National Australia Bank, the country's biggest agribusiness lender, is changing its policies so that credit assessments put more weight on the sustainability of customers' business practices.
As banks face growing pressure over their role in responding to environmental problems, NAB said it would include "natural capital" in lending policies and was raising the issue with farmer customers.
Eventually, the change is likely to mean farmers judged to have better environmental practices could receive higher credit ratings from the bank.
Natural capital refers to the world's stock of environmental assets such as water, soil or forests.
There is a push for financial services firms to consider how they might be exposed to risks in these areas, which could be significant for the large banks, given their large exposure to farming.
In a move that is also aimed at lifting market share, NAB said it would incorporate natural capital into a range of bank policies over the coming years, and was raising the issue with customers through its bankers in the meantime.
General manager of agribusiness Khan Horne said that within three to five years the concept of natural capital was likely to feed into its credit assessments.
For example, borrowers who were managing their natural resources more sustainably might eventually receive a credit rating upgrade.
"I think it will eventually feed into credit scoring, pricing models," he said.
The move comes amid warnings about the economic risks of businesses ignoring "natural capital" in their decision-making.
The running down of Australia's natural capital assets was a "material risk" to the economy and businesses should treat it as they do other financial risks, a paper by NAB, KPMPG, the Melbourne Sustainable Society Institute and Flora and Fauna International said last year.
NAB is one of several big financiers, alongside Rabobank, Standard Chartered, and Italy's UniCredit, to endorse the Natural Capital Declaration, which acknowledges the risks.
The latest change is driven by competition as much as it is by environmental concerns.
Mr Horne, an experienced agribusiness banker, said there was a clear correlation between farmers' environmental performance and their profitability.
Those with better environmental management practices tended to have more reliable yields and lower input costs, he said.
A survey of 5000 of the bank's farming customers last year said almost three-quarters were changing their businesses in response to sustainability concerns such as water scarcity or soil health.
"We're making these investments because we know that farmers who effectively manage their natural capital assets, such as water, soil and energy resources, generally have a more robust and resilient business model," Mr Horne said.
The policy change would not change how the bank responded to customers affected by drought, he said.
Farming is a significant credit exposure for Australia's big banks, with NAB, ANZ, Commonwealth Bank and Westpac lending far more to the sector than they do to mining. NAB's exposure to farming was $38.1 billion at September, when its last financial year ended.Author: Clancy Yeates
Source: The Sydney Morning Herald