Assessing natural capital risks and dependencies in lending to Australian wheat farms
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Developing an evidence base for assessing natural
capital risks and dependencies in lending to Australian
wheat farms
Abstract:
Farmers are highly dependent on stocks of natural capital, and lenders are in turn exposed to
natural capital through their loans to farmers. However, the traditional process for assessing a
farmer’s credit risk relies primarily on historical financial data. Banks’ consideration of
environmental factors tends to be limited to major risks such as contaminated land liabilities,
and to large project and corporate finance, as opposed to the smaller loans typical of the
Australian agricultural sector. The relevant risks and dependencies for agriculture vary by sub-
sector and geography, and there is a lack of standardized methodologies and evidence to
support risk assessment. We provide an evidence base to support natural capital risk
assessment for a single sub-sector of Australian agriculture – wheat farming. We show that
such an assessment is possible, with a combination of quantitative and qualitative inputs, but
the complexity and interconnectedness of natural capital processes is a challenge, particularly
for soil health.
Key Words:
Natural capital; environmental risk; environmental credit risk assessment; responsible lending;
wheat farming; Australia
Acknowledgements:
This work was supported by the Australian Commonwealth Department of Infrastructure and
Rural Development under the Sense-T “Sensing Natural Capital” project. We thank the project’s
industry partners, National Australia Bank (NAB) and the Climate Disclosure Standards Board
(CDSB) for their support.
capital risks and dependencies in lending to Australian
wheat farms
Abstract:
Farmers are highly dependent on stocks of natural capital, and lenders are in turn exposed to
natural capital through their loans to farmers. However, the traditional process for assessing a
farmer’s credit risk relies primarily on historical financial data. Banks’ consideration of
environmental factors tends to be limited to major risks such as contaminated land liabilities,
and to large project and corporate finance, as opposed to the smaller loans typical of the
Australian agricultural sector. The relevant risks and dependencies for agriculture vary by sub-
sector and geography, and there is a lack of standardized methodologies and evidence to
support risk assessment. We provide an evidence base to support natural capital risk
assessment for a single sub-sector of Australian agriculture – wheat farming. We show that
such an assessment is possible, with a combination of quantitative and qualitative inputs, but
the complexity and interconnectedness of natural capital processes is a challenge, particularly
for soil health.
Key Words:
Natural capital; environmental risk; environmental credit risk assessment; responsible lending;
wheat farming; Australia
Acknowledgements:
This work was supported by the Australian Commonwealth Department of Infrastructure and
Rural Development under the Sense-T “Sensing Natural Capital” project. We thank the project’s
industry partners, National Australia Bank (NAB) and the Climate Disclosure Standards Board
(CDSB) for their support.
2
1 Introduction
Agriculture is a small but important part of the Australian economy, accounting for 7% (by
value) of total exports in 2014-15 (ABS 2016a), and contributing as much as 12% of Australia’s
GDP, when including the value of associated pre- and post-farm production activities (NFF
2012). Farmers own or manage 61% of Australia’s land (NFF 2012) and therefore play a key role
in managing Australia’s stocks of natural capital, or “those elements of nature which either
directly provide benefits or underpin human wellbeing” (Natural Capital Committee 2013, 11).
Farmers all over the world are highly dependent on environmental factors such as rainfall,
temperature and climate, as well as natural capital stocks such as energy, mineral and water
resources, productive soils and ecosystems. Australia’s aridity (70% of mainland Australia
receives less than 500mm of rain per year – Geoscience Australia 2016) and generally poor soils
means that Australian agriculture is particularly vulnerable to variability and extreme
conditions. For example, widespread drought in 2002-03 led to a 41% reduction in agricultural
income, reducing Australia’s GDP by around 1% in that year (Lu and Hedley 2004).
99% of the 134,000 farm businesses operating in Australia in 2012 were family owned (NFF
2012), with on average 85% of business equity being held by the operator and close relatives or
business partners (ABARES 2016). The remaining 15% takes the form of debt, including short-
term unsecured debt such as credit cards; equipment supplier finance; and formal secured
loans, usually from one of the small number of Australian banks with extensive rural networks.
Through these loans, which are typically used either to fund land or machinery purchases, or to
provide working capital to bridge temporary income-cost mismatches, these banks are exposed
to a range of natural capital and environmental risks and dependencies. The traditional process
for assessing a farmer’s credit risk, however, relies primary on historical financial data, which
only indirectly and incompletely reflects these risks and dependencies.
