Banks will eventually start to impose higher interest rates on farmers and rural businesses that aren’t achieving satisfactory greenhouse gas reductions

Banks will eventually start to impose higher interest rates on farmers and rural businesses that aren’t achieving satisfactory greenhouse gas reductions,

Banks such as Rabobank have already introduced sustainability-linked loans, necessitating clients to commit to specific targets, which might involve emissions, according to Lara Yocarini, global head of rural and food & agri at the Utrecht-based lender.

“If a client has a sustainability linked loan with us and they actually meet those targets, they do indeed get a discount on their lending rate,” Yocarini said in an interview Thursday during a visit to New Zealand.

For other customers, the current strategy is to provide education and collaboration to achieve emissions reductions. However, if they fail to do so, they are likely to face higher costs, she said.

Agriculture is one of the leading contributors to greenhouse gases that contribute to global warming, with nitrogen from fertilizer and methane from livestock being scrutinized by climate activists who argue that there are too many animals. In New Zealand, nearly half of all emissions come from farming.

Rabobank has committed to achieving net-zero emissions by 2050, with interim targets set for 2030. Reducing its scope-3 emissions, which include those of its clients, will be crucial in reaching those goals.

“As a bank, we need to hold capital depending on the risk that our clients represent,” Yocarini said. “Over time, as we get closer to that 2030 deadline, obviously clients who are unable or unwilling to transition and improve their carbon footprint will become for us as a bank a higher risk. And so just by virtue of that higher risk, probably the pricing will adjust.”

Fonterra Cooperative Group, the world’s largest dairy exporter, last month set a greenhouse gas emissions target for its farmers, stating that major customers like Nestle SA and Mars Inc. want their suppliers to reduce their carbon footprint. However, at this point, there is no proposal to pay more for milk from farms that achieve the goals or less for those that don't.

“What Fonterra is doing is absolutely in line with what we see most of the large dairy companies doing,” said Yocarini. “If you look at Danone, if you look at Arla, if you look at Friesland Campina, they’re all doing exactly the same things.”

In the Netherlands, the government is aiming to halve nitrogen emissions and has offered to buy out some farmers. Rabobank has estimated that this could mean 30% fewer cows within 15 years.

Yocarini is optimistic that with the right tools, most farmers will be able to limit greenhouse gas emissions without having to drastically reduce herd sizes or exit the industry. The dairy industry is quite proactive globally in engaging with farmers to develop and implement tools to achieve emissions reductions, she said.

This includes the use of genetics, deploying different feeds and animal management, as well as building up carbon credits by planting trees. In New Zealand, Rabobank collaborates with Fonterra, other local food producers, and the government in AgriZeroNZ, which is working to develop techniques to help reduce emissions.