01 Feb Scarecrow on the ESG Cross
The following commentary/analysis is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers. I am sharing it here today because I thought it might be useful to some of you.
What’s the Opposite of Farm Aid?
Farmers throughout Europe have taken to the streets – literally – to protest various government policies and the effects that these policies are having on their lives. In Belgium, Germany, France, Italy, Greece, Lithuania, Poland, and Romania, farmers are blocking highways and bridges, rolling their tractors into town squares and seats of government, and generally making an acute nuisance of themselves. All of this comes on top of the sometimes violent protests that have rocked the Netherlands, where farmers have been demonstrating against their government and its fertilizer restrictions for the better part of the last two years. All over the continent, farmers are angry and are unlikely to be assuaged anytime soon.
Meanwhile, here in the United States, this past Monday Agriculture Commissioners from 12 states – 12 Red states, naturally – sent a letter to six of the nation’s largest banks, warning that the banks’ policies could have severe consequences for farmers and, in turn, for the rest of the nation, which relies upon those farmers for its food supplies. The ag. commissioners cautioned the banks that their policies “will increase food costs and decrease food production at a time when global food demand is expected to rise dramatically….”
What’s going on here? Why are farmers and farm interests throughout the Western world so unhappy at this specific moment in time? Food prices are generally high, which should, in theory, be good for farmers and those connected to them. So, why are they up in arms? Relatedly, where are Willie Nelson and John Mellencamp with their songs, concert tours, and other musical protests in support of these poor, beleaguered “family farmers?”
As you may have guessed (given the nature of this newsletter), all of these questions and more can be summed up with three little letters: E, S, and G. The ESG/sustainability agenda is proving to be what so many of us have warned for so long: far bigger and far more pervasive than merely an “investment strategy” and grievously destructive of far more than mere shareholder supremacy.
Next week, the Buckeye Institute, a state think tank located in Columbus, Ohio that also covers issues with national and international ramifications, will release the first comprehensive study of ESG’s effects on the agriculture community and the food economy. The report will detail the impact of ESG banking and investment policies on the financial costs and other burdens associated with farming, as well as the ensuing consequences of these increased costs and burdens for farmers and food consumers (which is to say, everyone on the planet). The specifics contained in the document will show that, if anything, the farmers in Europe are less frightened and angry than they probably should be, while farm interests and consumers in the United States are, for the most part, blissfully unaware that they are about to be steamrolled by the climate change agenda and, specifically, the Net-Zero Banking Alliance (NZBA). When all is said and done, when the bankers, the asset managers, and the rest of the Davos Glitterati have fully worked their magic, both the American farm crisis of the 1980s and the food inflation of the COVID and post-COVID eras will seem exceptionally mild by comparison.
The impacts that ESG and the entangled “sustainability” agenda have had or will have on farmers and the farm economy are manifold and, in anticipation of the Buckeye Institute study, are worth enumerating and explaining.
First, there is the issue of government takings.
Generally speaking, government takings are divided into two categories: physical and constructive (or regulatory). A physical taking is exactly what it sounds like, the physical seizure of private property by the government for public use. A constructive/regulatory taking occurs when the government imposes regulatory burdens on property usage that are so significant (so onerous, one might say) that the property is no longer economically fit for that usage. The ESG agenda will necessitate both types of government taking.
In the case of the latter category, constructive takings, it is not difficult to imagine innumerable scenarios in which ESG would promote such efforts. Many crops – especially livestock – are highly carbon intensive. In an effort to achieve carbon emissions reductions, the government can and will impose regulatory restrictions on land usage that will effectuate a constructive taking. Restrictions on heads of cattle permitted per acre or regulatory usage restrictions similar to those that “protect” wetlands are, almost guaranteed to be part of the federal agenda to manage emissions.
As for the former category, physical takings, erstwhile presidential candidate Vivek Ramaswamy spent a great deal of time and energy during his campaign in Iowa to discuss the most obvious manifestation of this phenomenon, the current green obsession with carbon-capture pipelines. Although these pipelines are highly controversial and their impact on climate change highly dubious, various state and federal entities have contracted (and will continue to contract) with private entities to build and operate them, using confiscated private land to do so. Although Ramaswamy’s effort to raise awareness about this issue did not translate into electoral victory in the state, it did make a significant impression on the discussion of ESG/climate change in Iowa, bringing the issue to the political forefront.
Second, the ESG agenda will increase costs to farmers and reduce yields by eliminating or severely restricting the use of the most effective fertilizers.
This is the part of the agenda that has had Dutch farmers agitated for the last couple of years. Synthetic, nitrogen-based fertilizers, which are dominant in agriculture because of their efficacy, are thought to be the source of roughly 5% of the world’s greenhouse gas emissions. Therefore, farmers are being encouraged or – as in the Netherlands – forced to use less of them. This “encouragement” is often financial (which itself takes different forms, some public, some private), which, in essence, means that the costs of modern farming techniques have been and will continue to be artificially inflated.
