I recently wrote that it won’t be premiums that scale sustainability and transparency in agrifood supply chains. It will be climate-related disclosure requirements that deliver meaningful change. The gut reaction to compliance as a driver for change is typically negative, especially for producers. It conjures up fears of extra costs and more red tape.
But, it doesn’t have to be all bad news. Here are 3 ways that climate and sustainability pressures can lead to new opportunities and innovations in supply chains that producers can benefit from.
Agrifood companies are increasingly being held accountable for the sustainability and climate impacts of their entire supply chains, not just their direct operations. This means that downstream players, such as manufacturers and brands, will need to work with and incentivize their supply sheds to achieve their commitments and targets.
One approach being used today is improved contracting terms, which can enable suppliers to make investments in new practices and technologies while mitigating market risk.
Danone, for example, has established long-term Cost Performance Model (CPM) contracts with dairy producers in the US, Europe, and Russia implementing regenerative practices. These contracts have an average term of three to five years and the price factors in production costs, providing producers with stable margins and greater visibility as they make long-term investments in changing on-farm practices. In 2020, Danone procured 43% of its milk in Europe and 55% of its milk in the US under these CPM contracts.
Just as manufacturers and brands are being held accountable for the emissions in their supply chains, financial institutions are also being held accountable for the climate impacts of their portfolios. As banks seek to mitigate the climate-related risks associated with their books, there is an opportunity to bring innovative financing products to market in support of these outcomes.
Commonwealth Bank, for example, issued Australia’s first agricultural sustainability linked-loan to a beef cattle business, Stockyard Group, in 2021. The structure of the three-year loan ties Stockyard’s financing costs to their performance across five metrics related to emissions reductions, animal welfare, and people well-being. This loan structure enables Stockyard to save on financing costs for demonstrated achievement of sustainability outcomes that are aligned with Commonwealth Bank’s interests.
It’s normal human behavior to weigh potential losses more significantly than potential gains, a phenomenon called loss aversion. This psychological quirk, combined with the fact that departing from the status quo can feel risky, presents a challenge for the adoption of new production practices and technologies that improve sustainability outcomes–even when there may be productivity or financial benefits in doing so.
Organizations who have a vested interest in seeing farmers adopt sustainable solutions, whether they be trading partners or new technology providers themselves, can look to embed risk management solutions with tools and products to support farmers to transition to new practices. For example, Sound Agriculture recently launched a pilot program offering growers an unlimited yield risk guarantee when using SOURCE, their flagship microbial soil application which seeks to mitigate nitrogen use. Embedded risk management tools and new insurance products offer a pathway to mitigate both real and perceived financial risk and accelerate uptake of sustainable practices on-farm.
Sustainability pressures are ratcheting up for stakeholders globally, including banks, consumer brands, primary producers, and more. And while compliance-led change has a bad rap, I think there’s plenty of reason for optimism here. As the examples above highlight, the shared responsibility for achieving sustainability outcomes means there is scope for innovation in how we unlock profitable, on-farm practice changes and share risk across the supply chain.
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Tenacious Ventures Management Pty Ltd (CAR 001275760), Tenacious Ventures Management Partnership, LP (CAR 001298484), Tenacious Ventures Fund II Management Partnership, LP (CAR 001298483), and Tenacious Ventures Fund II Staple Co Pty Ltd (CAR 001298487) are Corporate Authorised Representatives of Sandford Capital Pty Ltd (ABN 82 600 590 887), Australian Financial Services Licence No 461981, and are authorised to provide advisory and dealing in connection with investments to wholesale clients only.