Banks have begun setting dairy emission targets, inquiry hears

Tuesday, 29 October 2024

ANALYSIS: “Is it necessary or appropriate for ANZ to put climate change or biometric protections, or conditions in as part of rural loan requirements? If so why?” Mark Cameron, farmer and MP, asked ANZ chief executive Antonia Watson last week.

“I can confirm we don’t,” Watson told him.

But while Watson was short and succinct in her answer to Cameron at the first Finance and Expenditure select committee banking inquiry hearing, she might have added the qualifier “currently” to her statement.

In ANZ’s written submission to the inquiry, the bank said: “We do not currently apply restrictions to businesses with a high proportion of agricultural greenhouse gases (i.e., biogenic methane).”

But, it said: “We acknowledge this may change in the future, if we are required to manage climate transitional risk.”

Farmers are deeply suspicious of big bank climate change intentions, and have convinced MPs to include the question of whether bank sustainability policies “have, or are likely to result” in costlier loans to farmers.

There are also rumblings of discontent from farmers at the Reserve Bank Te Pūtea Matua’s moves to require banks to actively manage climate-related risks, and a law requiring banks to report on their climate risks.

Like other banks, ANZ has been putting itself in a position to satisfy those demands, but also those of big shareholder-investors for data on the “financed emissions” that are the result of the loans banks make.

ANZ has built an “ESG Information System” to combine “physical, emissions and financial data”, including from the companies it banks.

The inputs started with ANZ’s large institutional agri-businesses, around 30% of which have set science-aligned targets.

“At this stage, we have concluded it is not currently appropriate to set an emissions reduction pathway and target for the agri sector,” the bank said in its submission.

But ANZ signalled a clear direct of travel.

“We are seeking a deeper understanding of the options for farmers, and we are working on ways we can help them to lower emissions from their farming practices,” it said.

Other banks have set emissions “intensity” targets for dairy farmers.

BNZ, for example, says its ambition is to transition its lending portfolio to net zero emissions by 2050.

For dairy, its shorter-term aim is to see an 11% reduction in the emissions intensity per kilogramme of milk solids that it finances by 2030 against a 2022 baseline.

To do that, it is going to need data from farmers, but as one submission to the inquiry has indicated, banks hold the whip hand over farmers, and have a history of requiring them to hand over data not specifically required under their loan contracts.

BNZ thinks some of its dairy emissions intensity reductions will come from de-stocking, though it hopes efficiency gains will mean that milk production does not drop. Some will come from better selective breeding. Some will come from the development of technologies like methane inhibitors added to feedstock. Some will come from changes in fertiliser use, and type.

Like ANZ, BNZ is an investor in the AgriZero technology programme seeking to lower dairy emissions.

ASB says between 2025 to 2030 it will “progressively set targets based on financed Emissions”.

Dairy is one of the first areas it has moved on, setting emissions intensity reduction targets by 2030, which could imply dairy farmers who do not help it meet that target might come under pressure.

It’s clear the banks see a business opportunity in requiring farmers to reduce emissions intensity by lending them money to become more efficient.

But, ASB sold that as a positive for the farming sector.

“Our experience working with farmers, is that the most efficiently-run and profitable farms are often those that have embraced sustainability practices, reducing greenhouse gas emissions, nutrient losses and waste,” it said.

“It is often the case that poor environmental practices are linked to poor business practices and performance that would in turn more directly influence lending decisions,” ASB said.

But there are farmers who think farmers’ emissions should be the banks’ business, and some who fear banks becoming a form of emissions police for the country.

Groundswell NZ told MPs banks would soon serve as “the point of compliance regarding emissions management”.

Groundswell, which styles itself as “a grassroots volunteer-driven advocacy group seeking a halt to, and rewrite of, unworkable regulations which unfairly impact farmers”, told MPs: “Banks are not qualified to make decisions on the highly complex matter of agricultural emissions.”

There was a real risk to agriculture from both mandatory disclosures (introduced by the previous government) and the global Net-Zero Banking Alliance, which ANZ, BNZ, Westpac and Commonwealth Bank of Australia (ASB’s owner) were members of.

However, submitters to the inquiry including Fonterra have pointed out that global food giants like Nestle, overseas supermarkets like Sainsbury, and capital investors are demanding action on emissions.

Westpac told MPs it did not add a premium to loans for higher-emitting farmers, or restrict lending based on borrowers’ emissions.

But it did provide lower-cost “sustainable farm loans” to farmers that hit sustainability targets.

It’s a carrot rather than stick approach that’s fast becoming the norm for Westpac’s farmer-borrowers, with 39% of the bank’s agri-lending in sustainable farm loans.

It’s not only farmers who are concerned about banks’ climate change plans.

Fuel retailer Waitomo, which has helped bring petrol margins down in areas it operates, has pointed out its experience of banks’ willingness to lend was at odds with their stated emissions reduction policies.

It told MPs that it was effectively stranded by bank sustainability strategies.

“Work being done on ‘financed emissions’ by all major banks has resulted in only our incumbent bank being willing to continue funding us for term lending, regardless of price,” its chief executive Simon Parham told MPs.

“This situation is well-known in the market and leaves our incumbent bank with a power imbalance in our relationship,” he said.

“Put bluntly, because we sell hydrocarbons, the major banks are now debanking us.”

None of the big banks’ public climate strategies exclude lending to petrol retailers, though they do have policies on reducing lending to “upstream” fossil fuel industries, the exploration, extraction and refining of fuels.