THE CLIMATE KELPIE BLOG: Climate plan may hold keys to a better deal on farm finance

Posted by BCG on 2nd June 2020

The physical risks of a warming climate − such as drought, heatwaves, flood, fire and storms − are very much front of mind for agriculture.

But, in recent years, there has been a shift in the business world that means agricultural businesses now need to consider their climate-related financial and liability risks.

The increasing frequency of natural disasters has prompted large corporations to consider their exposure to climate-related risk. And while physical risks are important to the top end of town, they are also prioritising financial risk and business liability.

For agricultural businesses, a well-documented plan to deal with all aspects of climate risk may soon open the door to a better deal on finance and insurance.

“Farm businesses that get this right could position themselves to take advantage of new opportunities when it comes to getting a good deal on farm finance and insurance,” says Charlotte Turner, Associate Climate Risk Governance with MinterEllison.

Ms. Turner’s role is to help organisations understand how an increasing focus on climate-related risk will have an impact on their business.

She says that, given the inconsistent approach to global climate policy, it can be difficult to understand what has driven big business to shift their focus and what it will mean for agriculture.

Money talks

“For large corporations, profitability and returns to their shareholders are key,” says Ms. Turner. “Recently, corporations have identified climate as a material business risk that was not previously part of their risk assessment.”

“Banks and corporate regulatory bodies have shifted climate-related risk squarely into their focus and made disclosure of those climate risks a top priority for businesses of the future.”

It can be traced back to 2015 when the Bank of England identified climate change as one of the biggest risks to the global economy. Their call shifted climate from the fringe to a mainstream concern for big business.

Each January the World Economic Forum reports on global risks. Since 2016 the risks associated with climate change have been in the top ten of both likelihood and impact. In the latest report (January 2020) five of the top ten risks were climate focused (Figure 1).

Figure 1. Climate risks topped the 2020 Global Risk Report. Source: World Economic Forum

Institutional investors, particularly the cashed-up superannuation companies, have recognised that businesses need to plan for the impact of climate change to ensure they can maintain that return on investment into the future.

Consequently, they are demanding that corporations disclose their climate-related risks, as well as plan and clearly communicate their adaption and mitigation strategy.

Enter the climate-related financial disclosure.

Full disclosure

The 2015 Paris Agreement between 196 countries set goals to keep global warming below two degrees Celsius and reduce emissions to a net-zero, effectively striving to balance emissions and sequestration.

To meet these targets the global economy needs to be able to measure and document both their current impact and their progress towards reducing emissions. This led the international Financial Stability Board to establish the Taskforce on Climate-related Financial Disclosures (TCFD).

“The TCFD recommends how companies should assess and disclose their material financial climate-related risks. Their key recommendation is to conduct scenario planning and stress tests,” says Ms. Turner.

“These have been widely adopted by regulatory bodies, and many governments are moving towards mandatory disclosure of climate-related risks by listed companies.”

“Climate-related risks can be the physical risks associated with climate change, such as the direct impact of heatwaves or bushfires on supply chains, assets or infrastructure, but there are other risks such as the impact that regulatory change might impose on a business.”

“Hence why the recommended scenario planning and stress testing is so important.”

“For instance, a 1.5°C rise in temperatures would be better for agriculture than a 4°C rise with fewer physical impacts to the business, but this situation would almost certainly require rapid change in government policy and substantial economic transitions to low-emission solutions.”

Big policy changes, such as reduction targets for fossil fuels, can dramatically impact on business risk.

The Commonwealth Bank and ANZ are already starting to run these stress tests on their own lending portfolios to better understand their exposure to climate risk. Both have drilled down into agriculture as a significant part of their business.

The potential impact of climate change on agriculture can be alarming for those on the land, but the Commonwealth Bank’s analysis demonstrated that farm profitability can grow when the business is guided by a well-planned adaption and mitigation strategy.

The ANZ bank has developed lending guidance information to help their lenders assess the adaptability of agricultural businesses.

“It is likely that farm businesses that are not able to demonstrate a strategy for adaption and mitigation will face an increasing cost of borrowing and insurances,” says Ms. Turner.

“Sustainability-linked loans have taken off in Europe and are starting to gain traction in Australia. These general-purpose loans can be used for any commercial purpose and from the outset, sustainability targets are agreed between the lender and borrower. The interest rate is reviewed annually and there is an adjustment up or down depending on whether the targets have been achieved or not. For instance, a farm business may be able to borrow money at a reduced rate to convert to lower-emission machinery or install solar panels.”

These types of loans were initially only available to large corporations, with Sydney Airport negotiating the first sustainability-linked loan in Australia, but most of the mainstream banks are now looking to make them available to a broader range of businesses, including agriculture.

Liability

“The other climate-related financial risk that businesses face is legal liability, for example, for negligence or breach of contract,” Ms. Turner says. “We are already seeing this at a local government level, particularly with the recent bushfires.”

In the past bushfires were considered an unforeseeable risk, but with the increasing frequency they are starting to be viewed as something that should be expected and planned for.

For agricultural businesses, weather events or supply-chain issues could potentially expose them to liability risks associated with not meeting contractual obligations, such as forward contracts.

Industry preparation

With agricultural emissions firmly in the public spotlight, Australia’s Rural Research and Development Corporations are working to help their industries measure emissions and identify where reductions can be made.

For instance, in 2017 the Australian Red-Meat Industry set the aspirational target to achieve net zero annual greenhouse gas emissions by 2030, known as the Carbon Neutral by 2030 (CN30) Initiative. According to Meat and Livestock Australia (MLA), net annual emissions have reduced 57 per cent since the 2005 baseline year (Figure 2). 

Figure 2. Meat and Livestock Australia are working towards the industry being carbon neutral by 2030. Source: Meat and Livestock Australia.

“Our red-meat producers are among the most innovative and resilient in the world. We believe they have a unique opportunity to use existing and emerging technologies and practices to be a significant part of Australia’s climate change solution, whilst being the trusted source of the highest quality protein,” said MLA Program Manager Sustainability and CN30 Doug McNicholl.

“CN30 has created an opportunity for our industry to turn today’s pressures into tomorrow’s opportunities for the Australian red meat industry.

“Under the CN30 initiative MLA and its R&D partners aim to help the industry to adapt to future market and environmental conditions, reduce emissions and improve carbon storage in grazing lands, while lifting productivity and profitability.”

More information

World Economic Forum Global Risks Report 2020

Task Force on Climate-related Financial Disclosures Overview booklet

Meat and Livestock Australia Carbon Neutral 2030 Initiative

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