Accounting for natural capital on farm

Accounting for natural capital on farm

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NAB focus on good management of natural resources.

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James Bentley, National Australia Bank's senior consultant natural value corporate responsibility.

James Bentley, National Australia Bank's senior consultant natural value corporate responsibility.

RELATED: Natural and financial capital have to be aligned: Farmers

A WORLD is fast approaching where being able to demonstrate good natural resource management will be critical to a farmer’s ability to secure finance, negotiate lower interest rates and attract vital investment.

It will be a world where good soil health, resilience to water stress, climate risk, pest outbreaks and reputational or legislative risks are crunched into the accounting figures in the same way financial or infrastructure assets are.

And it’s not before time, according to progressive producers who are already using their natural resource management to market products.

The concept of natural capital - the stock of ecosystems and the services like clean water, healthy soils and pest control they provide - was explored in depth at this year’s Australian Bureau of Agriculture Resource Economics and Sciences (ABARES) Outlook conference in Canberra.

In stark contrast to the traditional approach of economists who take natural capital to be intangible and unknown, pioneering thinking in the banking sector is placing strong value on farming ecosystem management.

Environmental economist James Bentley, from National Australia Bank, said robust natural capital accounts have a role to play in supporting farmers to market their products, secure finance and attract investment.

He said it was imperative farmers collecting environmental data layer in on-farm economic elements so that their data might underpin investment decisions into Australian agriculture.

“The point of using the frame natural capital is not to narrow the way in which we appreciate nature but to amplify the imperative to measure, manage and invest in natural systems with the same due diligence and rigour we apply other forms of capital, be it financial, human or built,” he said.

To demonstrate the the way in which commercial farming enterprises operate within complex ecosystems, Mr Bentley talked about birds.

Each year, 1.9 per cent of apples in Australia are destroyed each by birds.

Yet, if you scare insectivorous birds from orchards, insects ruin 12.8pc of apples. The net benefits of birds outweigh the costs.

The lesson from that simple case study, which could be replicated time and again across all agriculture industries, is that failure to understand and appreciate the nuances of ecosystems can lead to perverse outcomes.

Mr Bentley said the opportunity costs of foregone ecosystem services globally resulting from soil degradation alone has been estimated to be up to $10 trillion per annum.

World economic forum surveys of the top risks to the global economy for the past decade have consistently had factors linked to ecosystem degradation, such as biodiversity loss, water supply crisis and failure to adapt to climate change, in the top ten.

“From a banking perspective, this raises the question if good management of natural capital, such as increased soil carbon, steady pH levels and pasture diversity, can lower the risk of an enterprise, shouldn’t we be valuing it,” Mr Bentley said.

NAB surveys of more than 5000 agribusiness customers show 85pc rate soil health, water scarcity and energy costs as key business risks while 70pc said protection of biodiversity and native vegetation was a key business priority.

Three quarters had recently made investments to address a sustainable business risk.

Mr Bentley also cited a 2015 study of more than 9000 agricultural property transactions in central Victoria which found properties over 1000 hectares with 20pc tree coverage attracted a 4pc premium over those with none.

Yet agricultural surveyors report the standard practice is to exclude non-productive treed areas from their assessments.

CSIRO work looking at links between natural capital and financial performance have shown there is so much inherent noise in a grazing system that if you are just looking financials, the systems are indistinguishable in the short term, Mr Bentley said.

“In fact, you might inadvertently lend more money to a system that is slowly being overstocked,” he said.

“However, over time the risks of degrading natural capital through overgrazing are stark and the costs to return degraded land to good condition are substantial.

“What this means is that if you want to manage financial risk in these systems, financial accounts are not sufficient.”

NAB’s natural value strategy is comprehensive.

It includes training bankers to understand the opportunities and risks so that natural capital investments can be integrated into existing business processes, developing products and services to make it easier for customers to address natural capital risk and ongoing research into the links between natural capital management and financial performance.

Elevating natural capital to credit risk assessments is also in NAB’s sights.

“We hope to be in a better position to lend against the assets that underpin the resilience and productivity of farm businesses,” Mr Bentley said.

“And start to reward those who can demonstrate that because they have placed a focus on their natural capital they are lower risk.”

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