By Andrew Laming, Managing Director, NZAB

Environmental and social licences to operate are fast becoming critical for securing competitive bank funding. So what does this mean for farmers? Andrew Laming from New Zealand Agri Brokers (NZAB) explains.

Great balance sheet and security? Check.

Solid financial history and forecasts? Check.

Good management history? Check. “Ok, great, send me out the new loan documents.”

“Not so fast Mr and Mrs Farmer, we need to understand your environmental and social footprint before we approve this loan.”

“Ay?”

That simplified conversation above is now becoming commonplace with farmers when accessing new loans or even rolling over existing loans.

And it’s set to get more intense.

When banks assess credit, they’re actually assessing the risks associated with your ability to service the loan and, one day, pay it back.

Given that your loan is likely to be based on decades of future performance, a fundamental to that risk equation is whether you’ll be able to do what you currently do long into the future. In other words, will you still have your “licences” to operate?

We all know that you need a financial and management licence, but you’re also going to have to demonstrate your capability with a couple of others – your licences with environmental and social impact.

Those environmental and social licences to operate are risks banks are looking closely at right now. How you articulate your understanding of your own risks in these areas – and even more importantly, how you will deal with those risks to ensure that you can still stay in business in the future – could be the difference between a good interest rate or a not-so-good one. It could even mean a yes or no on your loan application, or worse, whether they will even roll over your existing loan.

Furthermore, banks are not just concerned about the risk of getting their loans repaid due to these factors, they’re also increasingly concerned about society’s view of the impact that their lending supports. In other words, by providing a loan that has a significant environmental or social impact, the bank’s community reputation is intrinsically tied to those outcomes, and understandably they are very sensitive to that in the court of public opinion.

Here’s a quick run-down of the risks that banks are currently looking at alongside those staples of profitability, balance sheet and personal factor. And when we say “looking at”, they’ve got very detailed checklists behind the scenes, making judgements on these factors.

1. Consents to undertake your farming activity

Already prevalent in many parts of the country, your bank is going to be really interested in whether you are legally allowed to farm as you currently do with your current stock intensity, inputs and other environmental impacts.

This is not just now, but also in the future: What upcoming limitations are in train and how will you meet them if you aren’t already?

Part of this is your Farm Environment Plan (FEP): Do you have an FEP in place that meets all regional and national standards as they pertain to healthy waterways and other ecological impacts? How have you performed on this when audited?

2. Consents to use resources

An obvious one, particularly with irrigation and stock water schemes, but the spotlight is getting brighter on this one with many consents coming up for renewal and having new conditions being imposed on them. How confidently can you speak about renewal of that particular consent? In the future, banks will go one step further and opine on how efficiently you use those resources, even if within your consent.

3. Animal welfare

Whilst animal welfare is at the heart of any good farming business, banks are going to inspect this to ensure that this is actually the case for your farm. This doesn’t just extend to what happens on farm, but also beyond the farm gate with animal processing.

4. Processor audits

The bank is going to be very interested in how you have performed against internal milk company/meat processor audits, and is likely to want to see these audits to ensure you’re compliant with their codes and controls.

5. Employment law

Whether or not you comply with employment and immigration laws is something the bank will ask and investigate. Just being compliant won’t be enough – they’re going to take a subjective view on whether you’re a good employer or not.

6. Greenhouse gas emissions

I’ve put this last, but this is arguably the biggest one.

While farmers have been working hard to start modelling and measuring their greenhouse gases, banks have also been busy measuring their collective portfolio emissions for all their customers. Very shortly they will have to report to the Reserve Bank (and in turn the public) with how much greenhouse gas their customers emit.

There is clear underlying direction here – banks that have a greater degree of “emissions” as part of their portfolio are going to want to manage those positions carefully. Naturally we see this extending to them being very interested in how much support (or lack of) they might provide to an existing or new customer who is not heading in the right direction with their own emissions.

But let’s stay ahead of these things

While some of these things are new and represent greater challenges, the best farmers are the ones who embrace change and set up their businesses to deal with the widening inspection of their environmental and social footprints. It is a measure of how far both business and community have come that we take in the “wider view” when conducting business. At times, the balance and resultant policy are not skewed correctly, nor time-phased appropriately, but in general, none of the things discussed above are bad things to include in your business.

And guess what – if you take the proactive approach with your bank with both action and reporting on all these activities, you’re going to be rewarded with more access to capital at a cheaper price.

Most banks have some version of a “sustainability linked loan” that rewards you with margin discounts if you meet a number of detailed criteria in these areas.

But a word of caution: banks are taking a carrot approach right now by rewarding customers who excel in this area, but very soon we’ll see the stick as well.

Andrew Laming is one of the founders and a director of NZAB, based in Timaru. He has 22 years’ experience in the agribusiness and advisory industry focused on agribusiness finance and credit analysis. His previous specialist roles include equity partnership formation, and governance leadership with expertise in both debt and interest rate structuring. He has experience in large and mid-size agribusinesses and sits on farm business advisory boards.