil and gas, mining,metals, paper and pulp, etc. that represent almost a fifth of global equitymarkets. The risk-return profile of these investments, though, is mainlydetermined by their debt or equity character and is therefore not consideredan optimal way to gain exposure to commodities for portfolio diversificationreasons.The environmental, social and governance issues involved in such investmentshave been described in a previous report 13 and are summarized in Appendix1. Asset owners and managers have a range of established techniquesat their disposal for considering material ESG issues in the management ofthese investments and in their ownership policies and practices.Many independent and sell-side research organisations provide regularanalysis of ESG issues which can be used for investment and risk managementpurposes. The impression is that investors’ awareness of environmental risksin highly exposed sectors such as oil and gas or mining is relatively advanced.The understanding of how poor performance in areas such as labour practices,workplace conditions and human rights can affect investment and reputationrisks, on the other hand, is underdeveloped.Institutional investors also increasingly include ESG considerations in theiractive ownership policies and programs. A growing number of institutionalinvestors, many of which are signatories to the UN-backed Principles for ResponsibleInvestment, focus on “commodity-intensive” sectors and companiesin their collaborative engagement programs.7.2 Recommendations for institutional investorsIt’s important that investors realise that ESG issues in these sectors canhave significant financial impacts on their investments: poor managementcan lead to loss of business, fines, delay in regulatory approval processes,conflicts with local regulators and communities, severe damage to brands,etc. It is therefore important that investors improve their understandingof how ESG issues lead to financial and reputational risks, and how theserisks can be managed.In our discussions with investors we have identified the following recommendedactions for institutional investors:■■Articulate the case for considering ESG factors as it relates to key businessvalue drivers such as sourcing, brands and talent attraction■■Ask independent and sell-side research analysts to provide relevantresearch on ESG issues■■Integrate ESG research in portfolio management, investment valuations/decisions, and risk management processes■■Select (and review) external investment managers based on their capabilityto incorporate ESG issues in investment management■■Participate (either directly or through your investment managers) insupply chain initiatives aimed at developing voluntary ESG standardsfor different commodities■■Exercise voting rights and engage with companies on ESG issues (eitherdirectly, through investment managers or outsourcing to specialistengagement service providers). Ask investment managers to undertakeand report on ESG-related engagement.12. Including investments in special purpose vehicles used for large projects13. See the 13 January 2011 report by onValues: “Responsible investment in commodities”

20 The Responsible Investor’s Guide to Commodities■■Participate in collaborative engagementinitiatives with other investors.7.3 Areas for further research andcollaborationThe breadth and quality of relevant investmentresearch, especially when it comes tosocial and human rights issues, needs to beexpanded. It is also necessary to focus moreon external suppliers and contractors, whosepoor track-record on ESG issues can be asource of considerable reputation risk forinvestors.Effective collaborative engagement, includingengagement with smaller companies andwith companies in developing and emergingcountries, is another area for furtherresearch and collaboration among investors.In certain countries it might be necessary forinvestors to engage directly with governmentsand regulators in view of improving local ESGstandards and oversight.

218SPECIAL FOCUS:INVESTMENTSIN AGRICULTUREAND FARMLANDAgriculture is a critical challenge area for the coming decades and the topichas recently risen to the top of the global agenda. In the course of our researchon commodities, it became clear that 1) Agricultural commodities area particularly sensitive area in terms of the environmental and social issuesinvolved, and 2) ESG aspects are also expected to be highly financially materialfor this type of commodity. This section will therefore highlight the uniqueposition of agriculture and—to the extent to which investors must make specialconsiderations for this commodity type—provide guidance on derivativesinvestments, farmland, and company debt and equity.Insights and recommendations in this section are the result of a specialresearch focus of our project and of the discussions with a range of investorsand stakeholders at the “Agri-investing for the long term” conference held on17 June 2011 in Geneva. The proceedings of the conference are summarised inAppendix 3.8.1 Agriculture: a global challengeAccording to the UN, the world will need to produce 70% more food by 2050to satisfy global demand. Growing populations with an increasing appetite forprotein-rich foods, coupled with new uses for food materials such as biofuels,all serve to push up global food demand. At the same time, however, foodsupply is constrained by a legacy of underinvestment, limits to arable land andgrowing water scarcity.Moreover, addressing the world’s food problems means more than increasingthe sheer amount of food produced on farms. That food must reach endconsumers, be financially accessible and be nutritionally sufficient 14 . Currently,roughly one-third of the world is chronically underfed or undernourished.The structural defects in the world food system stem from decades of neglectand underinvestment. From 1980 to 2000, the share of official developmentassistance dedicated to food and agriculture fell from 18% to 3%. Given14. United Nations High Level Task Force on the Global Food Security Crisis, “Updated Comprehensive Framework forAction”, 2010.SUPPLY CONSTRAINTS AND INCREASING DEMAND■ Underinvestmentin agribusiness fordecades■ Urbanisation andgrowing deserts eatfarmland■ Water scarcity andrising energy costs■ We have seen “peakarable land”PRESSURE ONSUPPLYEVER-RISINGDEMAND■ Growing populationdirectly causes a risingdemand for food■ Changing diets(more protein rich)in emerging marketsleads to more demand■ Biofuels are an additionaldemand driverSource: DWS, Credit Suisse, onValues

22 The Responsible Investor’s Guide to Commodities“Responsibleinvestment inagriculture isa necessity, notan option”—Graham Davies,Consultant, AltimaPartners, quoted atAgri-investingfor the long term,17 June 2011that over 50 of the world’s poorest nationshave economies almost 100% based on agriculture,the consequences for developmenthave been serious. The FAO estimates that anadditional $83 billion of annual investmentwill be needed to prepare agricultural systemsto handle the demand of 9 billion people.The world needs new approaches to foodsecurity. Strategies to increase food availabilityby simply bringing more land undercultivation, mining groundwater or applyingmore agri-chemicals to crops will not be sufficientto feed 9 billion people. Agri-chemicalsrely on non-renewable resources such asphosphorus for their production and scientistsalso have singled out the excessive use ofagri-chemicals (alongside the burning of fossilfuels) as one of the most critical oversteppingsof planetary thresholds 15 . Arable landis also a finite resource, and the current rateof arable land expansion cannot be sustainedgiven the limited size of arable land reserves.Water scarcity has begun to affect many agriculturalregions around the world. Futureagriculture must navigate these challengesby improving practices for both demandside and supply side management. Both thedeveloping and developed worlds must adaptto these challenges and do so with a greaterawareness for total system function. A systemthat fails to consistently deliver adequate,affordable nutrition to one-third of the worldcannot be called sustainable.The agricultural system, therefore, will requireinvestors that are attuned to the uniqueenvironmental, social and governance issuesinvolved in the production, distribution andconsumption of food. There are real opportunitieshere to direct capital toward financiallyand socially productive uses, but investorsmust educate themselves about the dynamicsof the world agricultural system to ensurethat their actions make a positive contributionto meeting long-term global objectives.8.2 Investments in soft commodityderivativesSupply-demand dynamics have led to decreasingfood reserves around the world and a dou-15. Rockström et al., “A safe operating space for humanity”, Nature2009.YESTERDAY’S APPROACHES......WILL NOT BE SUFFICIENT TOMORROWRESOURCEUTILIZATIONConvert potential arable landto croplandRapid scaling of irrigated landarea, overdraw on groundwaterAgriculture’s environmentalimpact accepted or ignoredDiminishing land availability, soil degradation,high environmental costDepleted ground water stores render urgentwater efficiency measuresEnvironmental sustainability as necessarystipulationPRODUCTIVITYGROWTHReliance on increased yields indeveloped countriesAcceptance of low smallholderproductivityYield growth in developing countries vital tomeet global demandSmallholder improvements critical to addressglobal hunger and povertySCOPEIMPROVEMENTPriority on calories and increasingcereal productionFocus on farm-level output andyieldImportance of crop diversity, nutritional contentand food affordabilityEfficiency in whole value chain necessary foraccess, food securitySource: WEF, “Realizing a New Vision for Agriculture”, 2010

23“One of the main things in food inflation isthat it has attracted speculators for shorttermprofit at the expense of people living adignified life”—Paul Polman, CEO, Unilever, quoted in The Telegraph, 21 January 2011bling of real food prices over the past decade.This has made the global food system moreprone to price shocks, leading to food riots,export restrictions and political instability.The rising price environment has alsoattracted the interest of financial investors.As discussed in Section 4, financial speculationon commodity markets can contribute toincreased price volatility. In agricultural commoditymarkets, excessive volatility has a disproportionateeffect on the most vulnerablepopulations and threatens the basic abilityof people to feed themselves. Such volatilityhurts small farmers who find it increasinglyexpensive to hedge price risks throughderivative markets and cannot confidentlyplan harvests ahead of time. It also hurtsthe very poor, living on less than $1 per daywithout a safety net if food suddenly becomesunaffordable. Price volatility also exposescertain developing country governments thatare importers of food and have no recourse ifadequate supplies become unobtainable.Given food’s unique status among commoditiesas a basic human right 16 and the factthat food price swings disproportionally impactthe poor, investors should only participatein soft commodity derivatives marketswhere they are sure they do no harm.In addition to our general recommendationsfor commodity derivatives investors,we recommend the following:■■Never take physical delivery of agriculturalcommodities (or allow managersto do so)■■Do not participate in smaller, moreilliquid markets where lack of marketsophistication and liquidity coveragecould lead to investors having a largeinfluence on prices■■Do not participate in markets wherefinancial investors are already known tohave caused increased volatility.8.3 Investments in farmlandFarmland is one of the real assets discussed inSection 6. It has attracted increased investorinterest in recent years due to its low correlationwith other asset classes, relativelystable cash flows and the fact that it providesa certain protection against inflation. Thisgrowing interest, however, has also thrown upchallenges of marketplace transparency andinvestor accountability, as well as concernsover the environmental and social impact ofincreased farmland investment flows. At thesame time, investment in farmland can bringmuch-needed capital flows to a sector that hassuffered from decades of underinvestment.In the context of farmland investment,the practice of “land grabbing” has drawnthe attention of concerned people aroundthe world. But here an important distinctionneeds to be made between 1) investors thatacquire land for the purposes of securingfood supply for their domestic populationsor realizing quick gains, and 2) institutionalinvestment in farmland. In the first case,much of the land can be left uncultivatedafter its purchase, or food is not allowed ontothe open market, both of which negativelyimpact food security.Institutional investment in farmland, onthe other hand, when done by pension fundsor institutional asset managers can lead to amore efficient use of the land. These investorshave a long-term interest in farmingthe land and investing in infrastructure tomaximize cash flows and sell their food onthe open market. Running successful commercialfarms contributes to food supply andputs downward pressure on prices, as wellas translating into tax revenue in the localcountry. Institutional investors are relativelynew to farmland and, admittedly, are stilllearning how to responsibly invest in a challengingsector, but their interest in managingcommercially viable farms over the long-term16, United Nations Universal Declaration of Human Rights, Article 25“For investorswith a longtermhorizonit is clearthat onlysustainableinvestmentswill yield thehighest longtermresults[…] It makesno sense toexhaust anddeplete theland withunsustainablepracticesgeared towardsshort-termgains”—Jos Lemmens, APG AssetManagement, quoted in IPE,July/August 2010, p. 39

