How new tools can support superior investment decisions

USD 29 trillion per year. That’s how much the Scientific Group of the UN Food Systems Summit estimated the annual costs of environmental, health and economic impacts of food systems in 2021. The same year, the economic value of the food produced by these systems netted only USD 9 trillion per year.

Numerous reports and research programs continue to show that the true cost of dominant food systems is disproportionally high, contributing upwards of 33% of global greenhouse gas emissions and being the primary driver of biodiversity loss. This, while 10% of the global population goes hungry or undernourished and the rates of diet-related diseases continue to multiply. 

The negative impacts of the dominant food systems far outweigh their positive value.

To address this, an estimated investment of USD 300-350 billion per year is needed to make food systems sustainable, equitable, and climate resilient. By deploying capital in this way, it’s estimated that these investments could result in new business opportunities worth up to USD 4.5 trillion a year by 2030.

Tim Crosby
Principal & Chair, Thread Fund & Transformational Investing in Food Systems (TIFS)

From Linear to Systemic

A key barrier in placing aligned capital to address these macro issues is that most of our tools and strategies were not designed to work in complex systems. If we are serious about understanding and assigning systemic risk and generating positive systemic returns, we need new tools and strategies that are designed to work within the complexity of regional and global food systems and support smart investment decisions.

The challenges caused by Business As Usual (BAU) food systems strategies are largely a result of linear thinking (e.g. only interested in yield). Operating with a singular goal in mind is risky for food systems and for systemic investments. By paying attention to the complex reality of food systems, real opportunities will open up – opportunities that deliver on multiple impact goals at the same time.

With increasing awareness that many BAU strategies have become our riskiest investments, calls for “transformation” are everywhere, with the main commonality being ‘not what we are currently doing.’ In order to place investments that consider natural, human, and social returns alongside financial returns, we need tools designed to work in systems and that provide directionality by placing individual efforts within the context of systems. Such assessment tools can provide systemic context to individual approaches by highlighting how a farm, business, or fund is currently focused, generating positive values as well as highlighting areas where unintended consequences or negative externalities can occur. These systemic exposure points can be unassigned risks in traditional assessment tools. With this systemic framing, businesses and programs can discover where they are currently impacting systems, highlight strengths and weaknesses, and provide pathways to improve multiple outcomes at the same time.

Connecting science to market

A key factor in the development of systemic assessment tools for investors, businesses and governments is to ensure that they are based on science and can be independently verified (e.g. third party certifiers). As one financial analyst said during the launch of an assessment tool, “I don’t care about the definition of soil health, but I do need to know it is based on solid science.”

In order to scale impact, metrics and targets need to address sector-specific compliance and standardization requirements needed for the scale of institutional investors needed to address the macro issues. This means, for example: one standard for soil health, another for biodiversity, another for net increase in producer livelihood. Such standardization can create tension with regional or landscape level realities that usually require customized metrics, and also with what is accepted as underlying science. Still, there is a need to develop standards, with a dynamic market developing for aligned measurement, reporting and verification services.

There is a lot of activity to develop science-based standards for natural capital and ecosystem services, with The Science-Based Targets for Nature (SBTN) and Ecosystem Services Market Consortium (ESMC) being prominent efforts. The development of these standards is good news. The major focus of these efforts, however, is primarily related to only natural capital interests. There has been less focus and clarity on the human and social capital interests (e.g. health, wages, cultural knowledge, land access, food security, social networks) that are critical in advancing circular economy and just transition goals. Without all of these elements included, we don’t get an accurate assessment of systemic risks and returns.

As well, if we only accept western peer-reviewed science to underwrite such standards, we exclude double materiality approaches (e.g. yield plus production practices) and more importantly traditional indigenous knowledge that is more systemic in its approach than peer-reviewed science. The Taskforce for Nature-related Financial Disclosures (TNFD) recognizes this and has already developed the “Guidance on engagement with Indigenous Peoples, Local Communities and affected stakeholders.” Their rationale is simple and clear: “Indigenous Peoples make up less than 5% of the world’s population and manage less than half of terrestrial landscapes and a third of inland waters, yet they have succeeded in protecting 80% of our global biodiversity.”

Acting now with Systemic Directionality

Investors making decisions today are generally using custom metrics and definitions based on developing best practices, regional customization needs, and innovation needs. This tension – between today’s decisions and tomorrow’s standards – generates a need to provide investment decision-makers with information today that supports systems driven transformation and provides directionality towards tomorrow’s standards.

