The Netherlands, like many other countries, is at a crossroads. On the one hand, the government is under pressure to significantly reduce nitrogen pollution if it wishes to avoid being penalised by the European Commission. On the other hand, it must try to win over the farmers unions, as well as other agricultural workers, who strongly oppose the proposals that seek to limit Greenhouse Gas (GHG) emissions and pollutants by reducing livestock numbers. Farmers fear this could potentially lead to expropriation. As it stands, the government remains resolute in its plans to lower nitrogen levels. The situation in the Netherlands is back in focus recently, thanks in part to Donald Trump, Marine le Pen and Geert Wilders expressing their views. But what has really been happening on the ground, and what does it mean for investors?
On 10 June 2022, the Dutch Minister for Nature and Nitrogen, Christianne van der Wal, reaffirmed the “radical but necessary transition of the rural area” to reduce nitrogen oxide and ammonia by 2030. The planned target reductions of between 12% and 95%, depending on the area, focus largely on the agricultural sector, with measures including a reduction in livestock numbers by around 30%. The national government has set aside €24.3 billion to solve this problem, and it has tasked the country’s 12 provinces to formulate a plan of action by 2023.
To protest these drastic measures, farmers have taken to the streets, blocking warehouses, roads, land borders and government buildings. In some areas of the country, farmers dumped and set fire to manure and waste containing asbestos on highways. In that same respect, fishermen are blocking ports.
What about the just transition?
The government has identified three options for farmers: (1) employ more sustainable farming methods, (2) relocate or (3) sell up. The fear of land expropriation has unsettled the farming unions and prompted outrage and indignation from the broader farmer community.
Overlooking the moral issues of expropriation, it offers no practical solution to the climate crisis and will invariably take between five and seven years to realise positive outcomes. The government could have ensured a more managed transition, and avoided the resulting backlash from farmers, had it acted sooner. For example, it could have begun implementing policies and engaging with active dialogue with farmers on sustainable nitrogen use in 2018, when the Netherlands was ordered by the European Court of Justice to prohibit businesses from being able to compensate increases in nitrogen emissions with technological upgrades, such as air scrubbers. The following year, a court ordered thousands of construction projects to be delayed because the Netherlands had failed to stay within EU emission limits. Construction output in the country fell by 8% in 2021, which put 40,000 jobs at risk. If the government had been more proactive and put forward a mediator between government and farming unions sooner, these job and productivity losses may have been avoided.
Good intentions, slow execution
The Dutch government has previously launched incentives to encourage farmers to ditch unsustainable farming practices, albeit at a lower success rate than expected. In 2021, the government allocated €180 million to the Subsidy Scheme for the Remediation of Pig Farms, which resulted in 278 of the 407 eligible pig farms closing down. The reduction in nitrogen, however, was just a third of what was expected, namely due to a lower uptake of farmers willing to participate in the subsidy scheme. Johan Remkes has also recently been appointed as a mediator between the government and the farming groups. This appointment has further angered some farming groups since Remkes has a history of supporting drastic nitrogen reduction efforts. Thus far, some groups have agreed to speak with him, but many continue to refuse.
The importance of proactive governance
The events of the past year have reaffirmed the importance of a just transition through proactive governance in the intensive animal agriculture industry. Regulatory risk continues to be a growing threat for investors, particularly in the European Union, and this reactive response has increased the risk burden for investors with exposure to Dutch animal agriculture investments. Regardless of the protests, the Netherlands must work to reduce nitrogen pollution in the environment; otherwise, it risks a fine from the European Commission for breaking the EU’s Nitrate Directive. On 1 July 2022, Germany narrowly avoided a fine amounting to several billion euros after the German parliament’s upper house approved a compromise proposal on nitrogen. In 2016, the European Commission referred Germany to the European Court of Justice due to its inaction on nitrate pollution and violation of the EU’s Nitrate Directive. If the Dutch government wishes to avoid a similar financial burden, it should work alongside farming unions to understand the needs of farmers with regards to monetary compensation, as well as reskilling, upskilling and assisting in the provision of other agricultural opportunities through subsidies and grants.
It is not just governments that are failing to deliver on proactive pollution policies; corporates are too. The latest iteration of the Coller FAIRR Protein Producer Index, for example, shows that Cranswick, a UK protein producer, was just one of eleven global pork and chicken producers that publicly discloses data on phosphorous pollution from manure in addition to nitrogen. In the company’s 2021 CDP responses, it cites the use of buffer zones, cover crops and sediment traps to reduce nutrient runoff and leaching from its outdoor hog facilities. Although this transparency is welcome, it only covers a portion of the company’s production while excluding indoor facilities and finishing units.
What can investors do?
Following a reactive response from both the Dutch government and the corporate world, investors have found themselves in a tricky situation. Environmental risks are growing due to the elevated levels of nitrogen in our atmosphere and in waterways. This is having a knock-on effect for biodiversity and may even impact the business operations of an investor’s portfolio companies. The threat of expropriation, moreover, is exacerbating social issues among farmers, fearing labour market exclusion and being forced out of the sector. This is why investors should proactively engage with animal protein and feed producers that have operations in the Netherlands. The aim of these engagements, whether direct or collaborative, should be to:
1. Set and enforce ambitious targets on nitrogen levels
2. Invest in education on nitrogen management and best practice; as well as reskilling and upskilling of producers to transition towards new sustainable agricultural practices
3. Invest in research and development to reduce the level of nitrogen pollution from livestock rearing.
4. Urge the EU to apply its Just Transition Mechanism to the agricultural sector, supporting farmers’ economic and social well-being, and involving farmers in discussions on Member State allocation.
Once nitrogen levels drastically fall to sustainable levels, and farmers are supported through a just transition, investors will be able to adequately manage their ESG risk exposure.