Banks and investors can now refer to a consistent and clear set of sustainable standards when deciding the extent of their lending and investment in the New Zealand agriculture sector.
A working group, under the umbrella of The Aotearoa Circle, has developed the Sustainable Agriculture Finance Initiative (SAFI), a definition or taxonomy (classification system) for good sustainable agriculture practices in New Zealand for use by the finance sector.
The guidance or standard will provide the finance sector with open-source information on sustainable farming and growing practices that are suitable for the New Zealand environment but also meet the growing environment, social and governance (ESG) requirements of international capital providers.
The SAFI initiative, prepared by ASB, ANZ, Westpac, BNZ, Rabobank, the Ministry for Primary Industries and EY, will be the first piece of new work posted and displayed publicly on the Centre for Sustainable Finance's website. The centre was launched in Auckland yesterday.
The aim of SAFI is to help New Zealand farmers and growers improve their environmental performance and meet the ever-changing expectations of governments and communities around acting sustainably.
SAFI investments are designed to be safer for the environment, safe ethically and safe for future generations.
Pip Best, EY's climate change and sustainability services partner and one of the authors of the initiative, said the SAFI framework can provide a risk assessment for lending and investing in the rural sector. It will also highlight the gaps in farming practices.
She said sustainable farming and growing lowers the long-term risk profile for farmers and growers, and can open the sector to new opportunities as consumer and investor preferences changes.
Ideally, this means banks and investors should lend or invest in sustainable farming and growing practices at a lower cost of long-term finance, reflecting the better risk/return characteristics.
"Having that clear definition will be very valuable," Best said. "Investors, for instance, need to know how sustainability and environmental is defined so they can be assured their funds really are being applied sustainably. Get that clarity and a major obstacle to the flow of funds is removed," she said.
Reducing the environmental and climate change impact of farm practices is vital to ensure the world's population can be fed sustainably. There is increased pressure on producers to reach this goal, but it's also a challenge to the agricultural lending and investment sector to support them.
SAFI covers a range of significant environmental and social issues including climate change mitigation and adaptation; sustainable use and protection of water; regenerative circular economy, waste prevention and recycling; pollution prevention and control; and healthy ecosystems.
On social issues, human rights, animal health and welfare, and health and safety are considered.
Best said if farmers, for instance, are not managing their greenhouse gases, then a carbon price will be attached to them. The price should increase over time and this will be an added expense.
If farmers do not have plans in place to manage drought, heat stress or other events — or they don't understand the climate patterns — then their productivity will be impacted.
Best said SAFI is aligned with leading international sustainable frameworks such as the EU Taxonomy, as well as taking note of existing sustainability standards used by New Zealand farmers and growers.
This allows both farmers and capital providers with an assessment of ESG risks and opportunities that is compared with international expectations and leading research.
EY has already used the guidance to provide prospective international investors with an assessment for a potential agricultural acquisition.
Under the EU Taxonomy, green business activities are based on the following objectives: Climate change mitigation and adaptation, sustainable use and protection of water and marine resources, circular economy, pollution prevention and control, and biodiversity.
To qualify as green, a business activity must prove to substantially support at least one of those objectives without doing any significant harm to another, and to meet technical screening criteria under the guidance of the newly-established Platform for Sustainable Finance.
The EU Taxonomy on agriculture recognises production of perennial and non-perennial crops, as well as livestock, as activities capable of making a substantial contribution to the environmental objectives.
To show a contribution for climate change mitigation, for example, agriculture investments need to demonstrate either that a set of essential management practices are being consistently deployed, or that net greenhouse gas emissions are declining.
Best said SAFI will be updated by the centre as domestic and international research on best practice develops.
The working group will continue to consult with the Ministry for the Environment to achieve international recognition of the SAFI standard through the Platform on Sustainable Finance. Through seeking equivalence with the EU Taxonomy and Climate Bonds Standard, SAFI can bridge the gap between international and domestic standards for sustainable agriculture to better support the flow of sustainable finance to the New Zealand sector.
● EY is a member of the Aotearoa Circle and is a sponsor partner for the Sustainable Business report.