Forestry and Agriculture ETFs – How to Invest Sustainably in Soft Commodity ETFs, Part I
Resource scarcity is a growing global concern. Sustainable investors need to wisely select Forestry and Agriculture ETFs that are sustainable and focus on efficient management of our forests, production of food and agriculture
This is Part I of the “soft commodity ETFs” series, where we look into Forestry and Agriculture ETFs. Make sure to read as well the Part II, where we compare Water and Ocean ETFs.
- The imminent risk of resource scarcity
- Which commodities are more sensitive to climate change?
- Beware of traditional “natural resources” ETFs
- The most sustainable soft commodity ETF (forestry and agriculture ETFs)
- Which soft commodity ETF should a sustainable investor buy?
- Most sustainable forestry and agriculture ETFs
The imminent risk of resource scarcity
Our obsession with unlimited economic growth combined with increasing urbanization and population growth will drive higher demand for energy, food, water, and other basic resources. Sooner than expected, this will create a global resource scarcity crisis.
The OECD’s Secretary-General, Angel Gurris, explains this challenge below:
“Moving towards a more responsible and efficient use of natural resources is key, not only to address resource scarcity, wastage, and the associated environmental effects, but also for incentivizing innovation and modernization towards a circular economy. Resource efficiency essentially means doing more with less, as it allows us to create more value using fewer natural resources. This transition can contribute to sustainable economic growth that generates welfare while limiting harmful impacts on the environment and hence future generations.”
As outlined above, the efficient use of resources will be critical to drive sustainable economic growth and mitigate environmental impacts. Sustainable investors need to be critical when selecting ETFs and stocks that are directly or indirectly related to natural resources and commodities.
The scarcity of a specific resource might drive the price of a commodity up. However, this should not be seen immediately as a good investment, since we need to access how the higher price would impact the final users and consumers of that commodity. The best approach for the sustainable investor is to invest in companies whose businesses focus on improving resource efficiency, instead of companies that mainly extract and trade commodities and natural resources.
Which commodities are more sensitive to climate change?
Commodities are defined as economic goods that are freely traded in the global markets, in which prices are given by supply and demand. Commodities can be split into two types: hard and soft commodities.
Hard commodities are natural resources that need to be mined or extracted. The main examples are industrial metals (copper, zinc, aluminum), precious metals (gold, silver, platinum), and energy fuels (crude oil, ethanol, natural gas). Hard commodities are largely durable and therefore have a somewhat predictable supply and demand.
On the other hand, soft commodities are products that need to be grown and cared for. The main examples are agricultural produce (corn, soybeans, sugar), livestock (cattle, fish), and forestry products (timber, lumber). Soft commodities, due to their durability, are more volatile assets. Consequently, the supply of soft commodities is highly subject to weather conditions and in the long term will be heavily impacted by climate change.
In this article, we will focus on ETFs related to soft commodities, and for comparison, we will divide them into 4 categories: Forestry, Agriculture, Water, and Ocean, which are further defined below:
- Forestry: the science and craft of creating, managing, using, conserving, and repairing forests, woodlands, and associated resources for human and environmental benefits.
- Agriculture: the science or practice of farming, including cultivation of the soil for the growing of crops and the rearing of animals to provide food, wool, and other products.
- Water: the water industry provides wastewater services (including sewage treatment) to residential, commercial, and industrial sectors of the economy.
- Ocean (or Blue Economy): the sustainable use of the ocean, seas, and coastal resources for economic growth, improved livelihoods, and jobs while preserving the health of the ocean ecosystem.
Hard commodities are also an interesting topic that we plan to cover in the future. Hard commodities can be a complex subject, since they are mostly comprised of finite resources, which are, by definition, unsustainable. Moreover, metals will be needed to build green energy technologies (e.g. solar and EV), which leads to a challenging environmental dilemma.
Beware of traditional “natural resources” ETFs
Similar to Energy ETFs, where we distinguished between old and new “energy” ETFs, when looking for soft and green commodities, sustainable investors should avoid the traditional “natural resources” ETFs.