24 The Responsible Investor’s Guide to Commoditiesshould direct them to be environmental stewardsof the land and contributing members ofthe local society.This report aims to help institutionalinvestors understand and navigate the challengesof farmland investments. Appendix 4also presents the Principles for ResponsibleInvestment in Farmland, a voluntary set ofguidelines developed by a group of institutionalfarmland investors with supportprovided by our project.In addition to the Section 6 recommendationsthat apply to all real assets, ourresearch and engagement with farmlandexperts and investors lead to the followingrecommended best-practices that specificallyapply to farmland investments:■■Ask investment managers or operatorsto assess the expected impact of aninvestment on the livelihoods of localcommunities and smallholder farmers,whenever relevant. Managers and operatorsshould support measures aimedat improving their livelihoods.■■Avoid investments in crops that areunsuited to local conditions■■Avoid investments in land conversionplays (e.g. forestland turned to pastureor fields).IMPACT INVESTING INFARMLANDImpact investing targets measurablesocial returns on an investment whilerelaxing expectations for risk-adjustedfinancial returns. Farming has emergedas an important area for impact investorsto supply productive capital thatcan improve the lives of the very poor.Many farmers in the developing worldhave no access to capital. Providingworking capital to smallholder farmers,financing trade contracts for co-operativesor investing in the equity of a localagribusiness company can allow thesebusinesses to operate in a more stableand entrepreneurial manner.The Global Impact Investing Network(GIIN), for example, has established aworking group called Project Terragua,which is dedicated to improving investorengagement with smallholders in sub-Saharan Africa. Working collaborativelyamong its investor members, the grouplooks to provide guidance on improvingthe ESG performance of agriculturalimpact investments. Funds that are activein the area include the SEAF IndiaAgribusiness Fund and the SNS AfricanAgriculture Fund.“Private capital has the potential to positively changethe face of agriculture provided that it is not drivenby short-term returns […] Investment must besteered towards improving operational efficiency ofexisting farms as opposed to “transformation plays”where native cover is cleared for the establishmentof monocrops”—Renatto Barbieri, Galtere, Annual World Bank Conferenceon Land and Poverty, April 2011

25“There is no inherent ethical dilemma ininvesting in the food and agri space, providedthese are investments in the true sense of theterm – such as investments in companiesthat make products and/or services that createvalue for customers and society as a whole”—Christophe Churet, analyst responsible forthe SAM Smart Materials Fund at Swiss-based SAM (from IPE, May 2011)8.4 Debt and equity investments inthe agriculture and food sectorParticularly in commodity-related businesses,ESG factors have a financial impact on investmentresults (as discussed in Section 7). Inthe agriculture and food sector, investors gaincommodities exposure by holding the equityand debt of agri-chemical and seed producers,agricultural technology companies,farm equipment manufacturers, agriculturalproducers, and food companies.Our research and engagement with investorssuggests that most investment managersdo not yet systematically integrate ESG analysisinto their investment decision making.There is also a lack of understanding of thecumulative effects of various ESG issues (e.g.the interaction of different environmentaland social issues, and resulting political reactions),whose interrelation will be particularlyimportant for food systems. Most investmentmanagers can speak generally about ESG issuesin agriculture, but do not think of theseissues as impacting a company’s ability tosource raw materials, attract fresh talent, orpreserve brand value.Speaking in the language of “sourcing, talentand brands” also gives company engagementsa better chance of success. Initiativessuch as the Unilever Sustainable AgricultureCode show that agriculture and food companieshave begun to grasp the financial stakesof ESG issues. Investors can play a role inemphasizing the importance of these issuesto companies.In addition to the recommendations inSection 7, we suggest that agricultural debtand equity investors:■■Educate themselves about the uniqueenvironmental and social dynamicsof the agricultural sector with a viewtoward systematically incorporating ESGconsiderations in investment decisions■■Engage with companies in a strategicmanner, focusing on financial materialityand—given the complexity of theagricultural supply chain—targeting keyintervention points to maximize impact.8.5 Areas for further research andcollaborationThe investment community has only justbegun to think about how it can contribute toimproving the global agricultural system. Initiativessuch as the World Economic Forum’sNew Vision for Agriculture, the Global ImpactInvesting Network’s Terragua Project, or thisvery research project aim to connect investorsand the private sector with the long-termrequirements of food security and nutrition.Significant questions remain unanswered:Can large international agri-businesses co-existalongside local smallholder farmers? Doescommercial agriculture always promote foodsecurity? Do globalised commodity marketsalways benefit poor countries?There is ample room and interest forgovernments, development banks, investors,companies, civil society and local populationsto work together on environmentally, sociallyand financially sustainable agricultural solutions.Further research on how to structurethese partnerships will be critical.

26 The Responsible Investor’s Guide to Commodities9Scarce resources and increasing demand present a compelling long-terminvestment case for commodities. These raw materials, energy sources andnutritional staples fuel human activity and their continued, sustainable provisionwill be critical for the indefinite future. Given the politically sensitivenature of these investments, it is important that investors maintain a longterm“license to invest” in this field.For long-term oriented investors it makes sense to consider ESG issues thatare expected to have a material impact on investment outcomes, while at thesame time avoiding investment practices that could harm the proper functioningof markets and the sustainable development of the whole economy.This report has suggested a range of best-practices for these investors in eachcommodity-related asset class. It has also provided guidance on how to approachthe strategic allocation between those asset classes.We are convinced that by implementing these best-practices, responsible investorscan contribute to better investment outcomes, while at the same timecontributing to societal goals and protecting their “license to invest”.CONCLUSION“From now on, price pressure and shortagesof resources will be a permanent feature ofour lives”—Jeremy Grantham, GMO Quarterly Letter, April 2011

27APPENDIX 1.OVERVIEW OF KEY ENVIRONMENTAL AND SOCIAL ISSUES FOR COMMODITIESNote that all issues do not apply equally across all geographies and individual commoditiesCOMMODITYTYPEENVIRONMENTAL ISSUESSOCIAL ISSUESENERGY› crude oil› natural gas› refinedproducts› etc.• Greenhouse gas (GHG) emissions• Energy intensity• Biodiversity impacts (esp. oil sands, arctic and deepseaoperations, hydraulic fracturing)• Acid gases (SOx, NOx) and volatile organic compoundemissions• Oil spills and discharges• Freshwater use and discharged water quality• Site waste management (hazardous and nonhazardous)• Site closure and decommissioning• Occupational health & safety• Impacts on local communities / indigenous people(incl. degree of procurement from local contractors)• Human rights issues (incl. issues related to supplychains / contractors and conflict areas)• Corruption and bribery• Labour/workplace issues• Site closure impacts• Transparency on payments to governmentsINDUSTRIALMETALS› copper› aluminium› lead› zinc› tin› nickel› cobalt› molybdenum› etc.• Energy intensity• GHG emissions• Material intensity (and possibility to mitigate throughrecycling), use of secondary raw materials• Freshwater use and discharged water quality / impactson aquatic ecosystems• Biodiversity impacts• Mine waste management (mineral and non-mineral,esp. safety of tailings disposal facilities)• Particulate emissions• Toxic emissions (e.g. fluoride from aluminium manufacturing)• Occupational health & safety (e.g. AIDS, ventilation/silicosis issues)• Human rights issues (incl. issues related to supplychains / contractors and conflict areas)• Impacts on local communities / indigenous people(incl. degree of procurement from local contractors)• Corruption and bribery• Labour/workplace issues• Mine closure impacts• Artisanal mining issues• Transparency on payments to governmentsPRECIOUSMETALS› gold› silver› platinum› palladium› etc.• Freshwater use and discharged water quality / impactson aquatic ecosystems• Mine waste management (mineral and non-mineral,esp. safety of tailings disposal facilities, cyanide usein gold mining, prevention of acid mine drainage etc.)• Biodiversity impacts• Energy intensity• GHG emissions• Artisanal mining issues• Occupational health & safety (e.g. AIDS, ventilation/silicosis issues)• Human rights issues (incl. issues related to supplychains / contractors and conflict areas)• Impacts on local communities / indigenous people(incl. degree of procurement from local contractors)• Corruption and bribery• Labour/workplace issues• Mine closure impacts• Artisanal mining issues• Transparency on payments to governmentsAGRICULTURE› wheat› corn› soybeans andderivatives› sugar› coffee› cocoa› ethanol› livestock› etc.• Water use (esp. overexploitation / depletion and deteriorationof groundwater)• Soil erosion / depletion• Pollution from agrochemicals• Biodiversity impacts, deforestation• GHG emissions• Issues related to intensive production, monocultures,GMO use• Risks related to food price volatility• Human / labour rights issues• Impact on smallholder farmers and local / regionalfood security• Impacts of intensive land use on communities /indigenous people• Occupational health & safety• Corruption and bribery• Transparency on payments to governments

