3rd November 2022
Sustainability in agriculture is complex. It covers a broad range of themes and the challenges vary depending on the product and region. Currently, there are many barriers that make it hard for banks or investors to assess the sustainability profile of their clients. This is because they don’t always have access to relevant data, or a deep understanding of all the dimensions of sustainability when it comes to specific crops or production areas.
Banks want to avoid financial and reputational risk, which is plentiful in the agricultural sector. It’s tricky for banks to decide who to provide funding to and on what terms. In parallel, producers struggle to secure funding to alter their practices or invest in their businesses. If lenders made decisions based on sustainability performance and planning, they would incentivise better production practices and reward those already doing well.
As these issues are prevalent in the sugarcane sector, we believed that it was important to explore how to find a solution that would be beneficial to our global membership. We developed a project in collaboration with nine other partners to create a methodology to help financial service providers understand sustainability practices of their farming clients and enable them to make better, more informed decisions.
We believed that with a methodology, banks and other financial institutions would be able to confidently assess the sustainability of producers. A better assessment of producers is likely to enhance their access to finance which could facilitate future investment in sustainability – setting off a positive cycle that could benefit financial institutions, farms, research institutes and sustainability standards.
Collaboration is key
From the outset, it was clear that we would need a collaborative approach. There is an enormous amount of sustainability information available but financial service providers need to access it in a format that’s both useable and meaningful.
We worked with WWF South Africa and SRK Consulting to plan and design the methodology. We then collaborated with Nedbank, Better Cotton, Cotton SA, the Alliance for Water Stewardship, SA Canegrowers, RCL Sugar and Milling, and Akwandze Finance to gather data and trial pilots – making it a truly multistakeholder, collaborative project. This project was possible thanks to a grant from the ISEAL Innovations Fund, which is supported by the Swiss State Secretariat for Economic Affairs SECO.
Developing the methodology
Our first step was to identify the different types of sustainability risks that banks need to be aware of. We mapped these with data from our project partners and then split them into three groups: farm management risks, landscape (external) risks, and reputational risks.
To ensure our project was successful, it was important we were focused so we decided to run the project in just one location: the Nkomazi Local Municipality where Malelane is based. This is because sugarcane and cotton are both produced there – essential for using data from the sustainability standard project partners. We needed to establish a baseline understanding of the sustainability performance in our pilot area. We explored the sustainability data available and how it would flow through our process, for both sugarcane and cotton.
Once the data requirements were clear, the next task was to design our approach to data collection. We need to make sure that we covered:
- External risks data using landscape-level data sets from government databases, universities, and research organisations.
- Farm level data by asking our project partners to complete carefully designed surveys.
- Sector data from the Standard partners in the project.
We then developed an information platform to act as a hub for farm sustainability knowledge and data. We used other tools such as software to map and visualise our data, and visualisation tools to analyse and present the data. Collectively, the data and the tools provided decision-makers working in financial institutions with a full and accurate sustainability profiles.
Testing the platform
Naturally we needed to test the platform we had developed. To do this we held events and consultations to understand the value of the tool and identify areas for improvement. We met with some of our longstanding partners like the International Finance Corporation, but also commercial banks including the Carbon Neutral Group, and our project partners. We were encouraged when feedback from stakeholders was overwhelmingly positive.
The figure below, shows the overall methodology and data flows that the project employed while the subsequent figure shows how the methodology looked from the perspective of a bank, which in this example is Nedbank.
Building on what we learned
We saw that our information platform approach was comprehensive but it wasn’t practical. It was too complex for application. Fortunately, the ISEAL Innovations Fund, granted us extension to the project so we could able build on what we had learned.
We needed to give the data structure for it to be meaningful for banks. Wet set out to develop a model and supporting scorecards for Nedbank (which could be adjusted for other banks) to easily assess the sustainability performance of their farming clients.
After developing the sustainability rating system and range of scorecards we presented them to Nedbank. The team at Nedbank said that our proposal was interesting but implementing this system would be impossible due to a lack of capacity.
We know that other banks in South Africa and around the world face similar constraints. To address this, we believe that the solution is to build a pre-competitive, industry-wide institution to performs these assessments for the whole agricultural sector that could consider the complexities of farming and sustainability themes and the limited capacity of banks. This institution would create and manage the sustainability rating system for agricultural businesses in South Africa using a range of data points, resulting in a final score akin to a credit rating.
Given the significant sustainability challenges the world is facing, we know we need to transform the way we produce commodities to become more sustainable. The approach we outlined creates transparency and provides new insights into how farming is being done and challenges the agriculture sector is facing.
As the project in its current form ends, some positive achievements from the process include positive feedback from 10 key partners and a successful collaboration, conceptualisation of how project outputs could be scaled at a sector level, and Increased awareness in the South African sugarcane and cotton sectors of the urgency of addressing sustainability risks.
Collaboration between the finance and agricultural sectors, commodity organisations, standards bodies, and other stakeholders is critical. This phase of the project is complete but it has potential for future extensions that could build on successes and learnings so far and even scale up to other locations around the world. By encouraging and enabling more collaboration and alignment, the farm sustainability rating institution we have outlined, can help us achieve thriving, sustainable farming sectors.
If you’re interested in the project you can download our a summary report or the full technical report.
We’d love to hear from organisations interested in taking this work further. If you’re interested, please contact our Director of Engagement and Markets, Norma Tregurtha on, Norma@bonsucro.com.