Sustainable finance for food systems transformation
When discussing global economic development, the food & agriculture (F&A) sector is one of the first to come up in conversation. It is the sector par excellence that the world cannot do without, as a growing world population needs ever more food. As such, the F&A sector therefore offers massive opportunities for sustainable economic growth and (youth) employment but, at the same time, forms an important contributor to environmental degradation and climate change. Stimulating the growth of the F&A sector while at the same time working to protect our planet and environment is a major challenge. Realising this dual task, however, is indispensable if the world population is to survive and thrive. So how to combine the two? Banks, like Rabobank, and the private sector are gradually embracing a promising contribution to the overall solution: Moving towards sustainable finance and making sure that Sustainability-Linked Loans (SLLs) become rule rather than exception.
In September 2021, the UN will organise a Food Systems Summit as part of the Decade of Action to achieve the Sustainable Development Goals (SDGs) by 2030. From 26 to 28 July a Pre-Summit was organised to set the stage for the culminating global event in September. During this Pre-Summit Rabobank was selected as one of the few private sector actors to host an online session titled ‘Sustainable finance for food systems – Setting the agenda’. By involving important key stakeholders such as corporates, multilateral organisations and multilateral banks, the session served to showcase prime examples of Sustainable Finance, to foster discussion on what still needs to be done to mainstream sustainable finance in the F&A space and, finally, to launch an online dashboard that keeps track of the current share of SLLs in the F&A space. This article presents the most important insights and most interesting discussions of the session.
Sustainability Linked Loans (SLLs) 101
Sustainability-Linked Loans (SLLs) are a way to integrate a company’s sustainability metrics into a loan. This textbox briefly explains how this works.
When a company wants to issue an SLL, 3-5 sustainability key performance indicators (KPIs) are agreed upon with the lending bank. These KPIs cover environmental as well as social aspects, aiming to tackle the most material sustainability issues that a company faces. Common KPI topics used within the F&A space include: reduction of carbon footprint, reduction of food waste, increasing certified products, and improving farmer training and agricultural practices. During the lifetime of the loan, the performance of the company on the pre-determined sustainability targets is monitored. When the company performs well it will earn a discount on the overall margin it pays and, conversely, will get punished if these targets are not met – i.e. the margin on the loan will then go up.
This type of loans first saw their inception in 2017, when Philips came to market with the first Sustainability-Linked Loan. Ever since, this market has grown enormously: At present, 12% of all F&A loans announced in 2021 are tied to sustainability. For companies, SLLs present a great opportunity to put their sustainability ambitions to practice, contributing to a more sustainable future while at the same time benefitting financially. For banks SLLs help identify which clients are preparing for tomorrow and enable them to have a wider dialogue with clients on the importance of integrating sustainability, especially given the upcoming sustainable financing policies.
Although most progress has been made, the F&A sector remains underserved in terms of Sustainability-Linked Loans. Given that most of the global food systems’ supply chains are located in emerging markets – i.e. in areas where sustainable solutions still have a long way to go and can have the most impact – it is crucial that SLLs are further rolled out to transform food systems for the better globally.
Starting the fire
When an online session is attended by over 70 participants – all of whom gave up their free evening – and speakers are among the greatest experts in the field, you know the subject matter is of great importance. Moderated by Oyumaa de Jong (Sustainable Capital Markets, Rabobank) this event was opened with fire starter speeches by three key actors operating in the world of sustainable finance in the F&A sector: Berry Marttin (Member of the Managing Board, Rabobank), Viktoria de Bourbon de Parme (Food Transformation Lead, World Benchmarking Alliance) and Caspar Veldkamp (Member of the Board of Directors, European Bank for Reconstruction and Development (EBRD)).
