An Interview with Henry Boucher, Manager of the Sarasin Food & Agriculture Opportunities Fund

The Food & Agriculture Fund is a recent entrant to the Castlefield B.E.S.T Sustainable Portfolio Fund. While not explicitly labelled as a ‘sustainability’ fund, we have followed the fund for some time and are confident that its focus on the sustainability of the food chain from ‘field to fork’ is well aligned with our own process. The team at Sarasin have a strong track record of engagement with investee companies, the assessment of corporate governance principles, and the ways in which companies address key issues such as climate change are included in the investment process.

As an introduction to the fund, Simon Holman, manager of the Castlefield B.E.S.T Sustainable Portfolio Fund, took the opportunity to conduct an interview with fund manager and deputy CIO at Sarasin, Henry Boucher. This should allow investors to gain an insight into the fund’s objective and Sarasin’s approach to sustainability issues.


Please can you outline briefly the Sarasin philosophy and what you are aiming to achieve with the Food & Agriculture Opportunities strategy?

The first thing to say about Sarasin Partners is that we are thematic investors, so we analyse long-term trend changes and the way in which they drive company performance and investor returns over time. As far as that relates to food, we see some very slow-moving, gradual but extraordinary changes happening over the next decade or two and the reason for that is that we still have a growing (and ageing) population, with about a million extra mouths to feed each year.

The population is also rapidly becoming better educated about food, with the internet and social media, for example, and we can all see the number of TV channels and programmes there are about food now. But also, looking at it in a global context, the population is becoming a lot more urbanised, which means that they have better access to much greater variety of food and, indeed, to eating out and preparing food in completely different way than in a rural context.

So the Food & Agriculture fund is trying to pick up on big trend changes, like the population shift, but also diet shift. Diets are changing as people are thinking about their health and increasingly the planet, giving rise to rising vegetarianism, and they are looking for access to better nutrition and longer lifespans.

Another really important issue which is driving food and agriculture is waste. The food chain wastes an enormous amount – about a third of all food goes uneaten. One of the dramatic things that technology can do is to improve productivity and cut waste. We will see a dramatic impact from the use of technology in the food chain, from new agricultural machinery to better processing, new packaging, and, for example, better understanding of the gut biome – all of these things are ways in which technology will change food over the next few years

The last, but not least factor to mention is environmental awareness as we all understand climate change and the impact that our current food production has on the world. So those are just some of the reasons that we have identified food as a particularly attractive theme in our long-term investment process.


Regarding the investment process, what are the key financial and ESG criteria that the fund looks at?

In any investment it is crucial to understand what the long-term cash flows that a business will generate are and the sustainability of the business. Sustainability depends on sales growth and margins – the financial metrics – but it also depends on the licence to operate that the company has been granted by society, and that depends on many ESG criteria. So, the two are integral to each other. It is difficult to give too precise a list of criteria that we look at because they vary across different industries, which all tend to have slightly different metrics. The crucial thing is to understand how the long-term cash flow that you are investing in will be sustainable - that companies aren’t making financial capital by destroying natural capital. You have to understand the uncosted negative externalities, as economists call it – such as how companies might react to climate change over the next five years. These are all factors that go into the equation, but ultimately what we are trying to seek are sustainable long-term returns for shareholders that are in balance with the environment and society.


To what extent do the companies you meet and invest in understand that good environmental, social and governance (ESG) policies can have a material financial impact and how does this vary across the different regions of the market?

I think most understand now much better about ESG. Companies are being bombarded with questions, not just by investors, but by the media, customers, and indeed their own workforces in a lot of cases, so I think most understand. However, I think it is important to appreciate that their responses depend on a whole range of other factors and particularly local context and regulation. Sadly, in too many countries companies are being allowed to make their profits in a way that isn’t regulated or is poorly regulated. When new regulation comes along, they are forced to change and that tends to have the most material financial impact

In terms of different regions, a lot depends on the underlying integrity of the companies being invested in. If you look at say, JBS, which is one of the world’s biggest meat producers and is based in Brazil, they have a wonderful environmental report claiming they meet certain standards when the reality is that they are falling short. You have to be very careful of greenwashing or dishonest reporting on ESG factors, and indeed the way that some companies operate their policies.


How has the investment landscape changed over the recent past with reference to responsible and sustainable investment issues?

