Cultivating Responsibility: Where Does the Buck Stop in Agricultural Investment?

Jennifer Clapp

A recently published Oxfam briefing paper, Smallholders at Risk, challenges a number of mainstream assumptions about the role of private-sector investment in developing country agriculture. The conventional wisdom from the World Bank and other powerful actors is that private investment in the sector will benefit smallholders and enhance food security.

Oxfam’s research shows that, even in cases where private investors claim to be investing “responsibly”, the outcomes can nonetheless be harmful to food security and smallholder livelihoods. This happened in the cases the organization examined in Paraguay, Guatemala, and Colombia involving large-scale private investments in soy, oil palm, and maize that displaced farmers, degraded the environment, and contributed to hunger.

The general response to this kind of outcome has been to promote voluntary initiatives that encourage more responsible investment. A spate of recent initiatives explicitly seek to promote responsibility among investors in the sector: the responsible agricultural investment (RAI) principles currently being developed by the Committee on World Food Security, the Principles for Responsible Agricultural Investment (PRAI) promoted by the World Bank and UNCTAD, as well as a range of other initiatives including commodity specific certification schemes.

These efforts aim to ensure that private sector investment avoids the kind of pitfalls that Oxfam’s research highlights. But voluntary initiatives alone are unlikely to make much of a difference, no matter how strongly they are worded.

There are good reasons to be skeptical of voluntary responsible investment initiatives in the agricultural sector. We have tried it before, with more general efforts such as the Global Compact, the UN Principles for Responsible Investment, as well as a range of more specific certification schemes for commodities ranging from timber to minerals to agricultural products. Over a decade of experience with voluntary initiatives along these lines has revealed serious shortcomings of this approach.

For starters, responsible investment measures typically state vague platitudes that are aspirational, and avoid specific measures that are measurable and enforceable. It is important to set out and define norms for good practice. But unless voluntary initiatives are crafted in a way that can be ratcheted up to make them stronger as well as legally enforceable down the road, they risk becoming talk shops rather than mechanisms for actual behavior change among investors.

These initiatives also only cover a small slice of the markets and sectors that they seek to influence. The UN PRI, for example, claims to capture around 15% of all institutional investment. But even this figure seems optimistic, given that its principles are applied unevenly among its members. Indeed, a recent paper by the Network for Sustainable Financial Markets estimates that only 1% of all assets under management globally specifically considers sustainability as the main criteria for investment. And the WWF reports that typically less 10% of the markets where commodity certification schemes are available are actually certified, often only 1-3% of the overall markets for those commodities.

The weak uptake of responsible investment initiatives is not surprising given that the business case for adopting them is weak. As David Vogel’s research on voluntary environmental initiatives shows, the “market for virtue” comes with caveats—typically only applying to niche markets and big brand-name companies. The financial performance of firms that undertake responsible investments is no better or worse than those that don’t. So they are only likely to implement responsibility initiatives in a serious way if it matters for their customer base. Sadly, the average customer is not well versed in these initiatives.

The Roundtable on Responsible Soy initiative illustrates many of these weaknesses. It is based on five very broad principles (that apply to soy production at all scales, and includes genetically modified soy). And even though development of the initiative began in 2004, as of 2012 the WWF reported that only a miniscule 0.16% of soy on the market was certified as “responsible.” The reason for this tiny slice is most likely the lack of a single big “brand” and the fact that most consumers have no idea that soy is an ingredient in many processed foods.

These types of weaknesses in responsibility schemes are only compounded by the huge influx of private financial investment in the agricultural sector over the past decade. New financial investors in the sector are typically seeking high investment returns through a variety of complicated agricultural derivative products, such as index funds, that make it difficult to connect a single investor to a specific farm outcome.

As I argue in a recent article, the complexity of financial investment in agriculture makes it extremely challenging to determine where exactly responsibility should be located within global value chains. The financial investors operate around the edges of agrifood chains and are largely obscured from view, including from regulators. The costs of these investments are often externalized and as the Oxfam paper highlights, they tend to fall most heavily on smallholders.

If voluntary responsible-investment initiatives are inherently weak, and if the financial investors in the sector are obscured from view, where does that leave us?

Rather than trying to convince large-scale private financial investors to “do the right thing,” we should instead be putting more effort into building up a more substantial role for the public sector. As the Oxfam report rightly suggests, the state needs to play a crucial role not only in attracting investment, but also in regulating it as well as investing in the sector itself by providing much-needed infrastructure. In short, there is much that the state can do to support truly responsible agricultural investment that comes not from distant large-scale investors, but from the smallholders themselves.

Triple Crisis welcomes your comments. Please share your thoughts below.