The sprouting seed of sustainable finance
“Sustainable finance is here to stay.” With this statement, Berry Marttin clearly set the stage for the rest of the session. The question is not whether we move to sustainable finance solutions, but how, at what pace and with what partners. There was strong agreement on this idea among all speakers, aptly voiced by Viktoria de Bourbon de Parme who said “Clearly, we are moving beyond this being a niche commitment.” Increasingly, financial institutions are not only embracing but actively promoting the idea of sustainable finance. One of these actors is the EBRD, a multi-lateral development bank that aims to makes economies – in 40 countries, spread across the Southern and Eastern Mediterranean to Central and Eastern Europe, to Central Asia region – more competitive, better governed, greener, more inclusive, resilient and integrated. As Caspar Veldkamp explained, the bank is making great headway on the path towards sustainable solutions. “[In collaboration with governments] we are working to create regulatory environments that promote investment in green buildings, renewable energy, green cities,” Veldkamp noted. Additionally, “between 2016-2020 green financing has represented 37 percent of the EBRD’s total investments” and the bank is aiming for 50 percent soon.
Viktoria de Bourbon de Parma
A value chain approach
Progress like that of the EBRD is very promising but, while the speakers agreed sustainable finance solutions and SLLs in particular should become ‘the new normal’, great challenges still remain. “There is still a lot of work to do,” Veldkamp argued. A systemic transformation of the F&A space not only demands a global framework, it also requires a framework that takes a value chain approach. Transformations cannot be limited to the financial sector, but also extend to nutrition, social inclusion, health and other fields, Marttin argued. The WBA’s upcoming publication, the F&A Benchmark, assesses 350 of the largest F&A companies worldwide, along 45 different topics and across 4 thematic areas – environment, nutrition, social inclusion, and governance and strategy. The publication, the preliminary findings of which have been received with great interests from many stakeholders, confirms the absolute need for a holistic value chain approach. “We are talking about systems,” de Bourbon de Parme explains. “Whichever part of the value chain [they represent], all companies [along the chain] contribute to the change that we need to see.”
Breaking down siloes
In September this year, the WBA will publish its F&A Benchmark, alongside the UN Food Systems Summit. The publication not only serves to highlight leading practices that are out there, but also to build a movement together with partners like Rabobank and the EBRD to incentivize other companies to contribute to the envisioned sustainable systems-change. Partnership, all three speakers emphasize, is key to realise a global transformation. Discussions on sustainable solutions for the F&A sector often tend to focus on what states can do, Veldkamp points out. “But sustainability should also be about the private sector, its opportunities and responsibilities.” Transformation requires collaboration, partnership and exchange of knowledge and data. This means that we must cross borders, between sectors, countries and people. Or, as Veldkamp put it, we should stop thinking in silos and “develop a more holistic picture of food, climate, finance, working together. For that we need to know each other, we need cooperation.”
SLLs in practice
After the thought-provoking speeches, two additional guests joined the conversation – Philippe Penet (CFO & Treasurer, Sucafina) and Gerbrand van Veldhuizen (CEO, vanRijsingengreen) – to share their experiences with Sustainability Linked Loans (SLLs). To date, Sucafina has issued two SLLs structured by Rabobank and vanRijsingengreen was one of the first companies to issue the SDG 12.3 loan, also structured by Rabobank. The 12.3 loan is an SLL that rewards the reduction of food waste with lower interest rates. While both companies issued SLLs, the key performance indicators (KPIs) for their loans differ as they are tailored to the sectors both companies operate in and aim to tackle the most material ESG (Environmental, Social & Governance) issues each company faces. Additionally, for Sucafina’s second SLL, the KPIs were updated to incorporate a greater focus on carbon reduction to match the changing priorities on the global sustainability agenda. As Van Veldhuizen explained, the KPIs not only function as targets that must be reached to avoid fines; more importantly, they act as catalysts for company-wide change. “Sustainability, and food waste reduction in our case, [do not only have a place] only in one part of the company but they are on the agenda in every department.”
