New Zealand’s agricultural sector is well placed to capitalise on a growing trend in ‘sustainable finance’ over the coming decade, according a new report by agribusiness specialist Rabobank.
The market for sustainable finance – finance specifically used for activities which produce a verifiable positive impact on the environment or society – continues to grow in scope and scale, the report says, as financial institutions and businesses increasingly direct capital into investments that improve their sustainability performance. And this set to increase considerably over the next decade.
The report, Cashing in on Sustainable Agriculture – How New Zealand can Capitalise on the Emerging Sustainable Finance Trend, says sustainable finance has the potential to be a “key enabler” in helping New Zealand’s agricultural sector achieve its long-term sustainability aspirations.
And, it says, the sector should proactively position itself to realise these opportunities.
“New Zealand‘s robust climate change and environmental policies, strong environmental credentials and the environmental progress already made by primary producers, mean the sector has a strong platform upon which to attract sustainability-linked investment vehicles,” report author, RaboResearch sustainability analyst Blake Holgate said.
The report says significant changes will be required of New Zealand agriculture over the coming years in order to achieve both government-set environmental targets, and the sector’s own sustainability aspirations.
“This transition will require substantial investment of capital into New Zealand farming to reduce environmental and climate impacts,” Mr Holgate said.
Mr Holgate said while sustainable agricultural finance was in its infancy, and its scope and scale likely to remain limited in the immediate future, in the longer term it has the potential to help New Zealand agriculture access the capital required to meet sustainability goals.
“But for this to happen, sustainable agricultural finance needs to be factored into the longer term strategic decisions of the New Zealand’s agricultural sector and individual primary producers,” he said.
What is sustainable finance?
The report says sustainable finance can take many forms, but is essentially finance used for business or economic activities which produce verifiable and direct positive impact on the environment and/or or society.
Mr Holgate said there are two main methods for structuring sustainable finance investments.
“The first of these are sustainable facilities – where proceeds are used for eligible sustainability projects or asset purchases such as switching from a fossil fuel energy source to renewable. And the second are sustainability linked facilities – where funding is linked to the sustainability performance of the business as measured by Key Performance indicators, for example meeting agreed Greenhouse Gas Emissions targets,” he said.
“A further key aspect of sustainable finance is that, regardless of its structure, it must be used to provide a positive sustainability impact that is meaningful, measureable and above minimum sector compliance requirements.”
Barriers to sustainable agricultural finance
Mr Holgate said while sustainable finance in sectors such as energy, building and transport is well-advanced, a lack of market paradigms and business models has, to date, hampered the global growth of sustainable agricultural finance.
“One of the existing barriers with regard to sustainable finance, is the difficulty in defining sustainable agriculture due to the complexity of the relationship between agricultural systems and their impact in the environment in which they operate,” he said.
“Technology limitations — both in terms of ability to reduce GHG emissions, but also to measure and report on progress — have also been an obstacle.”
The report says a lack of scale has acted as a further barrier — with large institutions generally only seeking investments in excess of USD 200 million to 250 million — as has the fact agriculture has traditionally faced less public & regulatory scrutiny than some other sectors.
Steps for NZ agriculture to capture the benefits
The report says these barriers are gradually being broken down around the globe, and are expected to reduce further over the next decade.
With this anticipated to lead to increased global sustainable finance investment in agriculture, Mr Holgate said there were a number of steps New Zealand agriculture could take to establish itself as an attractive destination for would-be investors.
“Key among these is establishment of acceptable sustainable agricultural standards relevant to New Zealand that set out the agricultural practices and outcomes against which environmental performance can be assessed,” Mr Holgate said.
“Providing primary producers with clarity about the standards they are expected to achieve and the pathway available to meet them will also be essential.”
Mr Holgate said the New Zealand agricultural industry was making good progress in this area.
“Work is currently being undertaken by the Aotearoa Circle’s Sustainable Agriculture Finance Initiative to develop consistent standards for what good sustainable practices are in New Zealand,” he said.
“And the release of these standards is not far off with these scheduled to be finalised during the first quarter of 2021.”
In addition, Mr Holgate said the industry would need to take steps to improve on-farm data collection and tools as well as to create sustainable investment opportunities and develop sustainable finance investment vehicles.
“Tools will need to be developed that provide timely, cost effective, accurate data to provide verifiable evidence of positive environmental performance to investors,” he said.
“Investment opportunities and vehicles will also be needed that set out a clear vision of the sustainable investment opportunities in New Zealand, connect investors with these opportunities, and make sustainable finance easily accessible to primary producers.”
The report says successful completion of these steps would put New Zealand in a strong position to realise the considerable benefits that sustainable finance can provide.
“Chief among these is ensuring New Zealand is able to continue to access the capital required for future investments in the sector,” Mr Holgate said.
“Other key benefits include the potential for marginal capital cost advantages that are often associated with meeting sustainable finance performance targets and the enhanced reputation as a sustainable food producer that sustainable finance can bring for all stakeholders associated with the investment.”
Rabobank New Zealand is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 40 countries, servicing the needs of about 10 million clients worldwide through a network of close to 1000 offices and branches. Rabobank New Zealand is one of the country's leading agricultural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 32 offices throughout New Zealand.
Media contacts:
David Johnston
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Rabobank New Zealand
Phone: 04 819 2711 or 027 477 8153
Email: david.johnston@rabobank.com
Denise Shaw
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Rabobank Australia & New Zealand
Phone: +612 8115 2744 or +61 2 439 603 525
Email: denise.shaw@rabobank.com