There are a handful of systemic assessment frameworks and tools that have been developed for use in regenerative food systems. In 2019, The Economics of Ecosystem and Biodiversity Agrifood (TEEBAF), a United Nations (UN) Environment Program initiative supported by over 150 scientists, researchers, academics and trade associations, developed a True Cost Accounting framework to systematically assess food systems. Since then, multiple efforts have built upon the practicality and usability of this framework including 17 country level studies.

Based on TEEBAF, The UK’s Sustainable Food Trust developed the Global Farm Metric (GFM) for use in assessing an individual farm’s alignment with systemic goals. GFM establishes a common language that aligns existing metrics in the food and farming industry around a holistic view of farm-level sustainability. The Capitals Coalition developed TEEB for Business guidelines that provide “… a practical way for businesses to understand and act upon their impacts and dependencies on natural, human, social, and produced capital.” 

Alongside the TEEBAF framework was a complimentary effort by the UN Committee on Food Security and UN Food and Agriculture Organization to develop a comprehensive set of principles for agroecology, a production methodology similar to regenerative agriculture and that, like regen ag, builds on traditional indigenous knowledge regarding food production and producer livelihoods. The Business Agroecology Criteria Tool (B-ACT), was developed by Switzerland’s Biovision Foundation for Ecological Development to assess the depth of alignment of an individual business with the 13 Principles of Agroecology.

In concert with these efforts to develop systemic assessment tools for farms and businesses, Transformational Investing in Food Systems (TIFS) developed the Systemic Investing Assessment (SIA) tool from both TEEBAF and the 13 Principles of Agroecology. SIA assesses the positive and negative system risks associated with investments in funds. SIA also uses the Global Impact Investing Network’s best practices for funds to determine if a fund is fully designed for purpose and able deliver on its impact thesis.

Each of these tools can help investors, governments, producers, entrepreneurs, fund designers and managers to assess farms, businesses, and funds for how well they are performing today while providing science-based directionality towards collective food system transformation goals.

Emerging Standards

One goal of these systemic assessment tools is to provide directionality to today’s actions and provide feedback to improve systemic outcomes. This type of directionality is critical as reporting and metric standards continue to be developed. Below are a few relevant efforts that are becoming ‘standard bearers’ or are rising in terms of adoption and position, with the list by no means encompassing all of the engaged market players.

In 2021 the IRFS Foundation (IFRS) created the International Sustainability Standards Board (ISSB). In 2022 the Sustainability Accounting Standards Board (SASB) merged with ISSB to bring together the dominant US and EU financial and sustainability standardization efforts. Last year IFRS released a set of accounting rules for the financial statements of public companies that are intended to make them consistent, transparent, and easily comparable around the world.

2022’s Kunming-Montreal Global Biodiversity Framework (COP 15) set a strong bar upon which to develop biodiversity targets. Since then, a handful of complimentary financial disclosure guidances have been developed and are gaining acceptance. The Taskforce on Climate-related Financial Disclosures (TCFD) has merged into IFRS, and TNFD has released nature-related disclosure recommendations, with a Social-related financial disclosure under development. As a member of the World Economic Forum’s Executive Committee said in a recent meeting, “TNFD is the horse we will all have to ride.”

Like TNFD, The European Union’s Sustainable Finance Disclosure Regulation (SFDR) is a pivotal effort to address transparency and disclosure requirements for financial products. This past December SFDR closed consultation periods for their recent guidances. Related to SFDR is the EU Taxonomy’s Do Not Significant Harm principle “… which considers an investment to be a ‘Sustainable Investment’ if it contributes to an environmental or social objective and does not significantly harm any other environmental or social objective as set out in the SFDR.” This is a significant systemic regulatory innovation that, like the three systemic assessment tools highlighted, can guide investment decisions and promote capital flows that reveal the potential negative externalities and unintended consequences while accentuating the positive impact of investments.

Leveraging the amount of innovation occurring in systemic investing, climate/food/health systems, and financial regulations creates significant opportunities for advancing systemic change. By generating directionality in today’s investments, we will find ourselves farther down the road towards our collective goals. Our success will depend on solid leadership from the ground with the stewards of nature, our indigenous communities, food producers and board executives that generate new investment mechanisms designed for complex systems, informed governance, and moving forward with the confidence that our investments positively impact system transformation.

Tim Crosby is Principal of the Thread Fund and Chair of TIFS, an impact network of investors, funders, intermediaries, and enterprises building a market for a regenerative, equitable, and climate-resilient food future. TIFS develops and prototypes systemic investing tools and strategies that advise public and private investors to deliver results towards a set of system goals.

Join Tim and others who are leveraging these tools in their investment decisions at RFSI Europe in Brussels 28-29 February. Learn more here.