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

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.