Sustainability and finance are often at odds: how often is the most sustainable option also the cheapest option upfront? Many things that result in lower ongoing costs (both environmental and economic) require high initial investment.
This is something businesses have had to grapple with for years, particularly when trying to justify financial decisions to shareholders. Enter ‘sustainable finance’, which is seen as a tool to rapidly improve the environmental and social performance of business activities.
But what exactly do we mean by sustainable finance, and what’s it got to do with agriculture?
Broadly speaking, sustainable finance refers to financial services that take into account environmental, social and/or governance (ESG) considerations, resulting in lasting benefit for society, the planet, and those involved.
Some examples could be:
- An exchange-traded fund that only invests in renewable energy companies
- A superannuation fund implementing a policy to require consideration of metrics other than just financial return into their investment decisions (for example, climate risk), or requirements to divest from fossil fuels
- A loan programme that offers a discounted interest rate to borrowers who meet environmental metrics
- Green bonds, which provide investors a fixed return and are used to fund ‘green’ projects.
To many people, the world of finance is overwhelming (or just boring), but connecting ESG outcomes to capital is a transformative step forward in improving sustainability in the private sector.
In 2019, the Aotearoa Circle(external link) launched its first project, the Sustainable Finance Forum. This group, comprised of representatives of banks, businesses, Māori, academia, and Government, was tasked with designing a roadmap to change New Zealand’s financial system to support economic, social and environmental outcomes and achieve our UN Sustainable Development Goals.
This forum evolved in 2021 into Toitū Tahua, the Centre for Sustainable Finance, which now has dedicated staff to ramp up this work. In addition to initiatives around inclusion and equity, impact investing, and education, there is the Sustainable Agriculture Finance Initiative (SAFI) – more on this later.
Other organisations such as Mindful Money and the Ākina Foundation are helping to bring sustainable finance into the mainstream. The New Zealand Government is working on sustainable finance too, setting up New Zealand Green Investment Finance (a ‘green’ investment bank) and is planning on issuing sovereign green bonds(external link) next year.
So, back to SAFI. The steering group for this initiative included members of Toitū Tahua and MPI, along with the main rural lenders in New Zealand: ANZ, ASB, BNZ, Westpac, and Rabobank. The goal of SAFI was to develop guidance for sustainable agriculture finance (i.e. define the metrics and practices that determine what ‘sustainable’ farming or growing looks like).
The first SAFI frameworks are now in place(external link) , allowing banks to align their sustainable finance offerings with standardised guidance. This guidance allows for alignment with existing standards, to minimise the amount of separate certifications a farm may need to apply for this type of funding.
The first initiatives aligned with SAFI are sustainability-linked loans (SLLs). AsureQuality is supporting BNZ in their SLL offering, which began as a pilot with Southern Pastures. We’re also conducting on-farm verification for Toitū certification of Pāmu farms, a requirement of their SLL with Westpac. There is much activity in this area, and both ANZ and ASB also have existing SLL offerings.
On top of these offerings, initiatives such as Calm the Farm(external link) have been created to help farmers transition to regenerative farming practices. This is facilitated through transition finance and gathering metrics for impact investing in farms.
Undoubtedly we’ll see more sustainability-linked loans in the food and farming sectors in 2022, and it will be fascinating to see what other types of sustainable finance arise.
It would not be surprising to see further ways of allowing consumers and small ‘mum and dad’ investors to participate, using their money to fund farm conversions to more sustainable practices, expand on-farm carbon plantings, and trialling of new sustainable products.
Many farmers and growers are aware of environmental, social and governance improvements they could make to their systems. Now, sustainable finance offers a clear pathway for them to fund action, and see the economic benefits of improved sustainability. The future of farming is bright, and sustainable finance is an exciting part of moving the sector forward.