Implementing ESG practices in the agriculture and food industry

For companies in the agriculture and food industry, ESG factors have become increasingly important due to changing stakeholder expectations and regulatory requirements. Consumers, investors, and regulators are placing greater emphasis on sustainability, social responsibility, and governance practices, which has led to increased scrutiny of companies in the industry. ESG, in the context of our industry, stands for:

• Environmental factors would include reducing greenhouse gas emissions, promoting sustainable sourcing of raw materials, reducing waste and pollution in the production and distribution of food products, and promoting energy efficiency.

• Social factors would include promoting fair labor practices and working conditions for employees, ensuring food safety and quality, supporting local communities, and promoting responsible marketing practices.

• Governance factors would refer to the management and oversight of the business, including ethical and transparent business practices, ensuring compliance with regulations and standards, and promoting accountability and stakeholder engagement.

However, implementing ESG practices in the agriculture and food industry can be challenging due to the complexity of the supply chain, the significant environmental impact of farming operations, and the numerous stakeholders involved in the industry. This presents both challenges and opportunities for businesses in the industry.

One of the main challenges is to balance sustainability and profitability. Adopting sustainable practices can often involve significant upfront costs and reduced yields in the short term, which can impact profitability. However, companies that successfully integrate sustainability into their operations can achieve long-term benefits, such as improved reputation, reduced risks, and increased access to capital.

Moreover, companies need to consider the social and governance aspects of their operations. This includes addressing labor practices, promoting community engagement, and ensuring compliance with regulations. Failure to address these issues can lead to reputational damage, legal risks, and supply chain disruptions.

On the other hand, implementing ESG practices can create opportunities for businesses. Companies that adopt sustainable practices can differentiate themselves from competitors, attract socially conscious consumers and investors, and access new markets and partnerships. Moreover, ESG performance can be a key factor in investment decisions, and companies with strong ESG credentials can access cheaper capital and experience lower costs of capital.

Startups can play a crucial role in helping companies address these challenges and leverage these opportunities. Startups can develop innovative technologies and business models that reduce the environmental impact of farming operations, promote sustainable land use practices, and improve the social and economic conditions of farmers and workers. By collaborating with established companies, startups can help these companies integrate ESG practices into their operations, create new value propositions, and access new markets and partnerships.

Climate Smart Technologies

Even though the three letters of ESG are important, most of the business activity has been focused on the Environmental part of the equation. Climate-smart agriculture is a suite of practices that sustainably increase productivity and incomes, enhance resilience and adaptive capacity, and reduce and/or remove greenhouse gas emissions. The climate-smart agriculture sector is growing, has deployable technologies and emerging innovations, and capable farmer ingenuity, but needs investment now and throughout the next decade to deliver on the potential of soils to support resiliency for farmers and ranchers.

Farmers and ranchers have made significant advancements in building soil health, mitigating greenhouse gases, and increasing conservation practices to date, but the scale and pace of the transition required mean that stakeholders across the agriculture value chain and beyond have a critical role to play. The transition to a climate-smart agricultural system will require a range of stackable support tools: locale- and practice-specific knowledge, clear revenue opportunities and developed markets, supportive policies and programs, interconnected and interoperable data, and access to technology and capital. Innovative technology and finance are key enablers to the broad adoption of climate-smart soil practices.

Key barriers to technology adoption of those technologies include the lack of standardized data collection, methods and soil health metrics, data interoperability and rural broadband connectivity. On the other hand, approximately $972 billion flows annually from institutional, retail and government investors across asset classes into the agricultural value chain. A range of asset classes, financial mechanisms and enabling infrastructures offer promising avenues to move capital in ways that ultimately help farmers and ranchers scale the adoption of climate-smart practices.

According to a report by US Farmers and Ranchers in Action (2021), more than 150 companies support digital data collection, analysis and sharing for climate-smart soil agriculture (figure 1). These digital solutions can accelerate farmer and rancher practice-specific knowledge, aid in business planning, and simplify reporting to the value chain, funders, or other partners.

Figure 1 Climate-Smart Technologies Landscape 2021

Challenges regarding ESG in the Agriculture and Food industry: A Jobs to be Done perspective:

Below we explore some opportunities regarding ESG in agriculture and food from a number of different angles. We use the lens of the Jobs-to-be-done framework conceived by Clayton Christensen and popularized by Alexander Osterwalder in his Value Proposition Canvas framework. The Jobs-to-be-Done (JTBD) framework can help identify the emerging challenges and guide ESG-focused startups to develop innovative solutions to address the needs of the future.

One way to organize the overarching jobs in this space is to break down the elements of environment, social, and governance into sub-priorities, such as the ESG Ratings Key Issue Framework used by financial index firm MSCI.  Using that lens, we can propose several “meta-jobs” under which we can find many specific jobs across various customers:

1. Job: Manage climate impacts

The agri-food value chain is deeply involved in climate and has a significant role to play in managing climate impacts. Shareholders and government regulators both place priority on avoidance of greenhouse gas (GHG) emissions in companies’ product value chains. Where avoidance can’t be achieved, companies are increasingly seeking offsets in the form of carbon removal credits. On the current pace of climate change, avoidance and removal will be insufficient to prevent substantial adaptation. Agriculture and food can play a role in all three parts of managing climate impacts and change. Adaptation to drought, ecological changes, and more extreme weather will be a constant factor in agriculture.

