2 March 2020

Francisco Ascui, Senior Lecturer in Business and Climate Change, offers thoughts on how to move forward with agricultural finance.
Windmills over fields at sunset; Karsten Würth

3 March marks UN World Wildlife Day with this year's theme, 'Sustaining all life on Earth', encompassing all wild animal and plant species as key components of the world's biodiversity.

It is increasingly recognised that businesses are dependent on and impact upon the natural capital that sustains the global economy and human wellbeing. By natural capital we mean natural resources and ecosystems that provide services such as clean air and water, food and fibre, productive soil, pollination, and opportunities for recreation.

The growing awareness of the role finance can play comes as the UK Government proposes a new Agriculture Bill, setting out its approach to farming now that the UK has left the EU.

Our colleague Francisco Ascui, Senior Lecturer in Business and Climate Change, helped create a new framework which brings natural capital considerations into credit risk assessments for agricultural lending. Here, he gives his thoughts on the way ahead.

"Leading financial institutions have recognised, since about 2012, that they are indirectly exposed to risks when they lend to or invest in businesses which have significant impacts or dependencies on natural capital. The last eight years has seen an explosion of new standards and guidelines, such as the Natural Capital Protocol, to help businesses and the financial sector start measuring and managing these risks and opportunities.

"One of the most important ways in which banks are exposed to natural capital risks and opportunities is through their lending to farmers. I've had the privilege of working with the Natural Capital Finance Alliance—a group of over 40 leading financial institutions—over the past couple of years to develop a standardised approach to natural capital credit risk assessment in agricultural lending. It will take some time before it becomes a routine part of credit-scoring and loan pricing, but some banks are definitely starting to pay more attention to non-financial factors, such as management of key natural capital risks, in their lending to farmers.

"Globally, we are running down our stock of natural capital, largely because we fail to measure and value it. The hidden costs of global food production have recently been estimated at $12 trillion a year—significantly more than the sector's current measured economic value of $10 trillion a year. Financial institutions are exposed to these hidden costs through their investments in and lending to food and agricultural businesses. The sector needs substantially more investment and lending to drive a transition to more sustainable agriculture—estimated at $300 to $350 billion a year, of which at least $100 billion a year is likely to come from the private sector. The way that $100 billion a year is allocated will have a significant impact on the future trajectory of sustainable agriculture."

There is an increasing awareness of 'natural capital' as an idea—why do you think this has taken hold?

"It's an idea whose time has finally arrived—it was actually first used by E.F. Schumacher in his famous book Small is Beautiful: Economics As If People Mattered in 1973, but it failed to really catch on at that time. I think the reason it has now is very much to do with the massive change that has taken place in business attitudes to environmental and social issues over the past 20 years. Increasingly, businesses accept that if they want to prosper in the longer term they must not only deliver financial performance, but also make a positive contribution to society, as the boss of BlackRock—the world's biggest asset manager—demanded in his letter to CEOs back in 2018. 'Natural capital' is a term designed to appeal to business and financial thinking. When expressed like this, it seems intuitively obvious that we should take more care to sustain the natural assets that we depend on.

"Also, a lot of work has been going on in recent years to develop methods and tools to help governments and businesses account for and manage natural capital more effectively, and that helps them to deliver on what otherwise might just be good intentions."

What prompted your own research in this area?

"I see the financial sector as a powerful actor capable of achieving change across many other sectors of the economy. For example, I've worked closely with National Australia Bank over the past five years, and they lend to one in three Australian farmers: if they change their lending criteria, then that has the potential to affect the management of about 130 million hectares of land—a sixth of Australia's land mass—almost immediately. And competitive pressure means that other banks are likely to follow suit. Late last year, NAB announced that they would stop lending to any business breaching animal welfare principles (one of the risk factors identified in my natural capital credit risk assessment framework). They are the first of Australia's Big Four banks to do this, but I expect the others to follow in due course.

However, my own efforts would be very limited if they didn't fit in with a much broader agenda to develop methods and tools for natural capital accounting and risk/opportunity assessment, so it's vitally important that the framework has been endorsed by the two key organisations driving business and finance sector leadership on natural capital—the Natural Capital Coalition and the Natural Capital Finance Alliance."

What do you think would help ensure the success of proposals such as those in the UK Agriculture Bill to reward farmers for sustainable practices such as improving soil and water quality?

"Good intentions have to be translated into practicable metrics and data. How do you measure the contribution to public goods that farmers will in future be paid for? Metrics have to be informed by the best available science and wherever possible align with farmers' own management practices. Minimising additional monitoring costs is also essential. It may be best to start with relatively crude measures which may be wrong some of the time, as long as they are right most of the time, and plan for this to evolve over time. Agriculture is experiencing a revolution in new sensing and precision management technologies, which has great potential to be applied to measuring sustainability outcomes.

"It's also important that the Agriculture Bill doesn't throw out existing protections for biodiversity and water quality without bringing in at least equivalent new protections, and that enough resources are devoted to monitoring, and enforcement where necessary. And finally, it would be counter-productive if the Bill didn't ensure that similar standards are applied to agricultural imports, otherwise there is a risk of simply shifting environmental impacts elsewhere."

Francisco Ascui

Dr Francisco Ascui is Senior Lecturer in Business and Climate Change at the University of Edinburgh Business School