Well I do think we need to mention here the impact of the Blue Planet II TV programmes, but also a growing awareness of climate change and people really understanding where carbon emissions come from. I think in the past it was thought that is was just cars and lorries but actually there is so much more to understand particularly in relation to the food chain, such as methane from cows, emissions from fertilisers and the impact of deforestation. Plastics has also become a really big topic, particularly with consumers, but also businesses. So you need to add some of those macro factors to the micro factors discussed in the last question.


What do you think are the most crucial areas to engage with companies on and how long is it fair to give management to make the necessary changes?

Quite a challenging question - it varies is the simple answer. Climate is an existential threat that affects everybody and is incredibly urgent, but I think you also need to pay attention to the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) report that came out recently which highlights the scale of the wider biodiversity threat. So, I think we need to keep companies aware of those bigger issues and ask them in particular what they are doing about it. We are asking companies what they are doing to be Paris-compliant and it is extraordinary not only what good answers we get but also the sad thing is how few investors are asking that question. I think you’d be interested in how some of the biggest US fertiliser companies, for instance, are employing their own climate scientists and working really hard to find ways in which they can operate in the future while significantly cutting their CO2 footprints. I think there are lots of areas to engage on but I think it’s these big existential ones that stand out.


How do you tackle a management team that seems reluctant to pay proper attention to ESG issues?

Well, first – engage and maybe try and understand what is behind their views. Often there are complex issues involved and it’s not simply reluctance. For instance, going outside of food and agriculture here to consider the big oil and gas companies: the management of Royal Dutch Shell concluded that they really couldn’t find an alternative, profitable energy business to invest in that in any way replicated what they currently make out of selling oil. Management teams can often find themselves in a strategic bind. One has to first engage, then understand the context, but if it doesn’t meet your needs then ultimately divest.

We only really want to own high conviction opportunities in the fund and we have no need to own something for the sake of it, so if it’s clear the company isn’t heading in the right direction, we won’t own it.


Is the audit industry fit for purpose and how does Sarasin tackle issues related to audit? 

Although some people may consider the subject of audits dull, it really is an important issue. The key is that auditors are there to act as a check on the preparation of the accounts by management on behalf of shareholders and other stakeholders. However, in the UK some auditors seemed to have allowed conflicts of interests in their businesses to compromise their objectivity by seeking contracts for advice or general strategic work from the company, for instance, rather than thinking exclusively about the objectivity of the audit. There were also issues with the effectiveness of the audit regulator so we engaged with government and coordinated a group of large investors to effectively expose the conflicts and to encourage change to the regulation and the business practices of the audit firms. Engagement is often necessary at a policy level, as well as at a company level.


What are the key challenges facing global food and agriculture markets and by way of examples, how do the companies the Fund invests in tackle them?

Obviously the key challenges to food production are changing climate and biodiversity threats. The changing demand for food in different ways throws up other challenges in the supply chain, but we must also consider food demand: a fast-growing form of malnutrition is the spread of unhealthy diets, leading to obesity, heart disease etc. The list of challenges to be met by policy makers is sadly very long.

We are an ‘opportunities’ fund so what we are seeking is the beneficiaries of change as opposed to those most challenged by change and particularly that means new technology enablers, companies with lower impact businesses, and those providing solutions to the challenges.


What risks does agriculture face from the declared climate emergency? What impacts will the emergency have on food chains if left unchecked?

Probably the best answer would be for me to give you a quote from the UN Food and Agriculture Organisation which I happen to have here which says

‘Climate change threatens our ability to ensure global food security, eradicate poverty and achieve sustainable development. Greenhouse gas emissions from human activity and livestock are a significant driver of climate change, trapping heat in the earth's atmosphere and triggering global warming. Climate change has both direct and indirect effects on agricultural productivity including changing rainfall patterns, drought, flooding and the geographical redistribution of pests and diseases. The vast amounts of CO2 absorbed by the oceans causes acidification, influencing the health of our oceans and those whose livelihoods and nutrition depend on them.

I think that provides a pretty good summary of the impact of agriculture on the climate. The impact that the climate emergency will have on food chains if left unchecked is again multiple in lots of ways. We have been talking to all sorts of companies about how it affects them and in fact discussed it at a meeting with the chief executive of the world’s biggest wine company last week. What they are seeing is that vines are under greater stress, they are encountering a much earlier harvest – so grapes all over the world are now harvested about a month earlier than they used to be – resulting in a slightly shorter growing season. One solution is irrigation but of course in many places water is scarce. When you look at the ways in which the climate emergency will affect food chains it is just about all areas. In some cases the problem will be solvable and we will be able to adapt, but in others adaptation will be much more difficult.