Traditional natural resources ETFs, such as ‘FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR)’, ‘SPDR S&P Global Natural Resources ETF (GNR)’, and ‘SPDR S&P North American Natural Resources ETF (NANR)’, are heavily exposed to oil and gas companies.
For example, among the top 10 holdings of the GNR ETF are BHP Group, Exxon Mobil, Total, Chevron, Shell, BP, Vale, and Anglo American. Consequently, the GNR ETF has an extremely high carbon intensity, 494 tCO2e/M$ sales.
The most sustainable soft commodity ETF (forestry and agriculture ETFs)
We will now investigate the soft commodity ETFs available in each category and compare their sustainable performance using ESG ratings.
This Part I, where we look into Forestry and Agriculture ETFs.
In Part II we will look into Water and Ocean ETFs
Most of the soft commodity ETFs presented below have not been created as ESG ETFs, therefore it is expected that their sustainability performance will be subpar.
There are only two forestry ETFs, iShares Global Timber & Forestry (WOOD) and Invesco MSCI Global Timber ETF (CUT). The iShares ETF has an equivalent version of its forestry ETF for European investors, also named WOOD, which has been authorized to be traded in Europe as UCITS.
|ETF||Ticker||Domicile||AUM ($ million)||TER (%)||MSCI ESG Rating||MSCI WACI (tCO2/M$ sales)||FossilFreeFunds Issues|
|iShares Global Timber & Forestry ETF||WOOD||US||310||0.46%||A||359||Deforestation (F): WestRock Co A, Sumitomo Forestry Co Ltd|
|iShares Global Timber & Forestry UCITS ETF||WOOD||EU||107||0.65%||A||359||Not applicable|
|Invesco MSCI Global Timber ETF||CUT||US||93||0.61%||A||376||Deforestation (F): UPM-Kymmene Oyj, International Paper Co, Mondi PLC|
iShares Global Timber & Forestry ETF (WOOD)
WOOD has USD 310 million in assets under management. It follows the ‘S&P Global Timber & Forestry Index’ which seeks investment in 25 global companies with exposure to the timber and forestry business.
ESG: Despite receiving an ‘A’ rating from MSCI ESG, WOOD has a high carbon intensity, above 350 tCO2/M$ sales. Emissions in the forestry business are mainly driven by logging activities and deforestation. Fossil Free Funds gives WOOD a rating of ‘F’ for deforestation, mainly driven by the ETF exposure to WestRock Co. and Sumitomo Forestry Co.
Invesco MSCI Global Timber ETF (CUT)
CUT is a smaller forestry ETF, with less than USD 100 million in AUM. It follows the ‘MSCI ACWI IMI Timber Select Capped Index’ and is more diversified than WOOD, with 84 holdings.
ESG: CUT has the same ESG ratings as WOOD, ‘A’ from MSCI, and ‘F’ in deforestation from Fossil Free Funds. The deforestation risk is mainly driven by the ETF’s exposure to UPM-Kymmene Oyj and International Paper.
Three ETFs focus on global companies engaged in the business of agriculture and one ETF focus on food and agriculture. Those agriculture ETFs are VanEck Vectors Agribusiness ETF (MOO), iShares MSCI Global Agriculture Producers ETF (VEGI), iShares Agribusiness UCITS ETF (SPAG), and Rize Sustainable Future of Food UCITS ETF (FOOD)
The first three agriculture ETFs have significant overlap, having 5 similar stocks within the top 10 holdings: Deere, Corteva Inc., Nutrien Ltd., Archer Daniels Midland, and Kubota Corp. From this list, Rize FOOD ETF has only Deere on it top 10 holdings.