Third, the ESG agenda places restrictions on the number of animals that nations/states/farms may raise.
Again, this has been a problem in the Netherlands as well as other places in Europe. Methane from cattle flatulence and ammonia from poultry and swine feces contribute significantly to greenhouse gases. Therefore, cattle herds must be culled (as was proposed in Ireland) and the raising of other animals must be restricted severely (as was proposed in the Netherlands). Obviously, this too hampers the ability of small-to-medium-sized farms to remain competitive and, ultimately, to survive.
Fourth, the ESG agenda will raise the costs of fossil fuels while simultaneously encouraging the electrification of farm equipment.
This is less than ideal, as the state ag. commissioners noted in their letter to the Big Banks:
Achieving net-zero greenhouse gas emissions in agriculture requires a complete overhaul of on-farm infrastructure — one of the goals of the NZBA….This would have a catastrophic impact on our farmers. Proposed net-zero roadmaps describe dramatic, impractical, and costly changes to American farming and ranching operations such as switching to electric machinery and equipment; installing on-site solar panels and wind turbines; moving to organic fertilizer; altering rice-field irrigation systems; and slashing U.S. ruminant meat consumption in half, costing millions of livestock jobs.
Fifth, ESG will dramatically increase the regulatory burden on family farms, hurting small family farms comparatively.
Two years ago, the Farm Bureau took a crack at quantifying the costs that the SEC’s proposed emissions-reporting standards would have on farmers. Note here that this is only a fraction of the increased regulatory burden ESG-compliance will necessitate for the ag. economy:
There are an estimated 63,485 companies listed on the SEC website with some sort of registrant reporting requirements, with industries ranging from life sciences to energy and transportation, real estate and construction, manufacturing, technology, trade and services, finance, structured finance and international corporate finance.
Looking further into the companies that are registered with the SEC, each company is classified with a specific industry title and assigned a standard industrial classification (SIC) code that indicates the company’s type of business. Notably, none of the registrants listed on the SEC’s website has an SIC code corresponding to agricultural production. That is, for the SIC codes titled “Agricultural Production-Crops,” “Agricultural Production-Livestock & Animal Specialties,” “Agricultural Services,” “Forestry,” and “Fishing, Hunting and Trapping,” there are no reporting companies that disclose to the SEC. However, all five of these industries produce most of the raw products used by publicly traded companies and is, therefore, part of the value chain of that publicly traded company (i.e., Scope 3). For agriculture, food and forestry manufacturing alone, there are nearly 2,400 companies registered with the SEC that would be subject to reporting Scope 3 emissions from its farm suppliers.
For Scope 3 emissions disclosures, the proposed rule would require public companies to disclose the emissions for each significant category of their value chain, expressed in metric tons of carbon dioxide equivalent. The disclosures would further need to be disaggregated by each constituent greenhouse gas (carbon dioxide, methane, nitrous oxide, nitrogen trifluoride, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride).
For farmers to stay compliant with the companies that purchase their products downstream, this could mean producers will need to track and disclose on-farm data regarding individual operations and day-to-day activities. Unlike large corporations currently regulated by the SEC, farmers do not have teams of compliance officers or attorneys dedicated to handling SEC compliance issues. This could force farmers of all sizes, but particularly those with small and medium-sized operations, to report data they may be unable to provide, which would result in a costly additional expense or a loss of business to larger farms.
Sixth and finally, among other things, ESG is about starving unfavored businesses of capital or, at the very least, increasing their capital costs. This applies to farmers as well.
Part of what the Big Banks have promised to do as participants in the NZBA is to push the world towards net-zero, in part by de-capitalizing carbon-intensive businesses. Likely no business is more carbon-intensive than farming, which explains why the state ag. commissioners are getting involved in this issue. Even small farms can’t function year-to-year without the access to credit necessary to purchase equipment, seed stocks, fertilizer, and other materials. If the NZBA gets its way, if banks comply with the mandate to increase the costs of capitalization to carbon-intensive businesses, then farmers will struggle, either paying higher interest rates or finding credit impossible to attain. And because farmers are neither stupid nor martyrs, any increased costs will, of course, be passed on to cnsumers, if at all possible.
The bottom line here is that the ESG agenda, if implemented, will destroy countless “family” farms, will concentrate farmland and farm wealth into fewer and fewer hands, will exacerbate already significant food inflation, and will, in the end, lead to starvation in parts of the world that rely on European and American farm exports.
Obviously, the ag. commissioners didn’t ask me how to close their letter to the Big Banks, but if they had, I’d have suggested the following, from a man who is suspiciously quiet these days about the most serious farm crisis in his lifetime: Callin’ it your job ol’ hoss, sure don’t make it right. If you want me to I’ll say a prayer for your soul tonight.