Banks step in on climate change
Banks are getting involved in ensuring farming meets government and market requirements on emissions compliance. Phil Edwards reports.
The prospect of being regulated and charged for greenhouse gas emissions by the government will have stolen much of farmers’ spare thinking time over the latter part of this year. The prospect of being regulated for environmental compliance by supply chain partners has however probably deserved as much attention.
In terms of compliance, the government might well hold the biggest stick, but the potential of new rules imposed by the market could be equally imposing. Don’t worry though, banks are getting ready to help.
Many farmers won’t be unaccustomed to the banks’ desire to see farms invest in environmental projects. For some time now they have promoted bespoke lending that enables farmers to borrow to make their operations more environmentally robust or bring them into line with local regulations. The emerging trend in lending is however pointing to ‘sustainable finance’ taking hold where loans are written on the condition that farms meet agreed targets that show categorical improvements. For their trouble, farmers will be eligible for discounted interest rates.
Globally, the sustainable finance category is believed to have increased by an average 20% over the past five years. Much of this is being driven by investors looking for channels to support sustainable development. This is true in New Zealand with a growing green bonds market. But there are also other pressures on banks to develop its appeal.
In 2023 The Financial Sector (Climate-related Disclosure and Other Matters) Amendment Act will come into force, which will make climate-related disclosures mandatory for banks, licensed insurers and managers of investment schemes. For banks, these disclosures will need to indicate they are acting to address climate change in order to ensure they have future access to offshore capital, where the majority of NZ funds come from. A disclosure that shows they’re funding unsustainable activities without efforts being made to change will inevitably look unappealing.
For some sectors sustainable finance is already well advanced (energy and transport for example) but agriculture has struggled to attract funds based on the sustainable finance model because investors have not had the confidence that farm-level improvements are able to be accurately measured.
The metrics for measuring climate change on farms have been slow to form, with data gaps, the inability to share farm-level data and the ‘no one-size-fits-all’ farming system making it difficult to make uniform assumptions on impacts. Those challenges are however being overcome.
NZ-based lenders have finalised a framework of measured principles through the Sustainable Finance Agriculture Initiative (SAFI) that can now be used to provide assurance on the extent to which farm-level environmental impacts are being mitigated.
“The SAFI framework is one that the New Zealand finance sector can work with to issue sustainable finance to agriculture that meets the same requirements as the European green bond,” Westpac head of agri research David Whillans says.
So far, some banks have come out with various sustainable finance products, some of which incorporate bits of SAFI. BNZ launched a sustainability-linked loan for farmers several months ago, based on adherence to three different KPIs, including greenhouse gas emissions reduction. Beyond that the loan can be otherwise tailored to focus on other goals that go over and above those that are currently regulated, including soil health, animal welfare, biodiversity, waste prevention and so on. The assurance of the BNZ offering was developed with support from AgFirst, AsureQuality and professional services firm EY.
Whillans says Westpac is trialling a sustainable finance product for agriculture based on the SAFI framework. This will include leveraging off a lot of the compliance work going on for onfarm assurance – including farm environment plans, freshwater farm plans, processor requirements, NZ Farm Assurance Programme, NZFAP Plus and so on.
“There’s a lot of different programmes that farmers are involved in or completing which capture a lot of the core components of SAFI.”
The benefits for farmers from taking on sustainable finance are not just about interest rate incentives and a lower cost of capital.
“It will mean they’ll be able to get ongoing recognition for all the work they are doing, and have the meaningful improvement to the environment they are creating through adjustments to their farm management formally acknowledged,” Whillans says.
NZ is well placed to capitalise on the ability for banks to now offer sustainability-linked loans to the agriculture sector, he says.
“The growth in sustainable finance bonds around the world is very aggressive, and there’s a lot of investors that are wanting to place their money into investments that are verified as being sustainable. We’ve got a competitive advantage in that space because our farming models are as sustainable as any elsewhere in the world.”
There will also be opportunities to leverage the improvements formalised through this assurance by becoming more attractive supply chain partners. At a recent Institute of Financial Professionals event dedicated to sustainable finance in the primary sector, BNZ head of natural capital Dana Muir focused on this potential.
“It becomes part of a guarantee that production from a farm meets supply chain partners’ own needs.”
This latter advantage has gained significance over the past couple of months as overseas market requirements for assurance on environmental mitigation activities have started to hit NZ food manufacturers.
In November, chief executive Miles Hurrell is likely to have alarmed some attendees at the company’s AGM when he said that if Fonterra is unable to give its high value customers such as Nestle confidence that it can achieve emissions reduction targets as prescribed, they will look to other product suppliers, including those who are able to produce alternatives to milk.
Prior to this, Fonterra published its own Sustainable Finance Framework to reflect the evolving preferences of its own lenders and debt investors. Fonterra says it will do this by issuing sustainability-linked bonds and loans to mitigate environmental risks and continue to differentiate NZ milk.
It is already providing incentives for farmers to comply with its needs via the Co-Operative Difference initiative where farmers who meet specific criteria including milk quality and other onfarm improvements are eligible for a payment of up to 10c/kg milksolids (MS).
Earlier this year Silver Fern Farms started on a similar track. In June it announced the establishment of a sustainability-linked financing facility with ANZ, tailored to addressing water use, waste management and GHG emissions reductions which implicates its farmer suppliers and their farming practices.
Like Fonterra, SFF is also mindful of being able to meet the prescriptions for environmental mitigation placed on it by its customers. At the INFINZ event in October, Silver Fern Farms chief financial officer Vicki McColl noted that in order to meet its obligations, as well as meeting the expectations of its market partners, it was possible that Silver Fern Farms won’t be able to support some of its suppliers in the future.
These barely subtle warning shots to suppliers are based on the likes of Fonterra and Silver Fern Farms and others shifting their GHG reporting to include ‘Scope 3’ emissions – those emissions the company is indirectly, as well as directly responsible for, up and down its value chain.
This means the likes of Fonterra will have to report on its own manufacturing emissions, but also those made by producers of its products and those who deliver its goods to market. As alluded to above, this directional shift is being forced on it by international customers who have their own ambitions to deliver proof of their own sustainability credentials.
If farmers are sceptical of the motivations of their co-ops and other partners, the same message is being consistently broadcast by those with exposure to wider influences on supply chains.
NZ trade negotiator Vengalis Vitalis, who stitched together the NZ European Union free trade agreement, recently made the point that he reiterated immediately after concluding the deal in June, that EU negotiators were primarily focused on sustainability and how climate change issues were being dealt with NZ.
In a sense, the message was: access to the EU market will increasingly be determined by how good our story is on sustainability. In a similar vein, Finance Minister Grant Robertson said in November that during a business delegation trip to the United States, every conversation he’d had with business people on food production was on how we could describe the impact our food exports were having on the climate.
Back to sustainable finance. There is no sense at this stage that farmers will be forced by banks into adopting it in order to qualify for new lending. For one, Whillans points out that for it to work, farmers have to want to do it. But with an ever-increasing pot of money from conscious investors wanting to make a difference, and the assurance falling into place, the advantages of at least exploring its potential benefits, particularly longer term, are stacking up.