28 The Responsible Investor’s Guide to CommoditiesAPPENDIX 2.SUMMARY OF RECENT PUBLICATIONS ON INVESTORS’ INFLUENCE ONCOMMODITY PRICES AND VOLATILITYSince the publication of ourinterim report in January 2011 17 ,a series of high-level reports oninvestors’ influence on commodityprices and volatility has beenreleased whose findings we wouldlike to summarise here. The UNC-TAD study quoted below includes acomprehensive overview and summaryof recent academic researchin the field that we refrain fromrepeating here.A good overview of the state ofknowledge regarding potential effectsof growing commodity investmentson prices and price volatilityis provided by UNCTAD in a study 18released in June 2011.The authors review the latest researchin the area and conclude that“. . . [fundamental] factors alone arenot sufficient to explain recent commodityprice developments; anothermajor factor is the financializationof commodity markets. . . .Thisphenomenon is a serious concern,because the activities of financialparticipants tend to drive commodityprices away from levels justifiedby market fundamentals, with negativeeffects both on producers andconsumers”.By “financialization of commoditymarkets” they mean theincreasing role of financial motives,financial markets and financial actorsin the operation of commoditymarkets. The authors point to thefact that market actors increasinglymake trading decisions based onfactors that are totally unrelated tothe respective commodity, such asportfolio considerations or trend following.“Herding” of investors followinga trend (that might initiallybe triggered by changes in fundamentals)can lead to major amountsof money flowing in or out of commoditymarkets in short time.To complement their theoreticaland empirical findings, the authorsof the study conducted 22 interviewswith various commoditymarket participants, ranging fromphysical traders to financial investors,with the following main results(quoted from the UNCTAD report):• “Although all intervieweesstressed the role of fundamentalsin medium- to long-term commodityprice formation, theyconceded that substantial pricedistortions and herding effectscould occur in the short term dueto the participation of financialinvestors.• The interviewees agreed that dueto their financial strength financialinvestors can move pricesin the short term. This leads toincreased volatility, which mayharm markets and drive hedgerswith an interest in physical commoditiesaway from commodityderivatives markets. The increasedvolatility results in more margincalls and thus higher financingrequirements.• The main conclusion of theinterviewed commodity marketplayers was that market transparencyneeded to be increased• There was substantial scepticismabout bans (e.g. on highfrequencytrading) and positionlimits. The general belief was thatregulations were rather difficultto enforce.”The UNCTAD report concludes byrecommending that policy responsesfocus on the following issues:• Increased transparency withrespect to fundamentals (i.e.inventories)• Increased transparency in the exchangesand OTC markets themselves.More information shouldbe made available with regard toposition-taking and categories ofmarket participants in commodityderivatives markets.• Tighter regulation of financialplayers, i.e. position limits aimedat restraining the engagement offinancial investors in commoditymarkets (the report adds that “. . .appropriate levels are not easy todetermine, a first step might consistof position points at whichtraders would be required to provideadditional information”)• The possibility of establishing agovernment-administered virtualreserve mechanism and of allowinggovernments’ direct interventionin the physical and thefinancial markets.Olivier de Schutter, the UN SpecialRapporteur on the Right to Foodexamined the impact of speculationon the volatility of the prices of basicfood commodities in a briefing notepublished in September 2010 19 , callingfor new regulation to reduce therisks of price volatility. De Schutterargues that “…States should ensurethat dealing with food commodityderivatives is restricted as far as possibleto qualified and knowledgeableinvestors who deal with such instrumentson the basis of expectationsregarding market fundamentals,rather than mainly or only by speculativemotives”.He explains the impact of growingindex investment on commodityprices as follows: “… the effectof the commodities index funds17. See the 13 January 2011 report by onValues: “Responsibleinvestment in commodities”18. UNCTAD: “Price Formation in Financialized CommodityMarkets: The Role of Information”, UN New York andGeneva, June 201119. Olivier de Schutter: “Food commodities speculationand food price crises”, Briefing note 02, September2010

29appears to have been to throw thecommodities futures markets into“contango”, producing a viciouscircle of prices spiralling upward:the increased prices for futuresinitially led to small price increaseson spot markets; sellers delayedsales in anticipation of more priceincreases; and buyers increasedtheir purchases to put in stock forfear of even greater future priceincreases”, pointing to the fact thatmomentum-based speculation maymagnify the effects of changes inmarket fundamentals.De Schutter concludes his reportwith the following recommendations:• Registration, as well as clearingto the maximum extent possibleof OTC derivatives should berequired, so that there is real timereporting of all transactions made• The knowledge of regulatorybodies in the field should beimproved• The access to commodities futuresmarkets should be restrictedas far as possible to qualifiedand knowledgeable investorsand traders who are genuinelyconcerned about the underlyingagricultural commodities• Spot markets must also beregulated in order to preventhoarding. These markets must betransparent, and holdings shouldbe subject to strict limits in orderto prevent market manipulation• Physical grain reserves shouldbe established for the purpose ofcountering extreme fluctuations infood price, managing risk in agriculturalderivatives contracts, anddiscouraging excess speculation.In an open letter to the US CommodityFutures Trading Commissionon 28 March 2011, Mike Masters ofBetter Markets argues that excessivespeculation has caused not onlyincreased price volatility but is alsoleading to higher physical market(spot) prices. He explains the mechanismleading to higher spot pricesas follows: increased volatility infutures markets leads to increasedmargin requirements, making itmore expensive for farmers to hedgetheir production risks on futuresmarkets. This cost is eventuallypassed on to the end consumers.He points to the fact that growinginvestment in commodity indexfunds, often motivated by other reasonsthan fundamentals, is disruptingthe price discovery mechanismand increasing price volatility. Heargues that the market share (longopen position) of financial investors/speculatorsis today excessivecompared to commercial investors/hedgers (as exemplified by the situationin CBOT wheat futures markets1996 vs. 2008 shown below).Better Markets calls on the CFTC tostrengthen its market regulation inthe following ways:• Aggregate position limits shouldbe introduced• An aggregate position limit for allcommodity index fund investorsmust be applied• Concentration position limits forfutures, swaps and the two combinedshould be introduced.LONG OPEN POSITIONS IN CBOT WHEATFinancialInvestors 12%FinancialInvestors 65%CommercialInvestors 88%CommercialInvestors 35%25 June 199626 June 2008Source: Better Markets, “Position Limits for Derivatives”, letter to CFTC dated 28 March 2011

30 The Responsible Investor’s Guide to CommoditiesAPPENDIX 3.CONFERENCE REPORT: AGRI-INVESTING FOR THE LONG TERM– THE INVESTMENT CASE FOR RESPONSIBLE INVESTMENTS IN AGRICULTUREDATE: 17 JUNE 2011VENUE: CENTRE INTERNATIONAL DE CONFÉRENCES IN GENÈVA, SWITZERLANDHOSTED BY:• onValues Ltd.www.onvalues.ch• Swiss Federal Department of Foreign Affairs www.eda.admin.ch• UN Global Compactwww.unglobalcompact.org• UN-backed Principles for Responsible Investment www.unpri.orgTHIS REPORT WAS PREPARED BY:• David Imbert and Ivo Knoepfel, onValues Ltd.• Published on 2 August 2011a) IntroductionThis report summarises the outcomesof the conference “Agriinvestingfor the long term: Theinvestment case for responsibleinvestments in agriculture” heldon June 17, 2011 at the CentreInternational de Conférences inGenèva, Switzerland. The meetingwas hosted by onValues Ltd., withsupport from the Swiss Federal Departmentof Foreign Affairs, the UNGlobal Compact, and the UN-backedPrinciples for Responsible Investment(PRI) and was part of a multiyearresearch project on responsibleinvestment in commodities.The distinguishing features of themeeting included:• A focus on environmental, socialand governance (ESG) issues andtheir implications for investmentrisk and return• Coverage of different types ofinvestments providing exposureto agriculture, including soft commodities,farmland, and listedequities.The meeting gathered professionalsfrom the agricultural investmentand responsible investmentcommunities to discuss the uniquechallenges and opportunities inthe agricultural sector. By design,the meeting was led by asset owners(mainly pension funds), who,as ultimate decision makers inthe allocation of capital can sendimportant signals to the investmentcommunity and the economy atlarge. The meeting, however, alsoincluded asset managers, researchersand representatives from thepublic sector, who play an importantrole in implementing andinforming investment decisions andsetting policy. The share of differenttypes of conference participants isshown below.The day was conducted underChatham House Rule, giving participantsa protected space to candidlyassess challenges and realities. Thepublication of this meeting report,however, allows us to reach a wideraudience, including the PRI signatorycommunity 20 . While this reportcovers in detail what was discussedat the meeting, a more completereport on the entire commoditiesspectrum will follow in September2011, providing a standalone referencefor responsible investment incommodities 21 .20. 915 institutions with approximately $25 trillion inassets under management21. All reports will be available at www.onvalues.ch