|ETF||Ticker||Domicile||AUM ($ million)||TER (%)||MSCI ESG Rating||MSCI WACI (tCO2/M$ sales)||FossilFreeFunds Issues|
|VanEck Vectors Agribusiness ETF||MOO||US||939||0.56%||A||275||Deforestation (F): Archer-Daniels Midland Co, Bunge Ltd, WH Group Ltd|
|iShares MSCI Global Agriculture Producers ETF||VEGI||US||41||0.39%||A||326||Deforestation (F): Archer-Daniels Midland Co, Tyson Foods Inc Class A, Wilmar International Ltd|
|iShares Agribusiness UCITS ETF||SPAG||EU||99||0.55%||A||330||Not applicable|
|Rize Sustainable Future of Food UCITS ETF||FOOD||EU||37||0.45%||AA||161||Not applicable|
VanEck Vectors Agribusiness ETF (MOO)
MOO is the largest agriculture ETF with more than USD 900 million in AUM. The MOO ETF replicates the ‘MVIS Global Agribusiness Index’ which focuses on companies involved in “agri-chemicals, animal health, and fertilizers, seeds, and traits, from farm/irrigation equipment and farm machinery, aquaculture and fishing, livestock, cultivation and plantations and trading of agricultural products.”
ESG: Despite an MSCI ESG rating of ‘A’, MOO gets an ‘F’ for Deforestation from Fossil Free Funds. The deforestation risk is mainly driven by exposure to Archer-Daniels-Midland Co, Tyson Foods Inc Class A, and Wilmar International Ltd.
iShares MSCI Global Agriculture Producers ETF (VEGI) and iShares Agribusiness UCITS ETF (SPAG)
iShares brings two agriculture ETFs, VEGI for the North American market and SPAG for European investors. The ETFs are similar, sharing 7 stocks within the top 10 holdings.
ESG: MSCI ESG gives a generous ‘A’ rating for both VEGI and SPAG. However, Fossil Free Funds gives an ‘F’ for deforestation risk for VEGI. The VEGI ETF holdings which are driving the deforestation risk are Archer-Daniels-Midland Co and Bunge Ltd. Fossil Free Funds does not cover EU-based ETFs, therefore we don’t have a deforestation rating for it. However, the SPAG ETF has a very similar allocation as VEGI and is also exposed to Archer-Daniels-Midland Co and Bunge Ltd. stocks.
Rize Sustainable Future of Food UCITS ETF (FOOD)
Rize is a small European ETF issuer that focuses on thematic ETFs. The FOOD ETF has a modern approach, seeking to “invest in companies that potentially stand to benefit from the accelerating transition to more sustainable food production systems and consumption patterns”. FOOD ETF follows the ‘Foxberry Tematica Research Sustainable Future of Food Index’ which focuses on sustainable and innovative companies across the food value chain.
ESG: Rize Sustainable Future of Food ETF brings a sustainable approach to agriculture and food production. FOOD ETF has an MSCI ESG rating of ‘AA’ and carbon intensity of 160.6 tCO2/M$ sales. Its top 3 holdings are Beyond Meat (plant-based meat), SIG Combibloc Group (aseptic packaging), and John Deere (agricultural machinery). According to Sustainalytics, while Deere has a low ESG risk rating (17.7 points), Beyond Meat has a severe risk of 42.6 points. Some argue that the high ESG risk can be due to a lack of sustainability disclosure. No ESG rating was found for the SIG Combibloc Group.
Which soft commodity ETF should a sustainable investor buy?
Out of the 7 forestry and agriculture ETFs presented, only one ETFs has an ESG or sustainability mandate, it is Rize Sustainable Future of Food (FOOD).
FOOD ETF clearly stands out from the other traditional forestry and agriculture ETFs. The other ETFs issued by BlackRock, Invesco, and VanEck, all have an MSCI ESG rating of ‘A’, carbon intensities above 250 tCO2/M$ sales, and an ‘F’ in deforestation from Fossil Free Funds.
This conclusion also leaves us without a proper sustainable forestry ETF.
Most sustainable forestry and agriculture ETFs
- Forestry: none
- Agriculture: Rize Sustainable Future of Food (FOOD)
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Ethan Allen · November 2021 at 21:34
Is there any way to invest in the FOOD (Rize) ETF if I live in the USA?
Fernando · December 2021 at 16:37
Thank you for your question.
Unfortunately, the RIZE ETFs are only available for European and British investors.