‘Natural capital’ should be the basis of farm lending

Bankers who loan money to farming businesses have been advised to move away from the traditional checks of profit and loss financial figures and instead value the natural assets of a property.

This new approach to helping banks evaluate the sustainability of farming enterprises that they lend to could, according to Dr Francisco Ascui of the University of Edinburgh Business School, lead to greater recognition and reward for farmers who look after the long-term health of their soil, water and biodiversity.

“At present, banks still lend to farmers almost solely based on their most recent profit and loss accounts, not taking natural capital into account in their credit risk assessment,” he said.

This old approach to lending cash is, according to Ascui, short-sighted, because a farm’s financial performance can be improved over the short term in an unsustainable way. He gave as an example the over-application of fertiliser which might boost yields in the short term but in the long term causes a build-up of acidity in the soil.

Ascui put more faith in “natural capital”, which covers the natural resourcesandecosystemsthatprovide flows of environmental goods and services that underpin the global economy.

The new framework developed by Ascui, takes into account factors such as water availability, use and quality; soil health; biodiversity; energy use and greenhouse gas emissions – allowing banks to identify and increase lending to more sustainably run farms.

One drawback to using natural capital has been the great variation across agricultural sectors. What is beneficial for one crop or type of livestock might be harmful for another.

The new approach sets a global generic template for natural capital credit risk assessment which can then be readily adapted for different agricultural sectors and geographies.

Speaking at the launch of the initiative, Ascui said: “The agriculture sector is at the front line in terms of both its impacts and dependencies on the environment.

“Farmers are key custodians of our soil, water and biodiversity and depend on these resources for their livelihood, so lenders should recognise and reward more sustainable farming practices.

He admitted that natural capital credit risk assessment was only a first step. “The challenge will be in implementing it. This is a journey that we have to start, if we’re going to have any hope of achieving truly sustainable agriculture.”