Linking fees to sustainability performance – the next step in ESG?

A consistent theme that managers use to sell ag investments to prospective LPs is the asset class’s environmental, social and governance credentials – after all, what could be more sustainable than properly looking after farmland so it can continue feeding the world’s population?

In the past few months, we’ve seen evidence of increasing momentum towards further formalizing of this. Macquarie Infrastructure and Real Assets head of agriculture Liz O’Leary hinted to us earlier this year that the firm’s next ag fund will likely have sustainability as an explicit part of its investment mandate, in one form or another.

Others like Kilter Rural have had sustainability baked into fund mandates for a while, with up to 30 percent of the land in its Australian Farmlands Fund to be re-vegetated or re-forested, helping both on the sustainability front and boosting returns by increasing its ability to access carbon markets.

There are many other managers out there doing interesting things when it comes to ESG and farming, too.

Sydney-based Gunn Agri Partners, however, looks like it may have broken new ground.

The firm flagged to us last week that it was preparing to take the next logical step in this journey, by tying how it gets paid as a manager to how well its farmland assets perform against a variety of sustainability metrics, including soil carbon and input use, among others.

As far as we are aware, this is the first time that a manager has proposed linking the ESG performance of its assets to the fees it receives from LPs in such a direct manner (do get in touch if you have another example).

The extent to which the fund’s structure is regarded as truly ground-breaking will of course depend on the finer details, which are still light at the moment. We don’t yet know how performance will be measured and benchmarked, for example, or exactly how much fees will move in both directions in cases of outperformance and underperformance.

We’ve heard recently from one or two managers who had expected this to be the eventual result from the current direction of travel, so it will be interesting to see the response from investors to Gunn Agri’s plans (as well as more detail on how it will work when the fund holds a first close in 2021).

ESG performance has become ever more important for LPs and this could be a way for managers in ag to really put their money where their mouth is.