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ESG & sustainabilitySeptember 27 2022

Land use transformation demands bank attention

During New York Climate Week, the UN released a report which presents a stark warning for financial institutions. Philippa Nuttall reports.
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Land use transformation demands bank attentionImage: Getty images

Just as financial institutions were slowly getting used to the idea that fossil fuels must be consigned to the past, another, much less discussed, transition is increasingly demanding attention. The case for a land use – or food and farming – transformation is being made loud and clear at New York Climate Week. Banks that choose to ignore this alert could face losses commensurate with the 2008 financial crisis, warned a report published on September 20.

“Despite the dashboard flashing red when it comes to tackling climate change, public and private sector institutions have been slow to account for the critical significance of necessary food and land use system change,” states the report, entitled ‘Assessing the financial impact of the land use transition on the food and agriculture sector’, led by the UN High-level Climate Champions for Climate Action, and supported by investors including BlackRock, BNP Paribas Asset Management and Goldman Sachs Asset Management.

“Decision-makers are beginning to recognise that a rapid land use transition is coming… [with] significant implications for food and agriculture companies – and the financial institutions that bank and invest in them,” continues the report. 

Value loss warnings

Policy and demand shifts could drive permanent value loss across agribusinesses. Companies at the centre of the global food supply system could face losses of up to 26% of their value by 2030, with a sector average hit of over 7%, suggests the analysis. Such a blow would be the equivalent of “$150bn in losses to investors” and “unlike one-off cyclical shocks, this will be a permanent, non-cyclical loss if investors and companies do not act now to protect value”.

The lasting impact would be “comparable in magnitude to value loss following the 2008 financial crisis, where enduring losses in potential output across 19 Organisation for Economic Co-operation and Development countries averaged 5.5%”, states the report.

The worst impacts may be to come, but regulation linked to changing land use practices is already putting banks under pressure. Plans by the Dutch government to reduce nitrogen emissions by 50% by 2030 can be taken as a “bellwether” of the food and farming transition, says Andreea Playoust, country head of Benelux banks at Fitch Ratings.

Comparable in magnitude to value loss following the 2008 financial crisis

UN Report

Netherlands-based Rabobank has indicated that the strategy “could threaten the viability of its portfolio of Dutch agricultural exposures, particularly dairy, as some farms might be expropriated”. The bank has classified exposure to the Dutch dairy sector as posing a significant increase in credit risk, a move that has raised its stock of loans with a higher risk of impairments by 35% in the first half of 2022.

Forest, land and agriculture industries are the second-highest emitting sector after energy, contributing 22% of global emissions, highlights the UN report. “Fully half of these emissions come from deforestation and land conversion for commodities… Unless we end net deforestation, achieving net zero and a 1.5-degree world is impossible.” Agriculture is responsible for 80% of global deforestation, states the analysis, as trees are cleared to make way for fields of cattle, soy and other crops. Deforestation threatens to be the “new coal” in investors’ portfolios, it warns.

Climate challenges

In addition to ending deforestation, the report underlines the importance of making farmland and farming practices more resilient to the extreme weather events caused by climate change. Extreme weather linked to climate change caused $108bn in crop and livestock production losses in developing countries between 2008 and 2018, and richer countries are increasingly affected.

This summer’s drought in the EU has pushed yield forecasts for crops such as maize, potatoes and sunflowers below the five-year average, shows analysis this month by the European Commission’s Joint Research Centre. Europe’s rice yields are forecast to be down by 21%. To deal with the challenges posed by climate change, policies will be needed to stimulate new farming practices, diets and create innovative products to replace carbon-intensive meat and dairy foods. 

As well as increasing risks for investors, these policies can create new opportunities. “Developing and tapping solutions for a net zero, nature positive, resilient food system” could generate up to $4.5tn of new business opportunities annually by 2030, suggests the UN report.  

Small steps are being taken. More than 35 financial institutions, with $8.95tn in assets under management, have signed the financial sector’s Commitment on Eliminating Agricultural Commodity-driven Deforestation agreement at COP26 in Glasgow last November. But, asks the High-level Champions report, “Why haven’t all financial institutions that have net-zero commitments – with over $130tn assets under management collectively – made such a commitment?”

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