31GOALS OF THE CONFERENCE:• To highlight the opportunity, but also understand the challenges of investing inagriculture• To clarify the role of responsible investors• To develop actionable recommendations for investors• To identify areas for further research and engagementKEY QUESTIONS ON WHICH THE MEETING FOCUSED:• What role do investors have in contributing to the stability and sustainability ofagricultural markets?• Why are environmental, social, and governance (ESG) issues financially and reputationallymaterial for investors?• What can be learned from the most innovative investors in terms of taking ESG issuesinto account in investment strategies and active ownership?• Can a set of guidelines for investment in agriculture be defined and supported by awide range of investors?• How do we turn private sector investment in agriculture into a WIN (for local communities)– WIN (for pension fund beneficiaries) – WIN (for society and the environment)opportunity?PARTICIPANTS BY TYPEInvestment banking 4%Corporations 4%Investment research 8%Public sector 10%Asset owners 36%Consultants 12%Asset managers 26%

32 The Responsible Investor’s Guide to Commoditiesb) Food Security:A challenge to findwin-win-win solutionsDavid Nabarro, UN Special Representativeon Food Security andNutrition, opened the meeting witha keynote speech on food security.Giving a sense of perspective to theaudience, Dr. Nabarro stated “myfundamental concern is that 1 billionpeople are chronically hungryand a further 1 billion suffer fromnutrient deficiency.” His speechcontextualized the day’s proceedingsand focused on the role of theprivate sector in improving foodsystems.The food price spikes of 2007 and2008 exposed fundamental defectsin the global food system. Whilethe recession-induced drop in pricesin 2009 seemed a return to normalcy,in 2011 we now face prices thatare higher than 2008 peaks. Whilea gradual increase in prices can helpfarmers increase their revenues,such volatility hurts small farmerswho are unable to plan harvestsahead of time. It also hurts the verypoor, living on less than $1 per daywithout a safety net if food becomesunaffordable, as well as governmentsthat are importers of foodand have no recourse if adequatesupplies become unobtainable.David Nabarro pointed to thefact that the structural defects inthe world food system stem fromdecades of underinvestment. From1980 to 2000, the share of officialdevelopment assistance dedicatedto food and agriculture fell from18% to 3%. Given that over 50 ofthe world’s poorest nations haveFOOD SECURITYThe first step in enhancing food security is to understand what it is. Food security does not simply meanproducing more food. While population growth will test the world’s ability to supply enough food in the comingdecades, food is not scarce globally. A gross lack of food does not explain why one-third of the world ischronically hungry or under-nourished.Food security connotes the availability of sufficient quantities of food, physical and financial access to food,seasonal and long-term stability of food supplies, and nutritional utilization of food:ELEMENTS OF FOOD AND NUTRITION SECURITYe.g. low productivitydue to lack of agriculturalknow howAVAILABILITYSmall-holderproduction systemsand foodmarketsACCESSPhysicalaccess andpurchasingpowere.g. inability to obtainadequate food due totoo low income and lackof safety netse.g. price increasesdue to food price crisisor seasonal weathershocksReducedvolatility overseasons andyearsConsumptionand utilizationof adequatenutrientse.g. insufficient dietaryknowledge, e.g. onimportance of exclusivebreastfeedingSTABILITYUTILIZATIONFood productionNutrientconsumptionSource: UN

33SET THE DIRECTION• Establish and enforce consistent, transparentregulation to attract investors• Increase funding for agricultural development,especially infrastructure and research• Open trade policies that facilitate market accessfor developing countries• Ensure rural access to education, healthcare,and capital – regardless of gend• Lead stakeholders in holistic transformationsINNOVATE AND INVEST• Develop and scale interventionsthat are proven tomeet the combined objectivesof the New Vision• Increase access to agriculturalfinance throughinnovative risk-sharingpartnerships• Step up engagement inholistic transformationsPUBLIC SECTORTHEFARMERPRIVATE SECTORCIVIL SOCIETYMOBILIZE THE COMMUNITY• Actively represent the voiceof citizens, communities,and the environment inholistic transformations• Train and organize localproducer organizations• Leverage capital to bridgegaps in the value chain andreduce riskSource: WEF, “Realizing a New Vision for Agriculture”, 2010economies almost 100% based onagriculture, the consequences fordevelopment have been serious.According to David Nabarro, rehabilitatingthe global food system willrequire innovative approaches thatnecessarily involve the private sector.Whereas five years ago the developmentcommunity could have raiseda large fund of concessional aidfrom donor countries, that money isincreasingly hard to come by.The private sector should lookfor “win-win-win” solutions thatcreate value for local communities,host states and profit-oriented investors.These are the polar oppositesof “land grabs” where sovereignwealth funds, governments orcertain corporations displace localswith the connivance of their ownstate. Instead, such solutions putthe local people involved in agriculturalproduction at the heart ofprojects.A chief example of such “People-Public-Private Partnerships” (PPP) isthe World Economic Forum’s (WEF)New Vision for Agriculture 22 . Workingacross a group of 20 corporatemembers of the WEF, and leveragingthe UN system to access civilsociety and national leaders at thehighest level, the New Vision forAgriculture plans and manageslarge-scale projects that take anintegrated approach to improvingwhole agricultural value chains,whether by region or agriculturalcommodity.The graphic above illustrates theunique roles played by the privatesector, public sector and people(civil society) in forming win-winwinsolutions.To conclude, David Nabarrostressed that there are many opportunitiesfor new business in PPP approaches,though building sufficienttrust among the actors takes time.It requires proper facilitation and,importantly, the consistent backingof national leaders in the host countrieswho may face pressures fromhuman rights groups that are scepticalof the private sector. Experienceto date has been encouraging andshows a way forward for addressingfood security.22. World Economic Forum, “Realizing a New Visionfor Agriculture: A roadmap for stakeholders”, 2010.

34 The Responsible Investor’s Guide to Commoditiesc) Opening plenary:The investment casefor responsible investmentsin agriculture$83 billion in agricultural investmentwill be required annually tofeed 9 billion people in 2050, accordingto the FAO. Meeting this goal,however, will pose issues of environmentaland social sustainability.While governments and public fundshave an important role to play insetting responsible agriculturalpolicies and supporting initiativesto protect the most vulnerable, theprivate sector must also contributefunds and expertise to addressingthe world’s food challenges. Thissession discussed in detail just howthe private sector can and shouldcontribute to forming the agriculturalsystem of tomorrow.THE EXPERT PANEL FOR THE SESSIONCONSISTED OF:• Philippe Desfossés, Director of theFrench pension fund ERAFP• Juan Gonzalez Valero, HeadPublic Policy and Partnerships atSyngenta• David Hallam, Head of Trade andMarkets Division at the FAO• José Minaya, Head of NaturalResources & Infrastructure Investmentsat TIAA-CREF• David Nabarro, UN Special Representativeon Food Security andNutrition• Ivo Knoepfel of onValues moderatedthe session.THE KEY QUESTIONS EXPLORED WERE:• What role is there for privateinvestors in agriculture?• How can the investment communitynavigate the challenges ofbuilding an agricultural systemthat meets the needs of morepeople with less impact on theplanet?Key insights from the sessionTHE ROLE OF PRIVATE INVESTORS• The audience heard persistentlyfrom diverse participants (bothpublic and private) that agricultureis an undercapitalized sector.This owes to a legacy of historicallylow prices due to domesticsubsidies and trade barriers.Rising food prices have attractedinvestor attention, but newcapital must be deployed in a waythat supports new models for thefood system, rather than reinforcingold practices.• Participants spent significant timediscussing the role of technology.There was a general view that alltechnologies must be on the tableto meet future demand, plus newtechnologies. This presents a clearrole for the private sector, as oneparticipant said: “Meeting the newdemand requires a new innovationS-curve. That means investment.”And, finding a reason foroptimism, “We have coped withmuch higher demand growth ratesin the past”. The chart below illustratespotential yield increasesfrom technology in developed anddeveloping countries.• However, participants also recognizedthat technology is just ameans for farmers to do their jobbetter, a link between people andnature. Farmers must be able toaccess capital to invest in technicalimprovements. They alsomust find ways of managing therisk of such capital investments.The growing problem of farmindebtedness and increased uncertaintyon global food marketswill deter necessary investmentsunless the private sector findsinnovative solutions.Navigating social and environmentalchallengesTECHNOLOGY: MAJOR IMPROVEMENT EVEN IN “TECHNIFIED” SYSTEMSRelative yield improvement potential: Example WheatDeveloped countriesDeveloping countriesContinuous genetic improvement● Higher yielding, more adapted seedsHigher efficiency of alreadytreated diseases and pestsUntreated diseases and pestsBetter agricultural practicesBreakthrough technologies● Modern, more efficient products and programs● E.g. fusarium, nematodes● Mechanization● Better use of water, irrigation practices● Improved fertilization● Crop rotation● Higher tolerance to weather variability, e.g. droughtPotential increase of10-30% in 15 yearsSource: Syngenta

