BANKS may soon start paying more attention to the environmental sustainability of the farming enterprises that they lend to.

Under a new framework developed at the University of Edinburgh Business School, a coalition of over 40 international financial institutions aims to make 'natural capital' a factor in lending decisions.

‘Natural capital’ is a term for the natural resources and ecosystems that provide flows of environmental goods and services that underpin the global economy. The new framework, developed by Dr Francisco Ascui, takes into account factors such as water availability, use and quality; soil health; biodiversity; energy use and greenhouse gas emissions, allowing banks to identify and increase lending to more sustainably run farms.

At present, banks still lend to farmers almost solely based on their most recent profit and loss accounts, not taking natural capital into account in their credit risk assessment – a policy that the Natural Capital Finance Alliance described as short-sighted, as a farm’s financial performance might be improved over the short-term in an unsustainable way, for example by over-application of fertiliser, boosting yields but causing a build-up of acidity in the soil. In the longer-term, this type of activity will negatively affect the farmer’s financial performance, and therefore their ability to repay a loan.

Speaking at the launch of the initiative, Dr Ascui said: “The agriculture sector is at the front line in terms of both its impacts and dependencies on the environment. Farmers are key custodians of our soil, water and biodiversity and depend on these resources for their livelihood, so lenders should recognise and reward more sustainable farming practices.

“This new approach to natural capital credit risk assessment is only a first step – the challenge will be in implementing it. This is a journey that we have to start, if we’re going to have any hope of achieving truly sustainable agriculture.”