Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.

CAPture this opportunity: why agricultural policy matters to markets

Ahead of today’s EU Agriculture and Fisheries Council meeting, we call for reforms to align the Common Agricultural Policy (CAP) with the EU’s net-zero commitment.

 

We have long argued that agriculture and sustainable land use in general cannot be overlooked in discussions about carbon emissions and climate change. In Europe alone, the agriculture sector accounts for around 10% of EU emissions.

So, with reforms to the CAP due to be discussed at the EU Agriculture and Fisheries Council today, we are calling upon the European Commission to ensure these reforms enable it to meet its net-zero greenhouse gas emissions commitment by 2050. We do so as part of an alliance representing €2 trillion of assets, consisting of Aldersgate Group, Brunel Pension Partnership (AUM: €33bn), Robeco (€176bn), BMO Global Asset Management (€235bn), the international business of Federated Hermes (€40bn), Storebrand Asset Management (€92bn), Aviva Investors (€408bn), Asia Research & Engagement, and the FAIRR initiative.

While the decarbonisation of the European energy system is taking hold and progress continues on the European Green Deal, emissions in the agriculture sector have plateaued. Agricultural subsidies constitute a third of the EU’s total budget and are pivotal in determining how land across Europe is utilised and which commodities are produced. Reforming the CAP is therefore essential for climate mitigation, negative emissions, and long-term environmental resilience in terms of climate adaptation, biodiversity improvements, and food security.

With the Portuguese Presidency keen to finalise how sustainability is embedded in the updated CAP in April, our alliance is calling on the EU to unlock the potential for private finance to support agricultural and land-use decarbonisation practices, and to transform the sector.

To effect this change, we seek stronger measures from policymakers. Working with the alliance, we view the reform of the CAP as an opportunity for the Commission to once again be bold and ambitious. Along with the Paris Agreement and European Climate Law, such actions could keep Europe at the forefront of the environmental agenda.

CAP tips

In a paper published today, we make four recommendations to help ensure that the reformed CAP goes further in its steps to prioritise climate and biodiversity protection. These are to:

1. Encourage use of enforceable performance-based targets that link support to member states and farmers, commensurate with the cost of delivering public good or environmental services;

2. Shift away from incentives that prioritise yields at the expense of the climate and environment, and balance this with new monetary incentives that put a value on sustainable agriculture;

3. Decouple support from production metrics for single commodity transfers with high associated greenhouse gas emissions (e.g. beef and dairy);

4. Apply the Just Transition Mechanism to support farmers’ social and economic wellbeing, where impacted by CAP reforms.

We believe these recommendations will be broadly supported by both markets and regulators. Our alliance also includes experts at Chatham House, and the FAIRR initiative has said it supports the aims of these recommendations and will be launching a broader consultation with its $30 trillion investor network to develop key areas of engagement. The Institutional Investors Group on Climate Change (IIGCC) has been a key supporter of the alliance, too.

We are all becoming increasingly alert to the size and scale of risk that climate change poses to sustainable economic growth, epitomised by our own and so many others’ commitment to achieving net zero. As long-term investors, and stewards of our clients’ assets, we engage in this manner with policymakers, organisations and businesses across the food and agriculture sector to help them transition to a net-zero economy.

In delivering these reforms to the CAP, the EU can demonstrate to the world how agricultural subsidies can support – not undermine – this transition.

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