Ask: Who has priority job to be done in managing the impact of these factors? What are they trying to accomplish? What does success look like for them?

2. Job: Protect natural capital

Land, water, and other natural resources play critical roles in the sustainability of agriculture and food, but they are also strained by other demands. Agricultural land is threatened by desertification and expanding residential areas. The health of the soil itself is an essential component to the long-term value of the land as a productive resource. Demands on water resources grow with the population and new industry in an era of drought in the Western U.S. Agri-food has a unique position with respect to its control of and commitment to natural capital. Many stakeholders have an interest in this natural capital being used efficiently and sustainably, but the specifics of those interests are where the opportunities are.

Ask: Who has important jobs to be done in protecting and using natural capital? What does success look like to them? What solutions can they access today? How are they performing?

3. Job: Limit pollution and waste

Adjacent to protecting natural productive capital is mitigating the side-effects of how we operate. All stages of the value chain generate waste products, whether it be excess crop nutrition, livestock waste, wastewater from food production, or food packaging. Some of those by-products end up in landfills or leech in to watersheds, creating downstream problems. All of those waste materials are being managed by processes that can be seen as efficient from someone’s perspective, but that may not be efficient to all stakeholders.

Ask: Who is responsible for managing waste and what is their job to be done? How are existing solutions performing? Who has a job to be done that requires a different waste management process? Is there a way to bridge that gap?  

4. Job: Generate and use energy efficiently

The U.S. is undergoing an accelerating transition in its energy sector. Generation is shifting from older fossil fuels to renewables and cleaner-burning fuels. Electrification is trading out fuels in machinery and vehicles for grid connections and longer-lived batteries. Even the location of generation and storage is moving from a utility-scale plant to more distributed models that require less transmission infrastructure. Agri-food consumes energy, but it can also play a wide range of roles in generating and transmitting it. Farm buildings are an excellent target for photovoltaics, the Midwest and West has extensive wind power potential, and producing energy from biowastes can solve more than one problem at once.

Ask: Who has jobs to be done that can be better solved with new energy solutions? Who has a job to be done in building those solutions? What must be true for a transition to take place?

5. Job: Protect human capital

Agri-food is fundamentally a human industry. No matter how much automation or technology is deployed at every stage of the value chain, humans are still in the loop. In fact, the tasks that have been most difficult to automate are also often the most challenging physical labor that must be completed by human workers. As the agricultural workforce has changed over decades, a large and growing fraction of these workers have come to the U.S. from other countries, especially Central American nations. Up and down the value chain, workers range from people doing physical tasks like picking fruit to lab scientists to truck drivers. No matter where workers come from or what their roles are, many stakeholders place a priority on ensuring the health, safety, dignity, and fair compensation of those workers, without whom this sector could not feed the nation or the world.  

Ask: Where do we face major challenges in the welfare of workers in this sector? Who has a priority job to be done of protecting those workers? How are current solutions performing against the standards of those stakeholders’ jobs to be done?

6. Job: Support communities

The human impact of agri-food goes beyond the workforce into the communities that support the sector. As the workforce in agriculture and the economy have changed, farming communities have faced drop-offs in population and economic fortunes. Communities that live around heavy industry in agri-food, including energy generation, input manufacturing, transportation hubs, and processing often rely on a small number of employers to provide most of the jobs in an area. For smaller family farm operations, off-farm income makes up most of the household’s income with the family generating their livelihood from other roles in the community. For agricultural workers temporarily in the U.S. on visa programs, their communities at home are affected by U.S. agriculture – both its economic opportunity and the long absences of key family members.

Ask: Where do we see pressure on communities in agri-food? What are the underlying jobs to be done reflected in that pressure, and who has them? Who has a job to be done that might lead them to invest in solutions that enhance community support?

7. Job: Assure governance to stakeholders

ESG jobs to be done for corporations often converge in governance: ensuring that the mission and values of an organization are being executed. Much of governance is the same across sectors, and shareholders, regulators, and the public have well-understood tools to demand good governance. One area in which agri-food has unique challenges is in communication to stakeholders such as government regulators, shareholders, and the public. On any dimension of ESG, progress not communicated is unlikely to solve anyone’s jobs to be done. New solutions are emerging in creating transparency into current and new operations that make progress on ESG criteria, especially in those where verification is most important and challenging. The geographically dispersed and complex chain of agri-food cannot be easily made transparent, and observers often must fill gaps in their sight with assumptions. Both in current practices and evolving standards, the sector has an opportunity to demonstrate its commitment to good governance.

Ask: From a stakeholder’s perspective, which jobs to be done in governance are the least solved today? What is the performance that they need to see in governance? What is needed to deliver on that performance?

DIAL Ventures, the innovation arm of the Purdue Applied Research Institute, tackles big problems facing the U.S. and the world such as food safety, supply chain efficiency, sustainability, and environmental impact. DIAL Ventures creates new companies that drive innovation in the agri-food industry which, in turn, makes a positive impact on our lives and lifestyles for years to come.

If you are interested in becoming a DIAL Ventures Fellow or Corporate Partner, contact us at info@dialventures.com.

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