In 2012, around 40 international financial institutions signed the Natural Capital Declaration
(NCD), committing to integrate natural capital considerations into their financial products, and
their accounting and reporting frameworks, by 2020.1 A pilot study (Cojoianu et al. 2015) found
that 42% of financial institutions claim to be already integrating natural capital risks in credit
risk assessments. However, the evidence to date suggests that this is limited to large (over
US$10 million) project finance deals and even larger corporate loans, and is virtually non-
existent for smaller secured loans typical of the Australian agricultural sector. A key challenge
for agriculture is the fact that the relevant risks and dependencies vary by sub-sector and in
some cases by individual crop or animal production system, as well as by geography. Other
difficulties include lack of awareness around natural capital issues, the vagueness of regulatory
1 http://www.naturalcapitalfinancealliance.org/about-the-natural-capital-declaration/ (accessed 26 October 2016).
1 Introduction
Agriculture is a small but important part of the Australian economy, accounting for 7% (by
value) of total exports in 2014-15 (ABS 2016a), and contributing as much as 12% of Australia’s
GDP, when including the value of associated pre- and post-farm production activities (NFF
2012). Farmers own or manage 61% of Australia’s land (NFF 2012) and therefore play a key role
in managing Australia’s stocks of natural capital, or “those elements of nature which either
directly provide benefits or underpin human wellbeing” (Natural Capital Committee 2013, 11).
Farmers all over the world are highly dependent on environmental factors such as rainfall,
temperature and climate, as well as natural capital stocks such as energy, mineral and water
resources, productive soils and ecosystems. Australia’s aridity (70% of mainland Australia
receives less than 500mm of rain per year – Geoscience Australia 2016) and generally poor soils
means that Australian agriculture is particularly vulnerable to variability and extreme
conditions. For example, widespread drought in 2002-03 led to a 41% reduction in agricultural
income, reducing Australia’s GDP by around 1% in that year (Lu and Hedley 2004).
99% of the 134,000 farm businesses operating in Australia in 2012 were family owned (NFF
2012), with on average 85% of business equity being held by the operator and close relatives or
business partners (ABARES 2016). The remaining 15% takes the form of debt, including short-
term unsecured debt such as credit cards; equipment supplier finance; and formal secured
loans, usually from one of the small number of Australian banks with extensive rural networks.
Through these loans, which are typically used either to fund land or machinery purchases, or to
provide working capital to bridge temporary income-cost mismatches, these banks are exposed
to a range of natural capital and environmental risks and dependencies. The traditional process
for assessing a farmer’s credit risk, however, relies primary on historical financial data, which
only indirectly and incompletely reflects these risks and dependencies.
In 2012, around 40 international financial institutions signed the Natural Capital Declaration
(NCD), committing to integrate natural capital considerations into their financial products, and
their accounting and reporting frameworks, by 2020.1 A pilot study (Cojoianu et al. 2015) found
that 42% of financial institutions claim to be already integrating natural capital risks in credit
risk assessments. However, the evidence to date suggests that this is limited to large (over
US$10 million) project finance deals and even larger corporate loans, and is virtually non-
existent for smaller secured loans typical of the Australian agricultural sector. A key challenge
for agriculture is the fact that the relevant risks and dependencies vary by sub-sector and in
some cases by individual crop or animal production system, as well as by geography. Other
difficulties include lack of awareness around natural capital issues, the vagueness of regulatory
1 http://www.naturalcapitalfinancealliance.org/about-the-natural-capital-declaration/ (accessed 26 October 2016).
3
requirements around natural capital issues, the challenge of relating long-term issues to short-
term materiality, and most importantly, lack of standardized industry- and geography-specific
methodologies and robust information for the quantification of natural capital risks (Cojoianu
et al. 2015). Our paper therefore aims to help address these challenges by developing an
evidence base to support natural capital credit risk assessment for a single sub-sector of
Australian agriculture – wheat farming, which contributed over A$7 billion or 13% of Australia’s
total value of agricultural production in 2015, second only to cattle grazing (ABS 2016b).
The paper is structured as follows. In section 2, we review the literature on environmental
credit risk assessment. Section 3 outlines our methodology for identifying key environmental
and natural capital risks and dependencies, and section 4 sets out our findings for the
Australian wheat sector, explaining why each risk is material, how it can be mitigated, and how
a bank could assess and monitor the risk. Finally, section 5 discusses the overall findings that
emerged from this analysis.
