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Decision and Policy Analysis Research Area – DAPA

SEC mandates climate change risk disclosure: new opportunities for small farmer inclusion emerge

The first economy-wide climate risk disclosure requirement was announced a few weeks ago by the United States SEC.  This marks the first in the world, signaling that investors are viewing climate change disclosure as a way to understand potential risk and evaluate corporate ability to innovate and evolve ahead of future international and national regulations.  The SEC described the disclosure requirement as a way to provide;

new interpretive guidance that clarifies what publicly-traded companies need to disclose to investors in terms of climate-related ‘material’ effects on business operations, whether from new emissions management policies, the physical impacts of changing weather or business opportunities associated with the growing clean energy economy.”

This is a big deal – and no, it’s not because the SEC inherently cares about the environment or worker justice (although many individuals in the SEC might).   Much more for the acknowledgment that environmental and social impact reporting yields a more accurate reflection on the projected long term financial health of a company.  Environmental and social degradation is being recognized as a risk and also as a missed opportunity for innovation and value creation.  Read about it here or download the full SEC report.

In CIAT’s work linking small farmers to global markets, we’re uncovering the business case for including small farmers into supply chains.  Small farmer inclusion is a way to expand into emerging markets, diversify and solidify supply, reduce poverty, allow for efficient productivity per hectare, and mitigate the risk of supply chain disruptions that are likely to occur from climate change.   Greater disclosure of supply chain activity and it’s environmental impact means an opportunity to show investors that small farmer inclusion can signal better environmental management and  support long-term business value.

What does SEC recognition of the importance of environmental and social impact mean?

  1. The potential for a new standard for a good investment:  Understanding environmental and social impact is key to understanding risk and opportunity and SEC acknowledgment will further drive corporate change and reward companies that are making long term investments for sustainability.
  2. Investors are driving change as  group:  Investors,  in part because of the financial meltdown, are banding together to shift corporate policy and norms.  They are flexing $1 trillion dollars worth of muscle and not necessarily because they  are ethically concerned.  Rather they see it as part of a long term strategy for investment and an indicator financial health.
  3. Industry-wide belief that companies will be highly regulated: Investors seem to believe that governments will regulate environmental impact strongly in the future and thus want to understand which companies are best positioned to meet such challenges.
  4. Transparency is king:  Investors are demanding more information than ever before to make educated investment decisions that have a more holistic way of understanding long term value.
  5. Power / positional shifts: This announcement is coming after COP15, which means that despite countries not coming to consensus on climate change, institutions and individuals holding significant purse-strings are.  Investors and business alike see climate change as a real threat to future operations and are preemptively shifting practices to be more in line with environmental sustainability a way to understand and drive up perceived value to investors.

With a future planet of more than 9 billion people, agricultural production will need to increase by 60-70% by 2050.  In developing countries alone, where the highest percentage of market growth will occur, production will need to double.  This presents an incredible opportunity for investment and restructuring in our global food system.   New tools and partnerships are emerging, supporting a dramatic rise in private-sector involvement and interest in sustainable agricultural enterprises.

Why does this matter for food-trade companies?

  1. Food companies are extremely vulnerable to future complications for climate change.
  2. Food insecurity is a major issue for governments for security, stability, and economic growth. With more government attention, policies will constrict and expand simultaneously- tightening in terms of food safety, and likely more suitable for increased trade and market access.
  3. Increasing population growth and income generation from emerging markets (like China and India) – which is driving demand.

What opportunities does increased environmental and social impact disclosure mean for small farmers and investors in sustainable agriculture?

  1. Ability to better understand risk: Traditional food trade companies are often carbon-centric and extremely vulnerable to future complications for climate change.  Disclosure means understanding the risk of unsustainable methods of procurement, extraction, transport, and buying practices that may limit growth and profits (not to mention stifle innovation)  in the future.
  2. Option to better partnerships:  Mitigating risk and reducing spillover costs to the environment and society may encourage stronger, more creative partnerships.  NGO’s, government partnerships, and work with local groups and organizations can more widely disperse sustainable farming methods and use market forces to discourage environmental destruction.
  3. Greater acceptance that small farmer inclusion builds value:  diversity of and solid links to supply through small growers will mitigate risks of supply disruption.  Moreover, with changing consumer demands towards ethical production and procurement, companies facilitating small growers will be well poised.
  4. Emerging market development:  Greater push from investors for pro-poor inclusion as a benchmark of sustainable business practice means that small farmers find income and dignity through market-chain activity.  No longer a lost cause for aid or charity, but a dynamic valuable participant pool for the global economy.

As private sector involvement in sustainable agriculture continues to mount, responding to the international need for food system reform, rural development, poverty reduction, and food security, disclosure on environmental management will become all the more important.  Greater supply chain transparency though this type of disclosure will drive corporations to find value in small farmer inclusion and development of the South, and to this end we commend the progress made.

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