Minette Batters, president of the National Farmers’ Union, says her industry needs to harness some of the “trillions of dollars of green finance circling above our heads”. (Photo by Fototek / Geoff and Tordis Pagotto)
  • Banks have a key role to play in financing the low-carbon transition in British farming, which accounts for 10% of the country’s greenhouse gas emissions.
  • NatWest is working to establish a standardised measure for agricultural sustainability, and other banks are working on financing products.
  • Lenders are working to gather data on agricultural emissions but say doing so is a challenge, and their corporate clients are analysing such information. 

British farming is at the heart of decarbonising the domestic economy. For one thing, by government figures it is responsible for 10% of the country’s greenhouse gas (GHG) emissions, making it an obvious target sector for cutting pollution. It will also need to play a role in stemming biodiversity loss and providing sources of carbon sinks and sequestration for British businesses.

Farming may contribute just 0.5% to Britain’s GDP but it produces 53% of the food consumed in the UK, according to a report by HSBC and University College London. It is also likely to be one of the sectors most affected by climate change, with rising temperatures heavily impacting crop-growing patterns. The sustainable growth and resilience of this industry is therefore essential to ensuring food security in an era of rapidly rising prices.

But agriculture will not be able to achieve the climate target set by the National Farmers’ Union (NFU) of net-zero emissions by 2040, provide wider carbon sequestration services and feed the planet without stronger policy support, more private sector investment and a major shift in how – and what – food is consumed. Interestingly, the industry’s GHG emissions, of which carbon dioxide is a small fraction, have fallen since 1990, so it is on the right track (see charts below).

Public subsidies account for a large portion of the financing that farms receive in the UK, but the private sector has an important role to play too. A report from the Green Finance Institute in October estimated that £44bn ($59.2bn) to £97bn in private sector investment would be needed for the UK to meet nature-related outcomes in the next ten years.

However, the financial sector wants more data on the carbon footprint and sustainability of the agricultural sector before making more financing available, as investors and lenders look to reduce the GHG emissions of their portfolios.

Farming under more scrutiny

Indeed the farming industry is facing more scrutiny than ever from the business community, which is increasingly putting supply chains under the microscope. Almost 100 global corporates signed a pledge at the Cop26 summit in November to become ‘nature positive’ by 2030. More broadly, companies are preparing to disclose their impact on biodiversity and nature, with the Taskforce on Nature-related Financial Disclosures slated for launch in the first quarter of this year.

Yet bridging the gap between the smallholder farming community and the demands of big business is not easy. Minette Batters, president of the NFU, says the industry needs to harness “trillions of dollars of green finance circling above our heads” to ensure farmers can invest in biodiversity, water quality and more sustainable practices.

“You’ve got to invest in all of those areas,” she adds. “There isn’t enough focus on how the money hits the ground.”

British banks Barclays, HSBC, Lloyds and NatWest and lenders further afield say they are working to mobilise sustainable finance to support the farming sector by devising tailored financing tools – including green and sustainable bonds and loans – to enable the industry to access the huge volumes of ESG-aligned capital.

In the past three years, climate change has become front and centre, says Roddy McLean, director of agriculture at NatWest, and activity in finance has ramped up, particularly in the past 18 months.

Barclays has green loans that farmers can apply for, and it also set up a £250m fund in October 2020 they can access to make their businesses more environmentally sustainable and energy-efficient.

In November, HSBC launched a £500m green fund for small and medium-sized enterprises (SMEs) to support businesses in the transition to a low-carbon economy, most of which it expects to go to the agricultural sector, says Martin Hanson, the bank’s UK head of agriculture.

And Lloyds Banking Group, the largest financier of the British farming sector, having lent it £939m in 2020, has reduced the minimum loan size under its Clean Growth Financing Initiative (CGFI), potentially allowing more SMEs to benefit.

CGFI offers discounted loans to help businesses invest in reducing their environmental impact. The bank has provided more than £4bn out of the £5bn in finance it has committed to under its discounted green lending initiatives, which includes CGFI, says Lee Reeves, UK head of agriculture.

Lloyds is also working with the Woodland Trust to plant ten million trees over ten years and is helping to fund the MoreWoods and MoreHedges schemes. These provide landowners with partial funding if they plant at least 0.5 hectares of new woodland.


Anne-Laure Garnier of group BPCE says sustainable agriculture is an obvious area of interest for investors. (Photo courtesy of BPCE)

So far, only one sustainable agriculture bond has been issued, and not in the UK. On 6 January, French group BPCE – which encompasses the brands Banque Populaire, Caisse d'Epargne and Natixis – became the first issuer of a bond dedicated to this area. The €750m deal will enable the group to refinance sustainable agriculture-linked assets.

Sustainable agriculture is an obvious area of interest for investors, says Anne-Laure Garnier, BPCE’s head of group portfolio management, because it touches on four main areas: resources management preservation, protection of biodiversity, social factors, and climate change mitigation and adaption.

BPCE will assess the impact of the bond on farming practices, rather than GHG emissions reduced, because information on the latter is not yet readily available, Garnier says.

Banks are certainly bullish about the opportunities they see for funding growth in the sector; HSBC, Lloyds and NatWest are all keen to tout the number of relationship managers who have been trained in sustainability.