35• The opening plenary previewedthe detailed discussion of ESGissues in farmland, equities andderivatives that would happenlater in the day.• Some participants stressed thefact that, while the awarenessfor environmental factors hasincreased in the past years,investors need to focus more onsocial issues (incl. human rights,workplace safety, the situation ofsmallholder farmers, local foodsecurity) especially as investmentactivity will increasingly move todeveloping countries.• While the impact of single issuessuch as water scarcity, climatechange, and political risks is increasinglyunderstood, panellistspointed to a lack of understandingof the cumulative effects ofthe many ESG aspects involved.• Participants from the publicsector suggested that investors atthe leading edge of social responsibilitycould play a major role inimproving the image of the privatesector by clearly articulatingtheir commitment to sustainableinvestment in agriculture• Meeting participants expresseda clear interest in developinginvestment partnerships withthe help of corporate and publicsector actors, which would be“win-win-win” outcomes for beneficiaries,local communities andnational governments• Another point made was that,given developing countries areclearly the next frontier for institutionalinvestors, it is importantto prepare now for the uniqueset of issues associated with thoseinvestments.d) Panel discussion– Agricultural landinvestmentsIn recent years, farmland has attractedincreased investor interestdue to its characteristics as a “realasset”. Low correlation with otherassets, recurring cash flows and acertain protection from inflationhave drawn institutional investorsto become farm owners in both developedand developing countries.While new sources of capital are apositive development for a sectorthat has suffered from chronicunderinvestment over the past threedecades, this development has alsothrown up challenges of marketplacetransparency and investoraccountability, as well as concernsover the environmental and socialimpact of increased investmentflows. Investors active in this areashould be aware of these ESG issuesand take steps to manage them intheir farmland investments.THE EXPERT PANEL FOR THE SESSIONCONSISTED OF:• Graham Davies, a Consultantwith the farmland fund managerAltima Partners• Jos Lemmens, Senior PM Commoditiesand responsible for landinvestments at APG• Desmond Sheehy, ManagingDirector with the farmland fundmanager Duxton AM• Christof Walter, Sustainable AgricultureManager at UnileverThe session was moderated by BerndSchanzenbächer, Managing Partnerand responsible for agriculturalland investments at EBG Capital.THE KEY QUESTIONS EXPLORED WERE:• What are the most relevant ESGissues involved in managingfarmland assets, and why shouldinvestors consider them?• Given that farmland investmentsare made both directly and indirectlythrough specialist managers,how can investors ensure thatmaterial ESG factors are consideredin the management of theirinvestments?• What role can voluntary standardsplay in increasing transparencyand improving ESGoutcomes?The opening plenary also providedinput on farmland investmenttopics, and those discussions areincorporated here where relevant.Key insights from the sessionESG ISSUES IN FARMLAND• “Responsible investment inagriculture is a necessity, not anoption”, said one participant. Investorsclearly articulated that anintegrated approach to environmental(water, soils, deforestation),social (local communities), andgovernance issues was central tomaintaining and unlocking valuein any farmland investment. Onthe social front, it was more difficultto achieve consensus. On onehand, certain participants linkedsocial performance directly toinvestment results. For example,keeping good relations withfarmers in a region is an excellentway to source deal flow. Or,conducting covert audits of labourconditions is a responsible wayto monitor for potentially largereputational risks. One participantexplained that his firm workswith local operating partnersthat have a long track record intheir region and therefore have avested interest in preserving goodrelations with local communities.At the same time, however,other participants were forthrightabout the fact that large-scaleinvestment in agriculture aims toincrease the efficiency of farms,meaning that less people areneeded to work the land. Whilethe people who are needed enjoybetter jobs, in this scenario, thesocial contribution of the investorcomes more in the form of providingincreased tax revenue to thelocal governments and workingon a voluntary basis to improvethe situation of local communities.It needs to be said, however,that different types of investors(depending on their investmentstrategy) will pursue different approaches,and put varying degreesof emphasis on the different elementsof this integrated approach.

36 The Responsible Investor’s Guide to Commodities• Overall, participants agreedthat consideration of ESG issuesincreases the value of investmentsin the medium to long term• Among all the ESG issues that canimpact the value of a farmlandinvestment, water came up mostfrequently and forcefully in thediscussions. One participant wentso far as to say that the water availableto a property was worth morethan the land itself 23 . As such, thesustainable use of water resources(whether they be groundwater reserves,or local rivers and lakes) onagricultural land is deemed criticalby all investors, if the value of thatland is not to be eroded.• Pension fund participants madethe case that owning land for thelong term promotes stewardshipamong investors• One participant observed thatthe need to conduct proper duediligence limits the possibilityof investing in low transparencylocations• While the private sector investorsaround the table supported theview that ESG issues are centralto farmland investments, thisprompted one participant to questionif anyone in fact does notsupport this view, asking, “whoare the black hats?”. There are anumber of investor groups whichwere not present at the meetingwho do not prioritize ESGissues. Some of them for exampleacquire land to secure a stablesupply of food for their citizensand do not respond to the samedynamics as the institutionalinvestors in the meeting. Some ofthe participants felt that their ESGpractices were already advanced,but that they could do more interms of publicising / being transparentwith their investments.THE ROLE OF VOLUNTARYSTANDARDS• Investment managers on thepanel had their own set of internalguidelines (developed inaccordance with their investors/ clients) to which they adhere.Participants agreed that, becausethe concept of “responsible investment”is open to interpretation,detailed voluntary standards are agood way to clarify what practicesare expected of investment managersand operators• According to the asset managerrepresentatives in the room, onceend investors specify guidelines,these become hard rules forinvestment managers. The assetmanagers, however, feel that tooprescriptive rules may restrict theneeded flow of capital into certainregions and areas.• A panellist presented the UnileverSustainable Agriculture Code,which is a voluntary standardthat Unilever developed in theinterest of securing its supplyof raw materials. The Code wasdeveloped from scratch in places,and in others was mapped to existingstandards. Hence, in practice,the company will recognizethe validity of those pre-existingstandards.• Therefore, there was broad agreementthat voluntary standards—either new or adopted fromexisting best practice guidelines—will improve ESG outcomes infarmland investments, particularlyby increasing transparency andallowing best practices to scale up• Participants questioned, however,how applicable voluntarystandards could be to smallholderfarmers. There is a risk that suchstandards create another entrybarrier for smallholder farmerswanting to access supply chains.Agricultural extension servicescould possibly bridge the gapbetween standards developed forlarge farmers and smallholders.• Additionally, there was broadrecognition that the host countrygovernment must set the conditionsfor voluntary standards tobe effective, particularly enforcingthe rule of law. It is the governmentsof nation states that havethe attention of and relationshipswith the different investmentgroups, and it is these governmentswho have the ability to vetoan investment. This is clearly anarea where more work needs to bedone in order to promote appropriatepolicies at this level.e) Breakout 1– Commodity derivativesinvestmentsCommodity futures and over-thecounter(OTC) derivatives are themost common way for investorsto gain exposure to commoditymarkets. Therefore, it is critical forinvestors to understand their ownimpact on these markets and toinvest in a way that supports theirproper functioning. This sessionposed questions to investors with thegoal of arriving at insights that willhelp others invest in a responsiblemanner.THE EXPERT PANEL FOR THE SESSIONCONSISTED OF:• Helene Winch, a commoditiesexpert and Director of Policy at BTPension Scheme• Jeremy Baker, a commoditieshedge fund manager at HarcourtInvestment Consulting• Marek Ondraschek, CIO and longonlycommodities fund managerat ALNUA Investment Managers• Beat Zaugg, an investment consultantcommodities specialist atECOFINThe session also benefited fromindependent research that had beenconducted over the past year on thistopic by the moderator, Ivo Knoepfelof onValues.THE KEY QUESTIONS EXPLORED WERE:• Is increasing financial investmentin commodity derivatives influ-23. A full overview of the ESG issues involved infarmland investment can be found in “ResponsibleInvestment in Commodities”, onValues Ltd., January2011 or in the forthcoming summary report onresponsible investment in commodities by onValuesLtd., September 2011.

37encing prices levels and volatility,and how?• How can investors contribute towell-functioning markets andavoid negative impacts?• What is needed from other actors(e.g. regulators, index providers,traders, etc.) to ensure well-functioningmarkets?• What innovative approaches existto better integrate ESG factors incommodities investments?Key insights from the sessionTHE IMPACT OF FINANCIAL INVES-TORS ON COMMODITIES MARKETS:• While it is difficult to definitivelyattribute changes in price levelsand volatility to financial investors,investors themselves clearlyrecognize that in the short termtheir actions impact prices andcontribute to higher volatility. Inthe medium and long term, pricesare more likely driven by fundamentals.• Participants observed that thesheer size of futures markets hasled to a shift in price discoveryfrom the spot to the futuresmarket. The growth in futuresmarkets has been driven bythe increased role of financialinvestors (as can be seen fromthe graph below showing howfinancial investors have becomethe leading players in CBOTwheat futures markets, comparedto fifteen years ago)• Several participants stressed thatfinancial investors can play avaluable role in supplying liquidityto commercial hedgers• The discussion pointed to thefact that large inflow in indextracking funds, often motivatedby other reasons than fundamentalconsiderations (e.g. herdingaround a trend or investorsallocating to commodities fordiversification reasons) can create“bubbles” in commodity marketsand drive prices. The graphicbelow shows the significant roleplayed by index traders in variousmarkets.• Certain participants felt thatinvestments in commodity derivativeshave become less attractivein recent years due to contangoand other effects, which hasprompted increased investorinterest in real assets.A POTENTIAL ROLE FOR RESPONSIBLEINVESTORS:• There were diverging opinionsabout passive investment strategies.Some argued that only passiveapproaches provide a reliablehedge against inflation and thatfrequent rebalancing of commodityindex allocations withina portfolio tends to stabiliseprices, as the investor is a seller offutures when prices go up excessively(and vice-versa). However,other participants argued that,from a financial return perspective,passive approaches will notbe able to adjust to periods wherecommodity markets are highlycorrelated to equity markets, andtherefore active approaches maybe preferable overall.• Participants generally recognizedthat aggressive momentum-drivenstrategies can create price bubblesand should be avoided• Most participants agreed thatfinancial investors should avoidtaking physical delivery of commodities• Investors can use multiple investmentchannels to avoid singleinvestment managers or fundsattaining a dominant market position,emphasised one participantthat had seen firsthand how managersseek critical mass to controlcommodities markets• “It’s not a casino; we’re not tryingto shoot the lights out” said oneparticipant from a pension fund.Investors should communicatereasonable return expectation tomanagers to avoid excessive risktaking and momentum chasingstrategies.LONG OPEN POSITIONS IN CBOT WHEATFinancialInvestors 12%FinancialInvestors 65%CommercialInvestors 88%CommercialInvestors 35%25 June 199626 June 2008Source: Better Markets, “Position Limits for Derivatives”, letter to CFTC dated 28 March 2011

