Financial institutions and commodity traders have a significant role to play in fostering more sustainable agricultural systems and should factor this into their net-zero plans, a report has claimed.

Drawing on feedback from UK-based farmers, sustainability specialists and financiers, the report calls on banks to integrate just transition principles into their relationships with food and agricultural sector customers and focus on driving product innovation.

“The finance sector has a critical role as a provider of capital to the entire food and agricultural system. It can use its relationships with food retailers, processors and suppliers to drive a systemic response to social impacts and sustainability targets,” notes the report, titled Sowing seeds: How finance can support a just transition in UK agriculture.

Carried out as part of the Financing a Just Transition Alliance, convened by the London School of Economics’ Grantham Research Institute on Climate Change and Environment, the report suggests that banks could support food and agriculture clients by offering discounted finance for sustainable initiatives, ringfencing lending capacity for the sector or linking the financing of companies, including commodity traders, to improved social performance.

“Food manufacturers, traders and retailers must also integrate just transition principles into their decisions,” it adds.

Brendan Curran, senior policy fellow in sustainable finance at the Grantham Research Institute, tells GTR that a price incentive is vital: “Other than bringing down the cost of production over time for greener activities, from a finance point of view, linking sustainability performance to a cheaper cost of capital makes sense – it’s just about whether you can make the change sufficiently material to incentivise the behaviour change.”

“It can be a bit of a blunt tool at the minute, but it has some potential to be a lot more impactful, particularly if you can start to link social key performance indicators to financial products,” he says.

While the agriculture sector represents a relatively small percentage of banks’ portfolios, it accounts for a large proportion of their greenhouse gas emissions. For example, it makes up just 1.1% of NatWest’s total portfolio, but is “one of the largest contributing sectors to the bank’s financed emissions”, the report says.

The just transition is defined as “a shift to a net-zero and climate-resilient economy that delivers decent work, social inclusion and the eradication of poverty while simultaneously delivering biodiversity goals”, according to an August 2022 report from the Grantham Research Institute.

“UK banks are quite receptive to thinking about how they can find new market opportunities and bring an inclusive transition in terms of new green jobs and opportunities, and in allowing those stakeholders most at risk of the transition to have ownership of the transition,” Curran says, adding that international banks are similarly bearing in mind how this impacts them through their supply chains.

The report also flags up the need for banks to alter their approach to SMEs, as 90% of UK farms are sole traders or family partnerships, and the requirement to gather extra data and implement environmental and social improvements may add further burdens.

While landowners are generally perceived as “attractive borrowers”, the report adds that “some internal credit rating processes within banks, however, could be more sophisticated in calculating the credit risk of smaller agricultural clients”.

It suggests that the British Business Bank could play a role in supporting SMEs “via private sector banks through lending and guarantee schemes”.

Curran notes that a more general societal risk might arise if net-zero plans are not properly thought through.

“For example, rather than taking proactive action on product innovation, and active engagement with clients, banks may just decide to not offer them new products or try and remove them from their portfolios. The climate risk is removed from a single financial entity, but it still remains in society. This is particularly concerning in food production markets,” he says.

“It is unlikely, though, because a lot of the banks that we work with have demonstrated they are mindful of supporting customers through the transition in a just manner.”

To help regulate transition plans, the UK government has set up a transition plan taskforce – first announced at Cop26 in 2021 – to develop a “gold standard” for the ways in which businesses and financial institutions, including export credit agencies, banks and insurers, can include just transition principles in their plans for net zero.

The FCA will ultimately use the taskforce’s findings to beef up disclosure requirements and oblige banks and investors, as well as listed food and drinks companies and food retailers, to publish their transition plans.

The final disclosure framework is due to be published later this year, following a consultation period.