Sustainable pathways for agriculture
In a recent project to foster sustainable practices in agriculture, SRK Consulting has been working with Bonsucro and other stakeholders to develop a practical way for financial institutions to better understand and incentivise their farming clients.
By Wouter Jordaan and Boudewijn Goossens
The Good Practice, Better Finance project also involves SA Canegrowers, Cotton South Africa, the Better Cotton Initiative, Alliance for Water Stewardship, WWF and Nedbank. SRK’s main partner in this initiative, Bonsucro, is the sustainability standards body for the global sugar industry, while Cotton South Africa is the local implementing partner for the Better Cotton Initiative.
The important aspect of this diverse, multi-stakeholder group is that it includes players who are integrally involved in developing and applying sustainability standards. Funding for the project was provided by the Swiss State Secretariat for Economic Affairs (SECO), channelled through the Innovation Fund of the global sustainability standards group ISEAL.
As the leading global sustainability platform and standard for sugarcane, Bonsucro works toward accelerating the sustainable production and uses of sugarcane. It convenes over 270 members from more than 50 countries to address critical challenges in the sugarcane sector, driving performance and impact through its system of sustainability standards.
Similarly, Cotton South Africa promotes the Better Cotton Standard locally, a standard which underpins almost a quarter of the world’s cotton production. Through the Better Cotton Initiative, over 2.4 million cotton farmers have been trained globally in sustainable farming practices and are licensed to grow Better Cotton. The focus is on equipping cotton farmers and workers to cope with climate change, threats to the environment, global pandemics and other sustainability challenges.
SRK brought its experience in the due diligence space to the project, in particular its expertise in environmental and social reviews and due diligence for financial institutions and other clients. Its mandate was to bring together the relevant sustainability standards – in this case those applying to sugar and cotton production – with the transactional needs of lenders and farmers. The result was a tool which can help to assess the environmental and social risks associated with agricultural projects in these segments.
Reducing risks of investment
The value of the commodity-specific standards is that they are thoroughly researched within their particular market segment, giving lenders much greater insight into the risks involved in the clients’ businesses. The standards are also certified by ISEAL, ensuring that they are rigorous and meet ISEAL’s Codes of Good Practice for Standard-Setting, Impacts and Assurance.
In the development of this sustainability tool, SRK data specialists designed a platform on which information could be captured and analysed. The tool includes a dashboard for farmers and lenders to visualise their sustainability performance and identify areas for improvement.
The critical position that financial institutions play in this equation is that they have a clear interest in reducing the risk of their investments, while also wanting to support their clients in achieving financial success.
Efforts towards sustainability support both these goals. It has been well demonstrated that farmers taking a proactive approach in applying sustainable farming practices are more resilient to a range of threats and are more likely to succeed into the future.
The lender is therefore in an ideal position to incentivise sustainable farming – through more attractive terms, for example – as well as to support farmers by facilitating technology transfer or other interventions.
External factors also represent a growing threat to farmers, including climate change impacts like more variable rainfall and more frequent droughts. With better data and science-based forecasts, farmers can plan better for the future. Recognising the value of such strategic interventions, such as less water-intensive irrigation methods, the lender may consider accommodating these needs in their transactions with farmers.
In developing the sustainability tool, SRK used the indicators imbedded in the standards to help evaluate farmers’ risks. A fundamental principle in these standards is legislation; farmers who do not comply with the laws applicable to them will be precluded from borrowing money from mainstream financial institutions. The tool provides a starting point for stakeholders to address non-compliance, as well as to identify and avoid reputational risks such as farmers conducting operations based on poor labour practice.
The real advantage of this sustainability tool is that it helps to bring the lender and the farmer closer together – as the lender can identify not only risks but also opportunities. By understanding the farmer’s business better, the space is created for the lender to become more proactively involved in the client’s sustainability journey.
At the root of the project is the expectation that farmers pursuing more sustainable practices should be able to secure a better deal from the financial sector – whether that is in terms of lower interest rates or other benefits.
Importantly, the ‘Good Practice, Better Finance’ initiative introduces some incentive for change – encouraging banks not just to recognise those farmers who achieve sustainable practices, but to encourage others toward that goal. By motivating farmers to become more sustainable, they are also likely to become more efficient; this means improved business viability and long-term lower risk.
Farmers use data better
Industry groups involved in the project were able to contribute data on industry performance and practice in different regions of South Africa. This allows for regional variations in the assessment of agricultural practice, depending on local condition such as climate, soil, and topography. Such considerations are built into the electronic questionnaires developed within the sustainability tool – which the lender can use to compare agriculture practices in a more realistic way.
The tool also helps farmers to make better use of their data. Farmers generally collect substantial amounts of information but are often not in a position to analyse it effectively and make full use of its value.
By converting this data into graphs and visualisations that tell a story, farmers can also gain considerable benefit from the tool. For instance, if yields have dropped for the year but volumes of water and fertiliser consumed have increased, this raises a red flag for investigation – which could lead to improved practices.
Traditionally, standards have provided a useful benchmark for large consumers of agricultural products to assess and demonstrate the sustainability of their supply chain. The Good Practice, Better Finance project takes standards a step further, to practically address the challenges facing the farmers themselves. The nature of the collaboration and methodology pursued in this project has also allowed for a broad ‘landscape’ view of the challenges which farmers face – a valuable innovation that could potentially be applied in other sectors, as well as other parts of Africa and the world.
Wouter Jordaan is partner and principal ESG scientist at SRK Consulting and Boudewijn Goossens is regional director at Bonsucro
From left to right: Boudewijn Goossens, regional director, Bonsucro; Lisa Barratt, Africa Operations Manager at Better Cotton Initiative and Wouter Jordaan, partner and principal ESG scientist, SRK Consulting. Image credit: SRK Consulting.
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