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Cambridge Institute for Sustainability Leadership

soil degradation

24 January 2022 - Following extreme weather events, crop yields decline more if land is degraded. Degrading soils therefore pose financial risks to agricultural value chains – risks that are not currently integrated into investment decisions.

Analysis by the University of Cambridge Institute for Sustainability Leadership (CISL) and asset manager Robeco of a Brazil use case found that farmers operating on degraded land could see their market value decline by 13% while those on healthy soils could see valuation increase of 6%. The research also observed that small food processing companies sourcing from areas of degrading land could suffer a negative impact on valuation as high as 45%.

Dr Nina Seega, Research Director, Centre for Sustainable Finance at CISL said:

"By detailing precisely how land degradation is financially material, this use case shows that investors are able to measure nature-related financial risks today. Others need to learn from this example.  By doing so, the existential risk posed by nature loss can begin to be integrated into financial decisions, and the value of nature recognised by our economy."

This use case, How land degradation amplifies the financial vulnerability of listed companies in agricultural value chains is released as part of the CISL Centre for Sustainable Finance’s programme on nature-related financial risks. The findings underscore that land degradation is financially material, highlighting the urgency for investors to incorporate factors such as soil health into investment decisions. It also highlights the need to actively engage with companies in the agribusiness sector to mitigate nature-related risks.

Carola van Lamoen, Head of Sustainable Investing, Robeco:

“Integrating nature-related risks in our investment decisions is an important part of our biodiversity roadmap. The case study we did with CISL will help us in our journey towards translating nature risk into valuations. We hope and trust the study supports further development of frameworks, such as those of the Taskforce Nature Financial Disclosures (TNFD), to integrate biodiversity in financial decision-making.”

Key findings of the model indicate that:

  • The extent to which companies are in value chains containing degrading land is a determinant of market value: Farmers operating largely on degrading land see their market value decline by 13%, while those on healthy soils see a valuation uplift of 6 per cent (mainly due to their ability to capture crop price rises that follow extreme weather).
  • Packaged food companies are very vulnerable to land degradation effects. The analysis point to company value deterioration of both global and small producers, whereas a small producer connected to degrading land suffers far worse. Increased purchasing costs, caused by the need to cover supply shortfalls using increasingly expensive spot markets, cannot be passed on to consumers without risking market share to rivals not connected to degrading land. The negative impact on valuation can be as high as 45%.
  • Global fertilizer- and trading companies on the other hand are in position to benefit from price increases that follow crop yield declines. In general, the analysis shows that the smaller and less diversified a company is in the chain, and the more connected to degrading land, the worse the impact of a major crop yield decline is on its market valuation.
  • The risk posed by land degradation is encouraging value chain consolidation, and some companies are retreating from areas more vulnerable to soil degradation, risking the concentration of degrading land in the hands of smaller and less well-capitalised companies less able to invest in land restoration. This is troubling as restoring degraded soils is critical for meeting food demand.
  • The analysis also shows that to avert land degradation risk, assure food security, and support the future competitiveness of local companies, governments need to work on levelling the playing field, developing policies that promote and support best land use practices.

CISL’s Centre for Sustainable Finance, through its ongoing work on nature-related financial risks, today (Tuesday January 25, 2022) also announces its appointment as Knowledge Partner of the Taskforce on Nature-Related Financial Disclosures.

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