Preparation, partnership and perspective
Sucafina is among the largest coffee merchants in the world with a strong ambition to be the leading sustainable ‘Farm to Roaster’ coffee company in the world. The company issued its first Sustainability-Linked Loan (SLL) in 2019. To make this a success Sucafina had the tools and key partners, as well as the relevant KPIs set up before the loan was issued. This thorough preparation meant that the company had the technical and material means, the vision and the partner support needed to move ahead once the loan was granted. Despite such preparation however, challenges remain. Justin Archer, Sucafina’s East Africa COO and Sustainability Manager explains: “We don’t always have full visibility on our supply chain. […] For instance, we are not able to track our entire carbon footprint and we can’t fully guarantee that human rights are not violated in parts of the supply chain that are beyond our control.” That said, Sucafina is taking a long-term perspective, improving things incrementally through meeting the sustainability KPIs. The combination of this long-term perspective with meaningful cooperation with banking partners is, as Penet adds, the key to success. “It is a real partnership between bank and client,” he explains. “[W]e are at the beginning of this journey [which] will become standard in the future and we need to actively participate in this evolution.”
Tips and tricks to engage in sustainable findings
As participants were invited to pose their questions to all contributors, Penet and Van Veldhuizen were asked: What do companies need to have in place to engage in sustainable finance? “Probably one of the most important things to have is data,” Penet answered. “Without data it is very difficult to establish KPIs. Not only which work, but also which work in the long-term.” Second, Penet argued, a company needs to have a story, a vision, that matches with the idea of sustainability. There needs to be an understanding of why sustainability is important for the company and its stakeholders. Third, appropriate technology is key to scale up the sustainable finance aspect of a company’s strategy.
Gerbrand van Veldhuizen
In addition to the necessary preconditions, Penet and van Veldhuizen were asked to share their tips on preventing the practice of so-called ‘greenwashing’ – the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound. For Penet, the importance of ‘having a story’ again comes into play. Sucafina experienced first-hand that a bank felt uncomfortable providing the company with a loan for fear of greenwashing. “We realised the only reason why this bank was not comfortable was because we did not take the time to explain […] how the sustainability story of Sucafina was built, why the KPIs were selected, why they were important for us.” Sharing one’s story ties in with Van Veldhuizen’s argument. “I do not have a real answer,” he notes, but fostering transparency will be key to combat greenwashing.
Growing sustainable loans for sustainable growth
The three fire starter speeches as well as the contributions from Penet and Van Veldhuizen showed that there are still challenges on the road towards true transformation of our food systems. However, as Viktoria de Bourbon de Parme underscored, sustainability-related topics like planetary boundaries and human health should not be seen as a burden. “They are opportunities actually, for companies to deliver beyond short-term goals and establish resilient, long-term, profitable business strategies.” Financial institutions have a crucial role to play by offering companies the rights incentives, not least in the form of SLLs. Harnessing the impact of financial institutions is a cornerstone to realising lasting change towards food systems that work for all. Thus far, Rabobank has built up an impressive track-record in the field of sustainable finance, including its Agri3fund and the Rabo Carbon Bank. Its latest contribution comes in the form of the online Sustainability Dashboard, which was launched during this session by Rabobank’s Jiae Lee (Sustainable Capital Markets, Rabobank).
The Sustainability Dashboard keeps track of developments of sustainability-linked and green loans in the F&A sector, showing exactly the percentage of loans with sustainability components by continent and by country. “This is where the entire world can map and monitor this change in sustainable finance,” said Maarten Biermans (Global Head Sustainable Finance at the Rabobank), “specifically for the Food and Agricultural sector.” The dashboard provides a tool to keep track of which countries are leading the way and which ones should double down on their efforts. Finally, voicing the ambition of the Rabobank, Biermans closed this session by stating that “we, of course, think that ultimately, every loan in food and agri should be sustainability-linked or a green loan in one form or another. It needs to go to 100 percent. […] That is how we are going to change the world.”
If you missed the session, you can find below the highlights