What environmental implications are there from the increasing demand for meat, fuelled by the rapid urbanisation of emerging market economies?

There is still a disconnect between the reality of how meat consumption is growing and where the worst environmental impacts are. I think the emerging markets get an unfair rap in a way. Yes, protein demand is growing very strongly in a number of emerging markets but it’s not necessarily causing the same climate damaging impact you see from US feedlot beef production, for instance. That is damaging in so many ways, not just from the direct emissions from the cows, but the way they are grown in feedlots, but also the source of soy beans which can come from deforestation in countries like Brazil. Actually, it’s developed markets as much as emerging markets causing the problem.

The biggest protein source in China by far is pork, followed by chicken and duck, so beef is a long way down the menu and is only a relatively small part of the meat consumption in China. In India of course, half the population are vegetarian, and for Hindus, cows are sacred. So it is chicken that is really the key growth there. The environmental impacts of white meats and fish is typically much lower than cattle rearing.

It’s a slightly complicated area but there is no question that meat production has significant environmental impacts, both directly from the waste and indirectly from the supply chains, such as deforestation from soy mentioned earlier. The standards of meat production all over the world are, I think, disturbing, if you look at the way animal husbandry takes place, but it’s all about the local standards. Somewhere like China is beginning to develop standards quite quickly that may end up more like what we have in the EU – which are still not perfect by the way.


How do you approach an industry such as aquaculture, where salmon farming, for example, is needed to meet the demand that the wild catch can’t, but brings inescapable environmental concerns?

Rightly I think, there have been real concerns over intensive salmon farming. Over the last decade the industry has changed practices to address many of those concerns, and their operating licencing standards have been tightened. There are still escapes; the salmon are not as healthy as a wild salmon, but that is true of all farm animals, I’m afraid.  We ensure that the companies we invest in are following the higher standards and we support very strong regulation. We see the next stage of improvement coming in the development of new feed for fish and we invest in a company that is developing non-fish based feed for salmon.


What role does industry – as opposed to government – have to play in addressing the consequences of global dietary trends?

A lot of companies are highly responsive to consumers and society, and they always need to consider their own licence to operate. Profits will be damaged if consumers start to shun a product or there are bad reports in the media.  So industry has an incentive to address consequences like obesity and environmental damage. They also have an incentive to minimise their risk by greenwashing.

The inherent conflict of interest for industry is that to address many of the negative consequences of global dietary trends, consumers need to be encouraged to consume less and that means less sales and less profit and so I would say that governments will have to lead on addressing these issues rather than hoping that industries will voluntarily cut their own profits.


What three major changes over the next decade do you think are currently the most under-estimated or misunderstood?

In relation to food, I think, firstly, climate change. The change that is required to address climate change is still not well understood. We need to make extraordinarily large changes and that applies to biodiversity as well. When you look at the policy recommendations to government that come out of the IPCC or the IPBES, pretty much in every case, each recommendation is to consume less, and I think that is going to have a much bigger impact than people realise.

The second big thing that I think is underestimated is changes in diet. It’s not just about Greggs vegan sausage rolls and ‘Veganuary’. There is something much more fundamental going on in the way that people look at not only how their food is produced but also what it does for them. I think better understanding of how food and health relate to each other over the course of the next few years is still massively underestimated. People will start to eat in order to be healthier in new ways and they will have amazing software to help them do it and much better understanding versus faddy diets.

I think the final thing is the change in technology. Often, the real benefits of technology apply where there is the biggest problem to fix. Technology is very good at improving productivity which is very low in the food chain. If you apply so many of the existing generic technologies to different parts of the food chain – whether that is blockchain making contracts much more trusted and removing a lot of agency costs form the equation; whether it is drones and satellite tracking; or ‘see and spray’ leaf recognition technology to only target the weeds rather than the whole area – all sorts of changes are happening because of technology being applied much more intelligently. I think automation and digitisation are two really underestimated trend changes as far as the food chain is concerned.



Henry Boucher, Manager of the Sarasin

Food & Agriculture Opportunities Fund