38 The Responsible Investor’s Guide to CommoditiesPERCENTAGE OF TOTAL OPEN INTEREST HELD BY LONG COMMODITYINDEX TRADERS■ Index Traders ■ Non-Commercial ■ Commercial ■ NonreportableWheat (CBOT)Lean HogsLive CattleCoffeeSoybean OilCornSugarSoybeansFeeder CattleCottonCocoaWheat (KCBT)Crude Oil (NYMEX)0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%Source: CFTC. Data as of 30 November 2010THE ROLE OF OTHER STAKEHOLDERS:• Commonly, participants felt thatmarket regulators should publishdata similar to the CFTC in theU.S. also for other markets andotherwise increase transparencyrequirements• In general, commodities marketsare not well understood. Allstakeholders, including investors,should educate themselves betterto improve the sophistication ofmarket interactions. Participantsespecially would like pensionfund trustees to become morefamiliar with commodities investments.• Regulators could consider increasingthe margin requirement fornon-commercial investors to takesome “hot money” out of thesystem. However, certain participantsobserved that too muchregulation could drive marketsoffshore rather than reformingthem.• Participants called on indexproviders to take ESG and marketstability considerations into accountin defining and weightingthe composition of their commodityindexes.INNOVATIVE APPROACHES• Several participants identifiedthe opportunity for stakeholdersto collaborate in engaging withexchanges in creating a range ofESG-certified contracts for differentcommodities.• While investors still do not havean adequate choice of managerswho are concerned with systemicimpacts on commodities markets,meeting participants heard fromone manager that has developedits own process for limiting exposureto commodities with problematicprice dynamics or levels.The graphic below describes someof those considerations.f ) Breakout 2– Listed equityinvestmentsMany investors use listed equities asa convenient way to gain exposureto agricultural commodities. Mostcommonly, investors hold shares ofagri-chemical and seed producers,agricultural technology companies,farm equipment manufacturers,agricultural producers, andfood companies. Both individualcompany characteristics and the dynamicsof the related commoditiesmarkets will drive the performanceof these holdings. On both fronts,understanding ESG issues will beimportant in making informedinvestments and contributing to an

39PRICE IMPACT: DEFINITION OF RESPONSIBILITY PRICE RANGEPER COMMODITYCommodity Sectors & Examples Key Indicators Price BandsENERGYMETALS &MINERALSAGRICULTURE• Crude oil• Natural gas• Etc.• Aluminium• Copper• Etc.• Coffee• Corn• Etc.■ Classification of each Commodity(sensitivity, impact, dominance oflevel or dynamic)■ Historic price levels(long- & shortterm)■ Historic inflation adjusted pricelevels■ Historic price dynamic■ Assessment of documentedproblematic price developments(levels & dynamic)■ Prospective assessment (fundamentaldata)■ Forward curve➜ Definition of individual priceranges per future}Exclusion ZoneWarning ZoneNormal ZoneWarning ZoneExclusion ZoneSource: Alnua Investment Managersoverall improvement of the agriculturalsector. The session thereforeaimed to ascertain the level of ESGunderstanding and to provide participantswith insights for improvingthe level of ESG consideration ininvestments generally.THE EXPERT PANEL FOR THE SESSIONCONSISTED OF:• Gertjan van der Geer, an AgriculturalFund Porfolio Manager atPictet & Cie• Klaas Smits, the Head of Food andAgri Strategies at Robeco• Gabriella Ries, a Research Analystspecialized on agriculture at BankSarasin & Cie• Bruce Tozer, the Head of EMEASofts & Agricultural Products atCrédit AgricoleThe session was moderated by PeterZollinger of Globalance Bank, whohas long experience advising foodcompanies on sustainability issues.THE KEY QUESTIONS EXPLORED WERE:• To what extent do equity investorssystematically take ESG issuesinto account in their investmentdecision making?• How can investors improve theirunderstanding of ESG value driversand their use of ESG analysis?• How can investors engage withcompanies to promote more sustainablebusiness practices?Key insights from the sessionTHE EXTENT OF ESG INFORMATIONUSED IN INVESTMENT DECISIONS• As hypothesized before the meeting,participants with a directview on asset manager practicesconcluded that, while most managershave a general familiarity ofESG issues such as water scarcity,climate change, and food crises,almost none used ESG informationin a systematic manner todrive investment decisions (e.g.through inclusion in quantitativevaluation models)• Particularly, participants feltthere was a lack of understandingon the cumulative effects of ESGissues• In particular, the largest agriculturalinvestors are not activelyparticipating in the ESG discussion.One participant noted that,often, large agricultural equityfunds are run as ETFs, whichwould not have the resources toconduct ESG analysis even if theyhad the interest.• In other cases, sustainable investmentpolicies have made little differencein investor practices, appearingto be, as one participantput it, “old wine in new bottles”• However, some investors havemade thoughtful efforts to incorporatesustainability considerationsinto their agriculturalequity investments. One portfoliomanagement participant present-

40 The Responsible Investor’s Guide to Commoditiesed his fund’s approach, whichquantitatively integrates ESGscoring into the calculation ofweighted average cost of capitaland also top-line sales estimates,in addition to other screens applied.THE VALUE OF ESG ANALYSIS• A quick poll of the room at thebeginning of the session threwup clear articulations of how ESGissues can materially impact shareperformance. Using the exampleof the Unilever Sustainable AgricultureCode, participants citedspecific business reasons why thisshould improve prospects for thefood company. Securing key feedstocks, enhancing brand valueand attracting a young generationof talent were all reasons why theCode would have a material affecton financial results.• Investors need to be addressed inthe business language of “sourcing,brands and talent” ratherthan abstract ESG terms to bepersuaded of the financial materialityof ESG analysis• Peer investors can articulate howusing ESG analysis has helpedtheir results. For example, onefund manager cited the ESG-basedexclusion of a palm oil companythat recently was targeted by anNGO ad campaign and consequentlylost a key contract withWal-Mart.• Nevertheless, there was a generalappreciation for the challenges oflooking in detail at agriculturalsupply chains to determine howholdings are managing risks.More comprehensive research inthis area would be valuable.ENGAGEMENT TO PROMOTE SUSTAIN-ABILITY AT THE COMPANY-LEVEL• As one participant said, “theworld of tomorrow will largely bethe world we create today”, meaningsociety is at a critical momentand the decisions made today willlast into the future. Participantsgenerally expressed a sense of urgencyto link their investment activitieswith the global challengespresented in the first part of theday. Engaging with companies isan important tool to that end.• A focus on financial materialityalso pays off when working withcompanies to improve their ESGprofile, according to participantsthat are active in this area• Participants came to understandthat, given the complexity of theagricultural value chain, attentionshould be focused on key leveragepoints, which vary marketto market• Participants also recognized theopportunity to leverage existingbest practice guidelines. Theywould encourage companies toactively participate in supplychain initiatives aimed at developingvoluntary standards. However,participants clearly saw thatsuch standards initiatives couldbe stricter about qualification formembership.• NGOs can be valuable partnersfor investors to improve theirknowledge of best practices inagricultural markets• “If twenty of the world’s largestinvestors all took 90% similarpositions on the most criticalcompanies, that would focusattention”, said one participant,voicing the group feeling thatmore collaborative engagementamong investors should be done.

41“You really do have to wonder whether a few yearsfrom now we’ll look back at the first decade of the21st century — when food prices spiked, energyprices soared, world population surged, tornadosplowed through cities, floods and droughtsset records, populations were displaced andgovernments were threatened by the confluence ofit all — and ask ourselves: What were we thinking?How did we not panic when the evidence was soobvious that we’d crossed some growth/climate/natural-resource/population redlines all at once?”–Thomas Friedman, June 7, 2011g) Conclusion– A fireside chat onthe future of agriculturalinvestmentThe conference closed with a“fireside chat” between DonaldMacDonald, Trustee of the BritishTelecom Pension Scheme andfounding Chairman of the PRI, andPeter Zollinger of Globalance Bank.Prompted by the above quote, DonaldMacDonald offered his thoughtson the day 24 .According to Donald MacDonald,the meeting represents the “firststage of a long journey” to bringthe investment community in linewith the world’s agricultural needs.The issues discussed on the dayfundamentally concern the globalcompetition over scarce resources.Dwindling supplies of energy,water, and land have already begunto stress national food supplies, andcompetition over food will increasein the future.“Our duty is to approach thissituation not just as investors but ascitizens”, Donald MacDonald said.The investment community canplay an important role, but timeis of the essence. Investors musturgently familiarize themselveswith the dynamics of agriculture asan investment topic, and must showgreater imagination in planningfor a global economy that will bestarkly different from the past. Ifinvestors seize this moment, thereis a window of opportunity to setindustry-wide standards through responsibleleadership in agriculturalinvestment.24. Where these thoughts pertained specifically to thetopics of previous sessions, they have been includedunder those specific sections.

