Financing and ESG: What does the future hold?

Published: 3 May 2024

116
Marlene Louw,
senior agricultural economist, Absa Group

Environmental, social, and governance (ESG) considerations are becoming increasingly important in how business is conducted around the world. Increased knowledge on the effect of production practices and lifestyles and higher incidences of extreme weather events have caused consumers, investors, and regulators alike to increase the importance of this in investment and policy agendas.

The financing sector is no exception to this. In 2019, the United Nations developed the principles of responsible banking (PRB) to which more than 100 banks around the globe are signatories. In these principles, signatories commit to aligning their strategy and practice with the vision as set out in the Sustainable Development Goals and Paris Climate Agreement. Absa is also a signatory to these principles and as such we have committed to start disclosing our impact on the environment to society at large.

Agricultural financing
One of the variables that we have committed disclosure on is carbon emissions. As a signatory of the PRB, Absa has committed to reducing its carbon emissions by 50% by 2030 and to be carbon neutral by 2050. To understand the pathway of a financier to carbon neutrality, a distinction can be made to the carbon emissions that we generate from our operations (scope 1 and 2) and the emissions that we finance (scope 3). Scope 3 emissions, from an agricultural financing perspective, have to do with the carbon or carbon equivalents that are emitted through the agricultural production practices that we finance. Sources of emission can broadly be broken down into five categories:

  1. Emissions from energy use – specifically related to fossil fuels.
  2. Change in land use.
  3. Emissions from synthetic fertiliser use.
  4. For livestock, esoteric emissions from animals.
  5. Emissions from waste management.

Although the tools for measurement and reporting of these variables have not been fully developed in the financial system, experts agree that agricultural producers would at some point in the future need to start reporting on these variables. Commercial banks are, however, fully aware that additional reporting and auditing requirements present capacity and cost challenges to agricultural producers, especially for small and medium-sized enterprises. Here, digital and automation technology are being explored to see how financiers can leverage big data to get access to emission information. It would, however, also serve producers to start ex­ploring systems where this type of information is captured and validated. Service providers such as the Sustainability Initiative of South Africa (SIZA) and Blue North are trailblazers in the space of carbon footprint measurement in the South African agricultural context and their services have been successfully adopted by selected producers in the fruit and wine industry.

Unlocking opportunities
Having access to carbon footprint data, over time, can also unlock opportunities for agricultural producers. These opportunities include:

  • Green financing products with favourable rates. Here, funding can be given for climate mitigation or adaptation projects, but assurances in terms of a green classification would be needed to unlock the opportunity.
  • Carbon trading as an additional revenue stream – agriculture is one of the few sectors that both emit and sequester carbon. In order to unlock the opportunities associated with this, carbon measurement over time would be required.
  • Retained market access – international trade in agricultural products will increasingly be impacted by policies such as the European Union’s Green Deal. Disclosure on certain environmental variables will be imperative for market access for certain agricultural products.

Beyond carbon
Anyone that is not a specialist in the area of environmental sustainability will be forgiven for thinking that this agenda is centred on carbon and driving greenhouse emissions down. In the scientific community this is often referred to as ‘carbon tunnel vision’. Sustainability issues, however, span more broadly to include a wide range of ecological and social issues. The case is increasingly being made that to truly pursue sustainability an eco-systems approach is far more valuable (albeit more complex) than considering a single variable or metric such as carbon.

By virtue of the nature of the industry, agricultural producers as the custodians of natural resources such as water and land, have sustainability as a key focus already. This holds immense opportunity to unlock value and additional revenue for the sector. To unlock this opportunity, measurement of key environmental variables becomes imperative. The current journey in terms of carbon emission measurements serves as a teaser on a broader measurement and reporting landscape that is likely to form part of the sector into the future.