The agricultural community is experiencing a once in a generation level of change. There are many forces at play, taking up valuable mental energy for farmers and growers around the country. Dana Muir, Head of Natural Capital at BNZ, takes a look at what this means for the New Zealand agricultural community.
It is a challenge keeping up with constant technological advances, evolving regulations, and farm system evolutions, all the while making sure the day-to-day farming operations remain spick and span, producing the healthy, natural food for which New Zealand is globally renowned. Keeping ahead of the game and making sense of what will impact or advance your business is a full time job.
So, what’s triggering these changes and what are the opportunities for New Zealand’s primary sector?
Currently there are three key forces at play that are essential to understand in order to sucessfully manage your agribusiness and ensure it’s long term sustainability.
1. New Government legislation on climate and environment
It’ll be no surprise to farmers and growers that new compliance legislation is at the top of the list. It’s often the number one concern when speaking with agribusiness customers who’re creating their business plans. There’s a desire to understand what is required, do the right thing, and ensure they’re future-proofing their businesses.
Inside this challenge are the material targets the primary sector needs to meet in order to preserve our international reputation as a producer of high quality food, fibre, and fashion, while enriching our on farm natural capital. This includes protecting and enhancing our environment and mitigating or adapting our farming systems to manage impacts on the climate.
While Government legislation is supporting the pace of movement, we’re also seeing exceptional work from farmers and growers who’re creating a best practice farming environment and going above and beyond what they must do to remain compliant.
2. New banking requirements
Just as the day-to-day operations of agribusiness is changing, so too is the banking world. As a bank, we’ll have obligations to report on the Taskforce on Climate-related Financial Disclosures (TCFD). This means we’ll need to consider, as any good agribusiness does, the risks and opportunities associated with climate change.
When a bank evaluates an agribusiness, the more information we have on how a customer measures, manages and mitigates environmental and climatic factors, the easier we can verify the hard work being done on farm to be financially and environmentally sustainable. Have a farm environment plan already? This type of document no longer needs to sit atop your filing cabinet, rather get it out for your next banker meeting and highlight the work that’s being done.
3. Changing consumer and market preferences
Consumers and investors from key export markets are looking for increased levels of Environmental, Social, and Governance credentials in their purchases and investments. These three components are often abbreviated to ESG (Environment, Social, Governance) and are driven by global ambitions to reduce our impact on the environment and to support better outcomes for people and society.
This is a very clear signal from the market and an opportunity for New Zealand to maintain and continuously improve its high standards in food production, animal welfare, and care for people. The New Zealand primary sector often talks about the importance of showing the world how our products are sourced and the values that drive our farmers and growers in producing food, and rightly so. We have a great story to tell and, given it’s a story the market is wanting to hear, there’s an opportunity to increase the value in our New Zealand brand as a result.
The farmer mindset
Thankfully, we’re in good shape. NZ farmers are innovative and driven to succeed. Certainly, one of the most heartening aspects of my role is being able to hear from farmers across the country about their efforts to increase the sustainability of their businesses. There’s great work underway and a collective focus on doing the right thing, but as with any change there’s still some uncertainty and for some this is causing indecision and inaction.
The mindset one brings to approaching change can often be the difference between seeing the opportunities change presents, or seeing the threats to traditional ways of working. Sure, additional regulation can at times be burdensome, and the timelines for implementing ambitious, but pleasingly, the positive mindset we saw during COVID-19 has continued. The majority of farmers see the opportunity and the importance of their role to protect the land and climate for generations to come and have set about getting to work. Thinking about environmental management as a key component of your business’ success, rather than an optional, side of the desk issue, seems to be working well for leading farmers.
The bankable benefit of ESG
The world is changing and banks are changing with it. Where once a bank considered a few key factors such as cashflow, collateral, expenditure, and equity to evaluate ‘bankability’, there are now additional considerations from outside the traditional financial sphere that determine the current health and future prospects of a business.
To that end, we include how well a business considers, measures and manages their ‘ESG’ factors and how this integrates into their future planning. In practical terms, that means it’s useful to share with your banker these Environmental, Social and Governance factors within your business. For example:
- How you’re implementing and reviewing your business plan to address future environmental risks like waterway management, or how you plan to manage your on farm emissions number.
- If you’re aiming for a higher level of certification or entering best practice awards.
- Any need for environmental capital expenditure, such as upgrades to your effluent pond.
- Your succession plan, a tricky one to approach, but essential to have so everyone is clear on where the business is heading – how you wish your land to look and feel in the long term is a key consideration in a good succession plan.
- Monitoring and managining your farms social responsibilities, such as animal welfare, health and safety plans, and managing staff to ensure an enjoyable place to live and work.
Sustainability Linked Loans (SLL)
Tackling climate change and environmental stewardship requires a partnership approach and we are developing innovative funding solutions to help the sector meet its ESG ambitions. For us, it’s all about the ‘carrot’ – how to incentivise those with ambitions to go above and beyond the minimum. To that end, we’re trialling a new incentive-based sustainability loan, linked to a borrower’s performance against an agreed set of social and/or environmental metrics.
This sustainability linked loan (SLL) partners with farmers and growers of all sizes who are going beyond the minimum standard and putting their agribusiness in a strong position for the future. For example, in February 2021, BNZ matched a portion of Dairy Group Southern Pastures Limited Partnerships (owner of Lewis Road Creamery) cost of funding, to pre-agreed environmental targets which, if achieved, will lead to a discounted loan rate. The three targets identified in the loan related to greenhouse gas reductions, plant biodiversity, and water quality improvements. They were agreed at the outset and an independent auditor engaged to measure progress. Other examples of metrics could include improvements to animal welfare, labour practices, or waste reduction.
Unlike other forms of sustainable finance, SLLs have the ability to capture all of a business’ current debt in one facility, allowing potential savings to be reinvested back into any area of the business. Going further than simply supporting farmers to reach environmental compliance, this allows a business to be truly rewarded for striving for excellence and to bring the bank along with them. It’s an unprecedented funding approach, but one we see as pivotal to help farmers build longterm sustainability.
How to make a change
Juggling all these factors will require some out of the box thinking, planning and a proactive mindset. Consider making a start with the following:
- Create a farm environment plan to get clear on costs, efficiencies, and future compliance.
- Refresh your succession conversation with your family and advisers.
- Talk to your BNZ agribusiness partner. They’re experienced operators who can help connect you to the right advice or help you plan for upcoming ESG related expenditure.
- Explore investing in the right technology which may be support in getting to know your environmental numbers, your productivity, or make life easier.
- Connect with your levy groups like Beef+Lamb, DairyNZ, and HortNZ to better understand the compliance and legislation changes coming your way and tap into workshops and insights designed to build knowledge and confidence to respond to the changes coming your way.
- Reach out to your trusted advisers to build a change team you can rely on.
Doing all of this at once can seem overwhelming, but you don’t have to boil the ocean, as even small incremental steps can pay dividends in the long run.
Where do you see your land in 50 or 100 years? The enduring future of New Zealand agribusinesses depends on the decisions you make today and how you go about actioning plans to protect your land for generations of New Zealanders to come.
There are challenges ahead, but massive opportunities, and BNZ is here to help you on your journey.
Any views expressed in this article are the personal views of Dana Muir and do not necessarily represent the views of BNZ, or its related entities. This article is solely for information purposes and is not intended to be financial advice. If you need help, please contact BNZ or your financial adviser. Neither BNZ nor any person involved in this article accepts any liability for any direct or indirect loss or damage arising out of the use of, or reliance on, all or any part of the content.
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