Developing an evidence base for assessing natural capital risks and dependencies in lending to Australian wheat farms

ABSTRACT

Farmers are highly dependent on stocks of natural capital, and lenders are in turn exposed to natural capital through their loans to farmers. However, the traditional process for assessing a farmer’s credit risk relies primarily on historical financial data. Banks’ consideration of environmental factors tends to be limited to major risks such as contaminated land liabilities, and to large project and corporate finance, as opposed to the smaller loans typical of the Australian agricultural sector. The relevant risks and dependencies for agriculture vary by sub-sector and geography, and there is a lack of standardised methodologies and evidence to support risk assessment. We provide an evidence base to support natural capital risk assessment for a single sub-sector of Australian agriculture – wheat farming. We show that such an assessment is possible, with a combination of quantitative and qualitative inputs, but the complexity and interconnectedness of natural capital processes is a challenge, particularly for soil health.

KEYWORDS:

• Natural capital
• environmental risk
• environmental credit risk assessment
• responsible lending
• wheat farming
• Australia

Acknowledgement

We thank the project’s industry partners, National Australia Bank (NAB) and the Climate Disclosure Standards Board (CDSB) for their support.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Theodor F. Cojoianu http://orcid.org/0000-0002-7503-2387

Francisco Ascui http://orcid.org/0000-0001-6036-3987

Notes

1 http://www.naturalcapitalfinancealliance.org/about-the-natural-capital-declaration/ (Accessed 26 October 2016).

2 Own analysis. Indicative prices and profit margins from personal communication, Agribusiness finance manager, August 12, 2016.

3 https://www.agric.wa.gov.au/news/media-releases/world-soil-day-wa-soil-acidity-research-boosts-yields-and-profitability (Accessed 27 October 2016)

4 https://www.agric.wa.gov.au/water-erosion/water-erosion-introduction (Accessed 1 December 2016)

5 http://www.environment.gov.au/biodiversity/threatened/species (Accessed 23 March 2017).

 

Additional information

Funding

This work was supported by the Australian Commonwealth Department of Infrastructure and Rural Development under the Sense-T ‘Sensing Natural Capital’ project.