Coles’ recent announcement that it expects 75% of its suppliers by spend to set science-based emissions targets is just the tip of the iceberg in terms of the incoming pressure on ag producers to report on their carbon footprint, according to a leading fund manager.
Tim King is chief investment officer and founder of Melior Investment management, which counts Atlassian founder Mike Cannon-Brookes as a backer. According to Mr King major funds will be increasingly judging companies for their ability to report on, and demonstrate action towards their environmental, social and governance (ESG) activity. It’s not just a nice to have, he explained, it is increasingly being seen as an investment risk issue.
“You've got regulators starting to regulate where we've got a whole new set of accounting standards coming down the line,” he said.
“Unless companies can report on how they're managing that risk and how are they trying to abate that, they could become marginalised from an investment and capital flow sense.”
Ultimately that will mean pressure on suppliers to report their emissions numbers to their buyers, Mr King explained.
“So, I'm supermarket X and I'm getting all this pressure. You're supplying to me, so in order for me to solve all those pressures, you're going to have to do this too,” he said.
New accounting standards to drive change
The regulatory pressure is linked to new global accounting standards to be issued in January next year. Under the new standards, companies will be required to report on all relevant ESG topics, including emissions. That will influence financial decisions by key stakeholders such as investors, lenders and creditors.
The Department of Treasury has signalled that mandatory climate-related financial disclosures for Australian large-listed and unlisted companies and financial institutions will come into force from July 2024 and affect approximately 23,000 companies. Non-compliance will result in civil penalties.
Banks are also looking to focus on ESG targets.
The global Net-Zero Banking Alliance, currently representing over 40% of global banking assets, has committed to aligning their lending and investment portfolios with net-zero emissions by 2050. The big four Australian banks, plus Macquarie, have all signed up for the alliance. Agriculture will have to do its part and in a sign of how committed Commonwealth Bank is to supporting farmers, Carmel Onions has recently specialised her role from National Director of Agribusiness to Executive Manager Agribusiness Sustainability.
CBA's Carmel Onions and Natasha Greenwood (left and centre)
Speaking at the Trading in Regen event in Sydney recently, Ms Onions explained that public commitments to net zero are binding.
Ms Onions confirmed that as part of the banking sector’s net zero commitments, banks will need to understand the emissions from entities they lend to, progressively across all sectors.
“If we finance half of your balance sheet, we'll need to understand your emissions profile and count half of your emissions in our reporting,” Ms Onions explained.
“CBA recognises that each producer will be at a different stage of their journey in relation to emissions and will have different goals. CBA is ready to support farmers on that journey to a lower emissions future along with supply chains,” she said.
“What is clear is that the journey towards net carbon zero is underway and there are many ways we can support farmers get started.”
CBA’s major role as a financier can be extrapolated across the entire financial landscape.
Equity investors, like Melior, will be investing in companies that meet their screening requirements for ESG and can provide more rigorous information on so-called ‘nature risk’. That will not only affect a company’s share price, but its ability to raise capital.
He cites the potential impact of El Niño as an example, where his firm would try to quantify how drought could affect water-dependent companies and their earnings or reputations.
Until the introduction of the new accounting standards and their methodology for accounting for nature, there’s currently no standardised information. Melior must do its own research with limited information and has little visibility on how companies will manage that risk.
Early adopters to see benefits
That is the negative view, but the inverse exists as well. Those firms who demonstrate their good stewardship are likely to be rewarded. Agricultural companies can particularly benefit, as nutrition is one of the characteristics that investment firms will be favourably screening for.
“We have very high-quality agricultural companies in this country producing high quality agricultural products. If they can manage this ESG risk, I think they can prosper and attract an investor premium because they're benefiting the environment as opposed to negatively impacting the environment,” Mr King said.
Commonwealth Bank also wants to proactively encourage environmentally beneficial behaviour, launching an Agri Green Loan in August last year offering discounted rates for projects that reduce greenhouse gas emissions, build resilience to climate variability, and enhance their natural capital.
“We're really striving to help solve some of these hurdles around finance and encourage action,” Ms Onions said.
She pointed to some instances where the bank prepaid some carbon credits upfront allowing farmers to monetize future income.
“We have been focused on developing a whole range of sustainable finance solutions. (It is) another mechanism that a bank can use to try and encourage a conversation around what farmers doing to improve their natural capital and to get to net carbon zero,” she said.
“You might actually need some financial support to get through any sort of productivity dips while you're sort of transitioning, as an example.”
Will Onus and Bobby Miller of Ruminati
New solutions emerging
Farmers and founders of carbon reporting platform Ruminati, Will Onus and Bobby Miller, are hoping their tool will begin to provide the kind of reporting major firms will be looking for.
Ruminati provides a free emissions baselining tool for Australian cattle, sheep and grain producers allowing producers to generate emissions estimates for their farm enterprise in less than 30 minutes.
They have recently launched new tools that allow farmers to model the impact of carbon abatement projects, as well report their emissions back to the supply chain.
“We’ve made sure to keep farmers at the centre of this process because it’s their data that provides insights and creates industry change. They’re the key.
“By allowing farmers the opportunity to easily share their data with the supply chain, we’re also streamlining their access to programs that reward them for their climate stewardship,” said Mr Miller.
“At the end of the day we’d like to become the scoreboard for producers and the supply chain and let the industry itself become self-reporting. We’ve created the tools to do that and are excited to see the next steps.”