42 The Responsible Investor’s Guide to CommoditiesAPPENDIX TO CONFERENCE REPORTAGENDA - AGRI-INVESTING FOR THE LONG TERM:THE INVESTMENT CASE FOR RESPONSIBLE INVESTMENTS IN AGRICULTUREFriday, 17 June 2011 – 9:00 to 16:15Centre International de Conférences Genève, 17 rue de Varembé CH-1211, Genève | T: +41 22 791 911108:15 Registration Opens09:00 Chairman’s and hosts’ opening remarks• Ambassador Jürg Lauber, Permanent Mission ofSwitzerland to the UN• Rob Lake, Director of Strategic Development, PRI• Ivo Knoepfel, Managing Director, onValues Ltd.09:15 Keynote address> What role do different actors play in preventing aglobal food security crisis?• David Nabarro, UN Special Representative on FoodSecurity and Nutrition09:45 Panel discussion – A framework for responsibleagri-investment> What role is there for investors in the transition tomore sustainable agriculture? A discussion betweenpolicy makers, commercial and financial investors• Philippe Desfossés, CEO, ERAFP (French PublicService Additional Pension Scheme)• José Minaya, Head of Natural Resources & InfrastructureInvestments, TIAA-CREF• David Hallam, Head of Trade and Markets Division,FAO• David Nabarro, UN Special Representative on FoodSecurity and Nutrition• Juan Gonzalez Valero, Head Public Policy and Partnerships,Syngenta11:00 Panel discussion – Agricultural land investments> What ESG issues need to be addressed by investorsin farmland?> How can investors work with managers and operatorsto promote sustainable practices?• Jos Lemmens, Senior Portfolio Manager, APG• Desmond Sheehy, Managing Director, DuxtonAM• Graham Davies, Consultant, Altima Partners• Christof Walter, Sustainable Agriculture Manager,Unilever12:30 Lunch13:30 Breakout Sessions:Breakout 1 – Commodity derivatives investments(Rm. 5+6)> Is growing investment in soft commodity futures /indexes contributing to price volatility?> What measures can investors take to avoid disruptiveeffects on commodity markets?• Helene Winch, Head of Policy, BT Pension• Jeremy Baker, Commodity Portfolio Manager, HarcourtInvestment Consulting• Marek Ondraschek, CEO, Alnua Investment Mg.• Beat Zaugg, Senior Consultant, ECOFINBreakout 2 – Listed equity investments (Rm. 20)> Risks and opportunities for listed equity portfolios:How can investors address climate change, waterscarcity, food shortages in their investment decisionsand active ownership policies?• Gabriella Ries, Research Analyst, Bank Sarasin• Bruce Tozer, Head of EMEA Softs & Agricultural• Products, Crédit Agricole• Gertjan van der Geer, Senior Investment Manager,Pictet & Cie• Klaas Smits, Head of Food and Agri Strategies,RobecoShort coffee break15:00 Concluding plenary session (Rm. 5+6)> What lessons and common ground have been establishedduring the day?> What areas require more research and discussionamong investors and stakeholders?• Helene Winch, Head of Policy, BT Pension• Rik Plomp, Head of Real Assets & Insurance,PGGM• Karina Litvack, Head of Governance, F&C AssetManagement15:45 Concluding remarks> What is the way forward for responsible investorsin agriculture?• Donald MacDonald, Trustee, BT Pension• Peter Zollinger, Head of Impact Research, GlobalanceBank

43PARTICIPANT LISTParticipant Name Organization PositionStefan Baecke Rabobank Nederland CEO, Rabo FARMJeremy Baker Harcourt Investment Consulting AG Commodity Portfolio ManagerHans-Ulrich Beck Sustainalytics Global Director, ResearchSeb Beloe Henderson Global Investors Head of SRI ResearchChristoph Buchmann InCentive Asset Management AG Portfolio ManagerArne Cartridge World Economic Forum (WEF) Special Advisor, Global Partnerships for Food SecurityBen Cotton Earth Capital Partners PartnerFrank Curtiss Railway Pension Trustee Company (Railpen) Head of Corporate GovernanceGraham Davies Altima Partners LLP ConsultantBenoit de Combaud Combaud Industries CEORenier de Man Sustainable Business Development DirectorPhilippe Desfossés ERAFP CEOChristoph Eibl Tiberius Group CEOSimon Fox Mercer (UK) Senior Researcher, AlternativesJuan F Gonzalez-Valero Syngenta International AG Head Public Policy and PartnershipsGabriela Grab SAM Sustainable Asset Management Agri Theme CoordinatorNatacha Guerdat ConSer Invest PartnerDavid Hallam Food and Agriculture Organization (FAO) Head of Trade and Markets DivisionDaniel Hough Macquarie Agricultural Funds Management Head of EuropeJulie Hudson UBS Investment Bank (Research) Head of SRI ResearchHarry Hummels SNS Asset Management Managing Director SNS Impact InvestingAnna Hyrske Ilmarinen Mutual Pension Insurance Company Head of Responsible InvestmentDavid V. Imbert onValues ConsultantTill Jung oekom research Director Business DevelopmentManfred Kaufmann DEZA Programme ManagerIvo H Knoepfel onValues Managing DirectorRob Lake UN PRI Director of Strategic DevelopmentFlorence Lasbennes United Nations Food Security Task Force ManagerJürg Lauber Swiss Federal Department of Foreign Affairs Ambassador, Permanent Mission of Switzerland to the UNPierre Lavaud JetFin CEOJean Laville Ethos Deputy DirectorJos Lemmens APG Asset Management Senior Portfolio Manager CommoditiesKarina A Litvack F&C Asset Management Director Head of Governance and Sustainable InvestmentDonald MacDonald BT Pension Scheme Management Ltd. TrusteeJose Minaya TIAA-CREF Head of Natural Resources & Infrastructure InvestmentsHafiz Mizra UNCTAD Chief, Investment IssuesCorrina Morrisey Swiss Federal Department of Foreign Affairs AssistantLionel Motière Diapason Commodities Management SA ChairmanChristoph Müller NEST Pension Fund Member of the Investment CommitteeDavid Nabarro United Nations UN Special Representative for Food Security and NutritionMarek Ondraschek Alnua Investment Managers Managing Partner & CEOSusanne Pedersen Arbejdsmarkedets Tillaegspension (ATP) Senior Adviser Responsible InvestmentAnna Pot APG Asset Management Senior Sustainability SpecialistAndrea Ries DEZA Sustainability and Multilateral AffairsGabriella Ries Bank Sarasin & Co. Research AnalystBernd Schanzenbächer EBG Capital Managing PartnerDesmond Sheehy Duxton Asset Management CIOKlaas Smits Robeco SVP, Head of Food and Agri StrategiesBruce Tozer Crédit Agricole Head of EMEA Sales Softs & Agricultural Products

44 The Responsible Investor’s Guide to CommoditiesPARTICIPANT LISTParticipant Name Organization PositionGertjan van der Geer Pictet & Cie Senior Investment ManagerNadine Viel Lamare AP1 Senior ESG AnalystPhilip Walker SIFEM Investment AnalystChristof Walter Unilever Sustainable Agriculture ManagerJohn K Wilson TIAA-CREF Director of Corporate GovernanceHelene Winch BT Pension Scheme Management Ltd. Director, Head of PolicyLara Yacob Robeco Senior Engagement SpecialistBeat Zaugg ECOFIN Investment Consulting AG Senior ConsultantPeter Zollinger Globalance Bank AG Head of Impact ResearchBIBLIOGRAPHY OF “FOOD FOR THOUGHT” READINGS SENT TO PARTICIPANTSJuntunen, P., “Future Farmers”, Investments & Pensions Europe, July 2010.onValues, “Agriculture Overview”, June 2011.onValues, “As food prices rise, investors should consider systemic impacts of their commoditiesstrategies”, Responsible Investor, January 2011.Röhrbein, N., “Grub first, then ethics”, Investments & Pensions Europe, May 2011.Stewart, M., “Whipping up the amber waves”, Investments & Pensions Europe, May 2011

45APPENDIX 4.THE PRINCIPLES FOR RESPONSIBLE INVESTMENT IN FARMLANDSEPTEMBER 2011Preambleln recent years, investment infarmland A has emerged as a new assetclass for institutional investors.These “Principles for ResponsibleInvestment in Farmland” (“TheFarmland Principles”) are designedto guide institutional investors Bwho wish to invest in farmland in aresponsible C manner.As institutional investors, wehave a fiduciary duty to act in thebest long-term financial interests ofour beneficiaries and clients. In thisfiduciary role, we believe that environmental,social, and corporate governance(ESG) factors can representsources of financial risk and opportunityfor our investment portfolios. Atthe same time we acknowledge thatfarmland investments have implicationsfor the people and the naturalenvironment in the places where weinvest. We are therefore committedto incorporating ESG factors intoour investment policy and processeswhere appropriate.The Farmland Principles willserve as a common frameworkfor the specific farmland investmentpolicies and practices of eachinstitutional investor in support ofimplementation of the Principles.Our commitmentWe are committed to implementingthe Farmland Principles in allour farmland investments. We willdo this by applying the FarmlandPrinciples to pre-investment duediligenceand to the selection ofinvestment managers and operatorsacting on our behalf D , and throughongoing oversight and governanceof our investments.As long-term investors we believethat the interests of our beneficiariesand clients will be best servedby farmland operations that respectthe environment, adhere to responsiblelabour practices and maintainpositive stakeholder relations.Where feasible we will invest intechnology and infrastructure toimprove productivity and enhanceenvironmental performance. Theseinvestments may contribute to localdevelopment and relieve pressurefor farmland expansion.We support the developmentof best-practice ESG standards andguidelines E for agricultural commodityproduction and will askinvestment managers and operatorsacting on our behalf to apply themwhere applicable and to contributeto their further development. Whilesuch standards already exist forother sectors, best-practice standardsfor farmland management areat an early stage. We are committedto contributing actively to theirfurther development.We will review the FarmlandPrinciples from time to time basedon implementation experience, andin order to reflect ongoing learningand emerging best practice.