The Bank of England expects net lending to the sector to increase by 3% this year, after it has been broadly flat over the past few years.

Lenders are also keen to advise on potentially lucrative schemes in areas such as selling carbon and biodiversity credits, bioenergy with carbon capture and storage, and the use of genetics to reduce methane emissions from ruminant animals.

The agricultural emissions data challenge

Yet before the farming sector can start to monetise its natural capital – the elements of the natural environment that provide valuable goods and services – it faces the huge challenge of establishing its carbon footprint. To cut emissions, the sector must first determine a baseline figure for them. That will be essential if agriculture is to attract the billions it needs in funding.

“We need a comprehensive way of analysing what we’ve got,” says the NFU’s Batters. “At the moment the market is full of different tools. Metrics are absolutely key, but we want science- and evidence-based metrics. Otherwise it is just about gathering data and crunching numbers and is not genuine.”

It is important for the government to work with the industry to set a carbon value that is internationally agreed, Batters adds, but she acknowledges that setting a price is “very much an emerging market”.

There are around 70 carbon calculators on the market that offer varying degrees of granularity and tailoring for different types of farms, says HSBC’s Hanson. They allow farmers to estimate their emissions in tonnes of CO2 and to measure how much carbon is captured by sequestration activities.

Examples include the Cool Farm Tool and the Farm Carbon Toolkit. More advanced solutions – such as Alltech’s E-CO2 carbon calculator, which is designed for livestock farmers – are built around a Carbon Trust-accredited environmental assessment and involves a farm visit for verification and support.

With an eye on achieving more standardised metrics, NatWest is working with the Sustainable Food Trust to develop a tool called the Global Farm Metric (GFM). Its aim will be to help farmers understand the sustainability of their business, climate, soil and livestock and provide them with an overall score.

“The aim of the GFM is to streamline the gathering and dissemination of information from farmers to the supply chains they’re involved in,” says NatWest's McLean. “One of the next phases of the tool will be to consider developing APIs [application programming interfaces] that scrape data from other systems so farmers don’t have to make double entries.”

NatWest intends to make the GFM available to all UK farmers and then roll it out globally, without securing intellectual property rights. The bank, which has just over 25% market share of UK agricultural lending, has a strong incentive to develop such a tool: its own net-zero targets.

Agriculture represents one of the trickiest pieces of the decarbonisation puzzle for lenders. Banks worldwide are setting targets to cut the carbon emissions associated with their loan books. But the fragmented nature of the sector – around 80% of UK farmland is managed by family-run or smallholder farms – means collecting data on emissions, biodiversity and natural capital is challenging.

Agriculture accounts for the largest amount of financed emissions in NatWest’s loan book, for example, despite accounting for a relatively small amount of the bank’s total lending. As of December 2019, the bank’s financed emissions stood at 3.6 million tonnes of carbon dioxide equivalent per year (MtCO2e/y) for £5.3m of lending, compared with 2.2 MtCO2e/y for £190.5m of residential mortgages.

NatWest says agriculture and commercial real estate pose some of the greatest data challenges of any sector it has analysed. It had to model its sector exposure for both sectors using averages because it could not collect the detailed information on customer-specific activities and emissions intensity it needed.

Using farming emissions data

Both the farming and banking sectors are at the information-gathering stage. The next step for lenders will be to determine how they use the data to extend more tailored financing to farmers, to inform corporate supply chains and to help set their own sector targets.

Another potential step would be for banks to use the information to help them make lending decisions. That might include the question of whether to extend financing to farms with low sustainability scores or attach interest rate ratchets to sustainability key performance indicators for bonds and loans.

Lending [to the farming sector] will become more closely linked to sustainability scores. Timothy Coates, Oxbury Bank

One example is Dutch cooperative Rabobank’s Planet Impact Loan scheme, piloted in 2019. Under the initiative, dairy farmers receive lending rate discounts based on their biodiversity monitor scores, a tool devised by Rabobank, the Sustainable Dairy Chain (a partnership between the Dutch dairy industry and farmers), the World Wildlife Fund and dairy company Royal FrieslandCampina.

The market in general is well short of that stage as yet, says HSBC’s Hanson. “It is more about better assessing the risk and making lending decisions based on that risk. If farmers are not engaged [with the transition], that is a potential risk. But it isn’t for banks to drive this. The government will play a part and the big retailers will continue to drive this.”

That said, many would argue that banks and investors can and should help drive their corporate clients’ low-carbon transition – at least indirectly.

Lending will become more closely linked to sustainability scores, argues Timothy Coates, co-founder and chief customer officer of Oxbury Bank, a specialist UK lender to farmers. The company is looking at ways to tailor financing packages to reward more sustainable practices and to better embed climate and environmental risks into its lending decisions and pricing.

Meanwhile corporates themselves – such as Danish dairy products group Arla and UK supermarket chain Tesco – are already using emissions data on farming to help reduce their carbon footprint and better understand its provenance, says Hanson.

Farms unable to satisfy such product-sourcing criteria will find their market is more restricted, he adds. HSBC uses this information to “assess whether a farm is commercially viable and whether we would therefore want to lend to them”.

The agricultural sector looks to be facing a shake-out – one with potentially positive implications for the environment.