Sustainability is increasingly on the agenda for the food and agriculture sector, opening opportunities for sustainable finance. Mark Nicholls reports
There are few sectors which touch on as many sustainability challenges as food and agriculture – nor which are as fundamental to societal wellbeing. As the sector strives to feed a growing global population, it is also responding to demand for healthier nutrition, produced with lower impacts – and is turning to the sustainable finance market to raise the capital required.
"The sector is very attuned to the importance of sustainability, and it's particularly top of mind now, driven by consumers, investors, as well as producers, who are some of the first to feel the impacts of climate change," says Deborah Perkins, global head of food and agribusiness at ING in Dallas, Texas.
However, the sector is underrepresented in sustainable finance, with agriculture, forestry and food accounting for only around 3% of climate bonds issued to date, says Leisa Souza, head of Latin America at the non-profit Climate Bonds Initiative (CBI), with most of that directed at the forestry sector.
As interest from the sector in sustainable finance grows, the challenge for companies and investors alike is understanding what sustainability looks like across a range of production systems, in different sub-sectors, and across different parts of the world.
For example, a meat and dairy producer might be focused on increasing yield with fewer inputs, to reduce greenhouse gas emissions, while a fruit producer might be mostly concerned with water use. Other producers might be focused on soil health and improving biodiversity, while wastewater and pollution run-off can be important issues in certain watersheds. Anti-biotic overuse is a growing concern while, further down the supply chain, companies are working to reduce packaging waste. And, of course, the COVID pandemic has brought social concerns to the fore.
This can create challenges for investors looking to understand the most material sustainability issues facing a company, notes Mayke Geradts, a director in ING's sustainable finance team in Amsterdam. Independent bodies such as the Sustainability Accounting Standards Boards, verification companies and ESG ratings firms can all offer advice, as can the banks structuring sustainable finance products. "We can have strategic conversations with issuers and borrowers, to discuss major trends in the sector and what we are seeing from peers," she says.
Cross-market efforts are also underway to ensure that issuers and investors are on the same page relating to the environmental credibility of green bonds or loans issued by the sector. These include the agriculture criteria issued by CBI last year, which spell out which activities are deemed by the CBI to be eligible for proceeds from such green finance. However, the first iteration of the criteria focuses only on issuers' direct emissions, with supply chain criteria a work in progress.
For example, Royal FrieslandCampina's recently closed €300 million sustainability-linked loan from ING involved the Dutch dairy giant committing to reducing greenhouse gas emissions from its member farms and transport network, as well as working with it palm oil, cocoa, pulp and paper and soy suppliers to improve the traceability of its products.
Similarly, JDE Peet's, the world's largest pure-play coffee and tea group, whose brands include Douwe Egberts, linked recent €2.5 billion of new financing to a range of sustainability targets. These included supporting smallholder farmers with technical and other assistance to help build their resilience to climate change. "In the coffee sector, the impact companies can have with their smallholders is really important," says Geradts.
For JDE Peet's, the process helped cement already close relationships with its suppliers. Daniel Martz, director of corporate affairs at JDE Peet's subsidiary Jacobs Douwe Egberts, describes its supplier engagement programmes as "robust", providing a platform to work closely with them to meet critical KPIs. "We believe in continuous improvement and partner with our suppliers this way, so this initiative gives us extra incentive to improve along with our suppliers," he says.
But dealing with a disaggregated value chain poses problems – not least in collecting data such as on emissions. Investors in sustainable finance products are increasingly looking for issuers to set science-based targets that capture Scope 3 emissions – those from their value chain. "Emissions is one of the most material ESG metrics for the agri sector, but data availability is a key challenge," acknowledges Geradts. Addressing that availability essentially relies upon the issuer's relationships with its suppliers. "As we saw with FrieslandCampina ... that reflected the commitment of its members," she says.
There is also, as yet, a lack of consensus on exactly how some measures of sustainability in the sector – such as carbon captured in the soil, or biodiversity protected – are best tracked, says Sara Walton, the agri-food sector lead at the British Standards Institution, the UK's National Standards Body, which convenes stakeholders to develop technical standards. She notes that professional bodies are working on metrics, and companies are using existing tools, such as BS EN ISO 14064 on greenhouse gas emissions, which sets standards for monitoring, reporting and verification, but she adds that, "the market may need more independent third-party verification based on consensus standards ... to help avoid a situation where organisations could be seen to be marking their own homework."
Regardless of the challenges involved, Perkins sees large volumes of investment being directed to improving the sector's sustainability and in developing the new technologies and business models that will be needed to feed a growing global population. Moreover, it offers investors the opportunity to demonstrate positive impact: few sectors touch on as many of the UN Sustainable Development Goals (SDGs) as food and ag. "Investors are increasingly looking to use the SDGs to measure the positive impacts they are having, while companies in the sector are increasingly factoring in the SDGs into the sustainable finance frameworks that underpin their green bonds or loans," concludes Perkins.
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