Banks should reward farming businesses who look after the long-term health of the environment, a new report urges.
At present, banks still lend to farmers almost solely based on their most recent profit and loss accounts, not taking natural capital into account in their credit risk assessment.
But a new report, launched at the Natural Capital Finance Alliance - a coalition of over 40 international financial institutions - calls this approach 'short-sighted'.
The University of Edinburgh, which is behind the report, says a farm’s financial performance can be improved over the short-term in an 'unsustainable way'.
It uses an example of over-application of fertiliser, which may boost yields but causes a build-up of acidity in the soil.
In the longer-term, however, this type of activity would negatively affect the farmer’s financial performance, and therefore their ability to repay a loan.
However, Dr Francisco Ascui, Senior Lecturer in Business and Climate Change, takes into account factors such as water availability, soil health, biodiversity, energy use and greenhouse gas emissions in the report.
He said this would allow banks to identify and increase lending to more sustainably run farms.
Key custodians of environment
Dr Ascui said that the agriculture sector is on the 'front line' in terms of both its impacts and dependencies on the environment.
“Farmers are key custodians of our soil, water and biodiversity and depend on these resources for their livelihood, so lenders should recognise and reward more sustainable farming practices,” he said.
“This new approach to natural capital credit risk assessment is only a first step – the challenge will be in implementing it. This is a journey that we have to start, if we’re going to have any hope of achieving truly sustainable agriculture.”
One challenge that was holding banks back was that natural capital risks vary considerably across agricultural sectors and geographies. What is beneficial for one crop or type of livestock may be harmful for another, Dr Ascui said.
He added that this new approach sets a 'global generic template' for natural capital credit risk assessment which can be adapted for different agricultural sectors and geographies, with a worked example based on wheat cropping in Australia.
The approach is designed to be consistent with the leading international standard for including natural capital in business decision-making, the Natural Capital Protocol.