New Zealand's first farm sustainability linked loan is between the BNZ and Southern Pastures, a dairy group that owns the Lewis Road Creamery brand.
"It is a new form of funding for the primary sector. We worked with Southern Pastures to pre-agree a set of environmental, social and governance targets within the business," says BNZ's Head of Natural Capital Dana Muir.
The company has to meet targets over the three-year tenure of its loan. These include reducing greenhouse gas emissions, and improving water quality and biodiversity across their 20 farms in the North and South Island.
Southern Pastures produces milk under an independently certified 10 Star Certified Values Programme.
This has strict requirements covering environmental, climatic, animal and human welfare. The company's Waikato farms supply Fonterra and include New Zealand's largest organic farm in the country.
The bank has told Southern Pastures a proportion of the loan interest is there to win or lose depending on whether the targets are achieved. The way the deal is structured means the baseline needs to be measured first. Then, for each year of the loan, an independent auditor has to verify to the bank how well Southern Pastures tracks against that year's targets. Muir says the bank structures sustainability loans so that price is not the only benefit to both partners.
In the case of Southern Pastures it is a way of showing customers the business is putting its money where its mouth is. "It's also an opportunity to share with other farmers and, critically, with staff the types of goals you are putting in place in your business," says Muir.
At Southern Pastures, the financial incentive is to meet new water quality and biodiversity targets. The company already has low on-farm carbon emissions, but the loan commits it to achieving further reductions.
Says Muir: "The beauty of a sustainability linked loan is that the farmer can choose what goals are tangible and important to the sector they are in and their business. They can tailor the terms to be anything of environmental benefit. It could be biodiversity improvements or soil health. It can also be social, so there might be something to do with labour practices. It's not prescriptive."
Agriculture is the first sector to establish sustainability loans, but the BNZ plans similar strategies elsewhere in its drive to have a $10 billion sustainable finance portfolio by 2025. BNZ's GM of sustainable finance Louise Tong is quick to admit the goal is ambitious. "It won't be without hard work.
It'll be worth it. The impact of $10 billion in sustainable finance will be material."
Tong returned to an executive role at BNZ during the 2020 Covid lockdown. She says that was a tough time for the bank to make a decision about investing in new business.
"We were the first bank to set a sustainable finance target. That speaks to the fact that the trend and focus on sustainability is here to stay. There's a strong signal from all quarters of the market that this is what stakeholders want.
Sustainable farming will be a key focus. Muir say consumers around the world have come to demand ever higher standards from the farmers who produce their food. They want to see clean, green farming. That means sustainable agriculture along with better social practices and higher animal welfare standards. Now, investors are starting to think the same way. They might be looking for investments where there are already high sustainability credentials or where businesses need help as they aim to meet their carbon reduction and other obligations.
"This is where it gets exciting for us," says Muir. "BNZ is the second-largest lender to New Zealand's agricultural sector. We have amazing farmers who are striving for a continuous level of excellence on their farm. They are looking to protect, enhance, measure and manage their natural capital. They want to improve their environmental, social and governance credentials."
This opens an opportunity for the bank to partner with the agricultural sector in general and, more specifically, with New Zealand farmers who are driving change. For now, the loans target farmers at the front of the curve. They can then showcase their progress to the rest of the sector.
Muir says investments with high sustainability credentials represent an inherently lower risk for investors. "A big part of it is that the farmers are looking at the long term and they are committing to a higher level of reporting on the many risks in their business. There's a whole lot more information on that business and they are thinking about all the different forces in play.
"At the same time, there is a really big push for people to be investing in responsible investments that are driving the right behaviours, and that are helping to meet global responsibilities that we've got under climate change."
• BNZ is a sponsor partner for the Sustainable Business report.