The ESG Writing on the Wall

An under-reported yet potentially game changing announcement was made at COP26 last November.

Recognizing that financial markets need to assess the risks and opportunities facing companies that arise from environmental, social, and governance (ESG) issues, multiple stakeholders including the United Nations, World Bank, International Monetary Fund, World Economic Forum, and an alliance of sustainability standard setters, came together to announce the formation of the International Sustainability Standards Board (ISSB).

The intention of the ISSB is to provide uniform, high-quality, global standards by industry sector for ESG management, communications and reporting. Why? Because the markets and savvy investors recognize the link between ESG risks and opportunities and the financial performance of companies. To make sound investment decisions, reward companies taking action to manage climate risk, and avoid those that aren’t, investors need consistent and verifiable metrics. Follow the money…

A little history

More than 15 years ago Prince Charles, financier Michael Bloomberg, and others, were interested in creating a new reporting system better suited for the 21st century- moving beyond finance to provide timely, relevant information across a number of topics including the environment and human rights. Many initiatives were started that gave rise to an alphabet soup of organizations and programs. This resulted in the development of multiple financial disclosure frameworks and a jumble of reporting standards.

One of the organizations that gained traction, the Sustainable Accounting Standards Board (SASB), was founded in 2011 to help businesses and investors develop a much needed common language around the financial impacts of sustainability. The SASB’s widely adopted ESG framework provides sustainability accounting standards that help public corporations disclose material, decision-useful information to investors.

Financial reporting and ESG reporting are two sides of the same coin

It helps to think about this in the context of financial reporting. Prior to the creation of the Securities and Exchange Commission (SEC) in 1934, financial reporting was regulated at the state level to protect the public from fraud. Largely considered ineffective, it took the stock market crash in 1929 to eliminate what little public confidence was left in US markets. The SEC was created to restore public confidence, prevent fraud, and ensure a fair and level playing field. Public companies are now required to follow Generally Accepted Accounting Principles (GAAP) to ensure that their financial reporting is transparent and consistent from one organization to another and across states and countries. After all, without integrity and comparability, who would invest?

The announcement of the ISSB is a clear indication that the time has come to apply uniformity and universality to ESG reporting, just like we do for financial reporting. The ISSB’s parent organization, the International Financial Reporting Standards (IFRS) Foundation, governs reporting standards in 166 countries. Applying the structure and uniformity of financial reporting has long been hailed as the solution to ESG reporting challenges.

But what does this have to do with agriculture?

The SASB standards, which have been absorbed into the IFRS Sustainability Disclosure Standards, outline the ESG issues most relevant to financial performance across 77 industries, including agriculture and food. Specifically, the Agriculture Products Sustainability Accounting Standard covers eight topics: Greenhouse gas emissions Energy management Water management Food safety Workforce health and safety Environmental and social impacts of ingredient supply chains GMO management Ingredient sourcing.

Interestingly, immediately following the launch of the ISSB, Emanuel Faber- former Danone CEO and food industry hero- was appointed its Chair. Faber’s leadership has long demonstrated the importance of incorporating sustainability- including on the farm- into governance and strategy decision making and sustainability reporting to the global capital markets. We hope his influence on the ISSB will result in a focus on regenerative agriculture in ESG reporting.

The SEC stance on mandatory ESG reporting

On March 21 the SEC announced proposed rule changes, due to be enacted as early as 2023, that will require publicly-traded companies, and companies seeking financing, to disclose their greenhouse gas emissions. The required reporting probably will not be confined to the GHG emissions that occur from sources they own or control (Scope 1), it will probably include emissions resulting from their energy use (Scope 2), and, most interestingly, may include emissions arising out of their supply chains (Scope 3). In the case of food companies, this would include emissions arising from the farms from which they source their ingredients. And therein lies the opportunity for regenerative agriculture.

The Insets and Offsets of Regenerative Agriculture

Numerous studies have shown that the biggest environmental impact by food companies arises from their supply chains, which typically contribute more than 80% of total emissions. But anyone reading this article surely knows that agriculture is not only a contributor to those emissions, it can also be a powerful remedy.

Regenerative and organic farming practices can sequester carbon. Planting cover crops pulls carbon out of the air and puts it back in the ground. Low tillage or no tillage keeps it there. Protecting and enhancing biodiversity can increase soil organic carbon and provide habitat for beneficial insects and animals. Building soil can dramatically increase its capacity to filter and store water. Incorporating livestock adds fertility and decreases or eliminates the need for petroleum-based fertilizers.

Being able to measure carbon sequestration and other ecosystem services on the farm could deliver the insets a food company needs to mitigate its emissions further up the supply chain, or provide offsets to other companies. As the recent ruling by the SEC indicates, taking responsibility for the agriculture that supplies food companies’ ingredients is not only the right thing to do and the smart thing to do, it may soon be something that they are required to do. At Mad Ag, we think this promises to be a game changer to accelerate the adoption, and increase the marketplace value, of regenerative agriculture.

What’s Mad Ag got to do with it?

Through the Mad Markets program, Mad Agriculture connects the farms that we work with to the brands in the marketplace that are committed to sourcing from a more regenerative supply chain. We see opportunity in the recent ESG rulings by the SEC because it could be the big lever we’ve been looking for to “encourage” brands to support regenerative agriculture. By creating climate-smart commodity credits linked to a farm’s regenerative practices as insets to the brands purchasing Mad Ag farm ingredients, or making the credits available as offsets, we can leverage ESG reporting to accelerate the regeneration of agroecosystems. This will drive more financial reward to our regenerative farmers while healing our planet through agriculture.

We recently hired Dr. Kaitlin Kimmel and Dr. Jonathan Gelbard to our Mad Lands team — ecologists that will measure the true impact of regenerative agriculture and translate that data into meaningful reports and ecosystem market opportunities. Using a mix of on-the-ground data collection, remote sensing, and modeling, we can optimize for the appropriate balance of certainty and cost-effective methodology. Whether brands are looking to inset carbon, water, or biodiversity metrics in their ESG reporting or want to have the utmost assurance that they are restoring farm ecosystems through their purchasing. Mad Ag intends to provide exactly what they need.

Accurate and detailed impact data doesn’t just help brands with ESG reporting and integrity marketing; our farmers are also invested in the impact data that reflects their commitment and hard work on their land. Our reports will validate what farmers know through observation and connection with the landscape, and inform the continued management of their regenerative operation.

After all, improving management decisions that lead to real planetary impact is the ultimate goal. With better information and honest mechanisms for market-based rewards, farm stewards and their CPG partners can join together to revolutionize agriculture and food. Here at Mad Ag, it’s our mission to make that happen.