46 The Responsible Investor’s Guide to CommoditiesPrinciples for Responsible Investment in FarmlandPRINCIPLE ONE: PROMOTING ENVIRONMENTAL SUSTAINABILITYWe will promote measures aimed atprotecting the environment and contributingto the sustainability of specificcrops and locations, for exampleby reducing soil erosion, protectingbiodiversity, reducing chemical emissions,effectively managing water,and mitigating climate impacts.We will require investment managersand operators acting on ourbehalf to conduct an environmentalassessment identifying the relevantenvironmental impacts and risks ofa planned investment.Based on this environmental assessment,investment managers andoperators will be expected to implementmitigation and managementmeasures relevant and appropriate tothe nature and scale of the proposedinvestment.PRINCIPLE TWO: RESPECTING LABOUR AND HUMAN RIGHTSWe will respect labour and humanrights in our farmland investments.We will require investment managersand operators acting on our behalf todo the same and to avoid complicityin human rights abuses.We will require investment managersand operators to identify relevantlabour and human rights risksand impacts of a planned investmentand to implement mitigation andmanagement measures to addressthem appropriately.Depending on the location and thenature of the investment, we expectinvestment managers and operatorsto explicitly implement policies torespect rights such as those relatingto indigenous peoples, vulnerablegroups, unique cultural systems andvalues, local food security, labour andany other relevant rights in the scopeof their risk assessment and mitigationmeasures.PRINCIPLE THREE: RESPECTING EXISTING LAND AND RESOURCE RIGHTSWe will respect the existing use ofand ownership rights to land andother resources and we will requireinvestment managers and operatorsacting on our behalf to do the same.Investment managers and operatorsacting on our behalf will berequired to implement processes forland acquisitions and related investmentsthat are culturally appropriateand transparent, are monitored, ensureaccountability and the engagementwith relevant stakeholders.For investments with potentialsignificant adverse impacts F on affectedcommunities, the investmentmanagers are expected to implementprocesses to ensure their free, priorand informed consultation G and facilitatetheir informed participation as ameans to establish whether a projecthas adequately incorporated affectedcommunities’ concerns.PRINCIPLE FOUR: UPHOLDING HIGH BUSINESS AND ETHICAL STANDARDSWe will promote high business andethical standards in our farmlandinvestments.We will require that investmentmanagers and operators acting onour behalf respect the rule of laweven where it is poorly enforced.We will also require them to implementprocesses aimed at avoidingcorruption in all its forms, includingextortion and bribery, and to reflectan informed view of industry bestpracticein their operations.PRINCIPLE FIVE: REPORTING ON ACTIVITIES AND PROGRESS TOWARDS IMPLEMENTING THE PRINCIPLES ANDPROMOTING THE PRINCIPLESWe will report publicly on ouractivities and progress towardsimplementing the Farmland Principles,taking into account appropriateconfidentiality considerations.We will encourage other institutionalinvestors to endorse and implementthe Farmland Principles.

47Annexes to the Principles for Responsible Investmentin FarmlandAnnex 1 – NotesA: The attractiveness of investmentin farmland derives fromthe expected low correlation of itsreturns with other asset classes andits potential for relatively stablecash flows to investors. There arevarious ownership and/or operatingmodels that institutional investorscan adopt for farmland:• buy the land and operate at theirown risk, (with exposure to thecommodity price of the crop);• buy and lease to a farmer (receivinga fixed rate return);• buy and receive revenue based ona combination of the two previousmodels (cropsharing).• lease from the owner and operateat their own risk or shared risk.These models can be implementedthrough direct investments, orfunds or funds-of-funds managed bya third party.B: Institutional investors are organizationsthat pool large sums ofmoney and invest them on behalf oftheir clients and beneficiaries. Typesof typical investors include banks,insurance companies, national pensionschemes, retirement or pensionfunds, hedge funds, investment advisorsand mutual funds. Their role inthe economy is to act as professionalinvestors on behalf of others. InstitutionalInvestors have a fiduciary dutyto act in the best financial interest oftheir beneficiaries.C: As described by the UN-backedPrinciples for Responsible Investmentinitiative (www.unpri.org), ‘responsibleinvestors’ take a long-termview in managing their assets andare convinced that certain ESG issuescan affect the performance of theirinvestment portfolios and thereforeneed to be taken into account ininvestment management and ownershippolicies and practices.D: As noted above, institutionalinvestors often invest through afund or a fund-of-funds structure.The institutional investor or theinvestment manager, in turn, oftendelegates the task of operating andmanaging the land to a specialistoperator. This limits the extent towhich the institutional investor cancontrol the way the land is managedonce the investment has been made.This is why the institutional investor,as part of its pre-investmentdue diligence process, will activelyensure that the investment managersand operators have the policies,systems and expertise needed to integrateESG considerations into theirinvestment decisions and ownershipactivities. Prior to committingcapital, the investor will also discussthe ESG-related disclosures that theinvestment managers and operatorswill be required to provide duringthe life of the relationship.E: A range of voluntary standardsand guidelines for actors alongdifferent agricultural supply-chains(including investors) are currentlybeing developed. Relevant initiativesinclude the Roundtable on SustainableBiofuels, the Roundtable onResponsible Soy, the Roundtable onSustainable Palm Oil, and the BetterSugarcane Initiative. The IFC Socialand Environmental PerformanceStandards also provide a relevantoverall framework for farmlandinvestments.F: Adverse impacts are significant ifthey severely impact the well-beingand livelihood of whole communities,as opposed to the well-being andlivelihood of single individuals orgroups.G: Please refer to the IFC PerformanceStandards on Social &Environmental Sustainability forguidance on the concept of free,prior and informed consultationand informed participation.Annex 2 - Examples ofimplementation measuresWe expect our investment managersand operators to take the practicalsteps necessary to implement theFarmland Principles. These willdiffer greatly depending on the localcontext and the planned use of theland.We include here some examplesof possible implementation measuresby local land operators. Theinformation is for illustrativepurposes only and is by no meansexhaustive. It should not be seen asa prescription in defining an implementationplan, which will alwayshave to reflect the specific situationand use of the land.Examples of implementation measures:• Introduce a system to monitor andmanage agrochemical use witha view to minimizing risks andimpacts on the environment, farmworkers and local communities• Introduce a soil management andconservation system• Introduce a system to monitorand manage water use with aview to using water more efficiently,protecting and enhancingwater quality and minimisingwater pollution• Implement an energy and wastemanagement system, aimed atusing energy more efficiently, reducinggreenhouse gas emissionsand minimizing waste production(for example through reuse/recycling)• Introduce measures to protect biodiversity,including endangeredspecies and sensitive ecosystems(for example protected areaswithin own properties)• Implement a health and safety

48 The Responsible Investor’s Guide to Commoditiesmanagement system for employeesand contractors• Define and monitor the implementationof standards for suppliersand contractors, includinghuman rights issues and environmentalprotection• Define and monitor the implementationof a policy explicitlyprohibiting the use of child andforced labour• Establish a training programfor employees with the goalof better implementing social,environmental, health and safetymeasures• Commit to using crops andanimal husbandry systems thatare suited to the specific region /climate• Avoid using new crops wherepotential negative impacts are notfully understood• Avoid investments in regionswhere compliance with local lawis difficult to enforce• Avoid land acquisition which resultsin involuntary resettlement,or has significant impacts on localcommunities, disadvantaged orvulnerable groups and uniquecultural systems and values, unlessappropriate decision-makingprocedures are followed• Work with local officials andother leaders to ensure communitysupport• Use consultants and auditors withlocal know-how• Where appropriate, supportmeasures aimed at improving thelivelihoods and health of localcommunities.

49APPENDIX 5.PROJECT TIMELINE2010Background research on preciousmetals, agricultural commodities, industrialmetals, energy and cross-cutting issuesMARCHStructured interviews with 15 financialinstitutions, companies, statkeholdersJUNEProject report (internal)Working group (WG) on farmland investmentsestablished; project provides technical support forthis group until Sept. 2011Research paper for farmlandWG: “ESG issues in farmland andagribusiness investments”SEPTResearch paper for farmland WG: Initialbriefing and member surveySession on commodities investing at “PRIin Person” conference in San FranciscoProject report: “Responsible investmentin commodities”2011Article in Responsible InvestorBackground research on ESG issues inagricultural investments, round of interviews,invitation of speakers and panelists for finalconferenceMARCHArticle in Absolut|reportFinal conference of the project: “Agriinvestingfor the long term”, GenevaPRI Webinar, 7 July 2011: “Investingin agriculture: risks and opportunities”(moderation and presentation)Principles for ResponsibleInvestment in Farmland launched“PRI in Person” Annual Conference, Paris,15-16 September 2011: Panel on responsibleinvestments in commoditiesJUNESEPTBook section in Nachaltige Anlagen fürinstitutionelle InvestorenConference report publishedFinal report of the project publishedTSF Sustainability Symposium 2011,Zürich: Session on commodities investments(moderation and presentation)

50 The Responsible Investor’s Guide to CommoditiesAPPENDIX 6.PROJECT BIBLIOGRAPHY AND EVENTSPUBLICATIONS:• Project report: “Responsible investment in commodities - The issues at stake and a potentialrole for institutional investors”, Discussion draft, August 2010 (internal report)• Project report: “Responsible investment in commodities - The issues at stake and a potentialrole for institutional investors”, January 2011 (published on PRI and onValues websites, summaryon UN Global Compact website)• Article in Responsible Investor, January 2011• Article in Absolut|report, March 2011• Book section in Nachaltige Anlagen für institutionelle Investoren, Mirjam Staub-Bisang ed.,Verlag Neue Zürcher Zeitung: Zürich, 2011• Conference report: “Agri-investing for the long term”, August 2011• Final report of the project, September 2011CONFERENCES AND EVENTS:• “PRI in Person” Annual conference, San Francisco, 6-7 Oct. 2010: Session on commoditiesinvesting (organisation, moderation, presentation)• Final conference of the project: “Agri-investing for the long term”, Geneva, 17 June 2011(organisation,moderation, presentation)• PRI Webinar ‚ 7 July 2011: “Investing in agriculture: risks and opportunities” (moderation andpresentation)• Launch of Principles for Responsible Investment in Farmland (planning, media release and PRIwebsites)• TSF Sustainability Symposium 2011, Zürich, 19 September 2011: Session on commodities investments(moderation and presentation)• “PRI in Person” annual meeting, Paris, 15-16 September 2011 (panel moderation on: “Feedingthe world: Is there a role for investors in agricultural commodities and farmland?”)

Published by the UN Global Compact OfficeContact: globalcompact@un.orgSeptember 2011