16 Mar Ag in the 22nd Century Today
PHOTO: Charlie Arnott – Regenerative Farmer and Educator
“Farmers are in the enviable position of being able to leverage the natural capital of their landscape, and given the increasing understanding, support and expectations of lending institutions of farmers who look after the land in which they are growing food, this represents the opportunity to strengthen their balance sheet with this natural capital, whether it be soil carbon, renewable energy, biodiversity or water credits, or product premiums. That can only be a good thing for their credit rating as they become a more attractive client for lenders, not just as a ‘safer’ client, but potentially as a client that helps that institution tick a number of ESG boxes for themselves” – Charlie Arnott.
TAKE NOTE, accessing debt capital for borrowers in the (near) future will have baseline requirements that do not exist today. These new benchmarks or qualifications that borrowers will need to meet is stemming from a groundswell of investor and community sustainability expectations that is being embedded in corporate governance conventions.
Major lending institutions are falling into line to meet these sustainability protocols. The new framework by which these standards are being tallied is known as ESG (Environmental Social Governance). For corporate (and specialised) debt lenders, this is divided into two distinct categories.
First, their own direct footprint in managing these exposures. Their net carbon emission footprint, their social welfare with their employees (ie: exposure to underpaid overseas workers, employee diversity, anti-discrimination etc), their social obligation to external stakeholders including their customers. And finally, their governance deployment as made bare during the Royal Commission.
Second, and the most profound, will be defining as to which borrowers they will be willing to lend money to and support via their debt funding activities. It will be no more just a function of pure credit analysis (probability of default and loss given default), but an algorithm of applied filters to ensure their borrowing customers are compliant to the ESG framework and are managing their ESG risk.
Lenders in the (near) future will be managing their effective overall balance sheet customer exposure driven by large quantity of both domestic and offshore liquidity pools that demand as such. The credit analysis will be triple line reporting (cash flow, balance sheet and ESG). They will apply the ESG lens to everything they do in the future. Banks are already building dedicated sustainable finance and ESG teams within their resource arsenal in preparation. Lenders that fail to comply themselves will be at risk of board spills and corporate ruptures.
It is not just lenders that are under the spotlight. Superannuation funds, money managers and asset managers and in essence all corporate Australia are caught in this new emerging paradigm. Capital allocation will very quickly be divided into those that qualify and those that do not. The transition for borrowers will be distressing if foresight is not followed up by strategic action.
Farmers in the Spotlight: A Golden Opportunity
Farmers have a wonderful opportunity to be in forefront of ESG adoption and innovation, to reduce risk and build long term value.
Imagine for a moment a business that satisfies all these requirements in a world where capital is now funnelling towards those that do. Expansion capabilities will be supported by access to cheaper debt instruments and capital hybrid products that allow for further growth, research, and innovation.
Compliant farmers may even draw upon new revenue streams by selling off carbon credits to the multitude of companies that logistically cannot comply on all fronts. Taking it one step further, farmers could form joint ventures with major ASX listed companies to assist these listed companies with their ESG qualifications or demand a premium price for their product.
The technology is already here for farmers to measure their “E” in the ESG (environment) to satisfy the decarbonisation challenge that is facing corporate Australia. Smart interactive livestock eartags, future feed supplements, bio genetics, yield and IOT, circular farming, complementary cropping and regenerative agriculture, vertical and soil free farming, carbon and soil farming, satellite imaging and soil mapping. The list is growing.
The market is becoming more sophisticated, more complex, and more layered. The next generation of borrowers will be making business decisions that address the key issues being raised today.