2 Environmental credit risk assessment
The literature on sustainability in the banking sector can be divided into two broad groups
(Zeidan et al., 2015): one dealing with external practices (which include banks’ communications
with shareholders and stakeholders around sustainability issues) and the other with internal
practices (which include how sustainability issues are incorporated into risk management
models and lending or investment decisions). Our paper contributes to the latter.
Within this strand of the literature there are two main areas of focus. The first considers how
environmental performance influences the perceived credit risk and cost of debt of companies,
with most studies finding that firms with better sustainability performance ratings experience a
lower cost of debt, and vice versa (Bauer & Hann 2010; Nandy & Lodh 2012). Most studies focus
on public companies in developed countries (although Weber, Hoque, and Ayub Islam (2015)
provide evidence linking sustainability criteria to loan default probability in a developing
country, while noting that sustainability criteria are not yet being used by lenders there), and
on major risks such as hazardous chemicals, substantial emissions and climate change
(Schneider 2011; Chava 2014). Most papers also focus on large-scale corporate loans and bond
finance, rather than smaller loans to privately held companies and SMEs, where data on
sustainability as well as financial issues is much scarcer and opaque (Berger and Udell 1998).
There is, to the best of our knowledge, no peer-reviewed research demonstrating a clear link
between environmental performance at this smaller scale, and the availability, terms or cost of
bank loans. Nevertheless, from our discussions with Australian banking officials it appears that
at least some banks are operating on the assumption that there is such a link:
requirements around natural capital issues, the challenge of relating long-term issues to short-
term materiality, and most importantly, lack of standardized industry- and geography-specific
methodologies and robust information for the quantification of natural capital risks (Cojoianu
et al. 2015). Our paper therefore aims to help address these challenges by developing an
evidence base to support natural capital credit risk assessment for a single sub-sector of
Australian agriculture – wheat farming, which contributed over A$7 billion or 13% of Australia’s
total value of agricultural production in 2015, second only to cattle grazing (ABS 2016b).
The paper is structured as follows. In section 2, we review the literature on environmental
credit risk assessment. Section 3 outlines our methodology for identifying key environmental
and natural capital risks and dependencies, and section 4 sets out our findings for the
Australian wheat sector, explaining why each risk is material, how it can be mitigated, and how
a bank could assess and monitor the risk. Finally, section 5 discusses the overall findings that
emerged from this analysis.
2 Environmental credit risk assessment
The literature on sustainability in the banking sector can be divided into two broad groups
(Zeidan et al., 2015): one dealing with external practices (which include banks’ communications
with shareholders and stakeholders around sustainability issues) and the other with internal
practices (which include how sustainability issues are incorporated into risk management
models and lending or investment decisions). Our paper contributes to the latter.
Within this strand of the literature there are two main areas of focus. The first considers how
environmental performance influences the perceived credit risk and cost of debt of companies,
with most studies finding that firms with better sustainability performance ratings experience a
lower cost of debt, and vice versa (Bauer & Hann 2010; Nandy & Lodh 2012). Most studies focus
on public companies in developed countries (although Weber, Hoque, and Ayub Islam (2015)
provide evidence linking sustainability criteria to loan default probability in a developing
country, while noting that sustainability criteria are not yet being used by lenders there), and
on major risks such as hazardous chemicals, substantial emissions and climate change
(Schneider 2011; Chava 2014). Most papers also focus on large-scale corporate loans and bond
finance, rather than smaller loans to privately held companies and SMEs, where data on
sustainability as well as financial issues is much scarcer and opaque (Berger and Udell 1998).
There is, to the best of our knowledge, no peer-reviewed research demonstrating a clear link
between environmental performance at this smaller scale, and the availability, terms or cost of
bank loans. Nevertheless, from our discussions with Australian banking officials it appears that
at least some banks are operating on the assumption that there is such a link:
4
“I guess, you know, there’s an assumption that we’ve made, that seems to be validated
by numerous case studies, that our more productive agribusiness customers are those
who manage their environmental resources better, and they seem to be one and the
same thing.” (Environmental finance professional, August 6, 2015).
The second area concerns the extent to which banks incorporate sustainability criteria in their
lending decision-making. It is generally agreed that banks have been incorporating some
environmental risks into their credit assessment processes, since the early 1990s (Weber,
Fenchel, & Scholz 2008). This was originally driven by legislation, such as the Comprehensive
Environmental Response, Compensation and Liability Act 1980 in the United States, which
imposed remediation liabilities on the owners of contaminated sites. As a result, early
environmental credit risk assessments tended to focus only on such specific liabilities, rather
than providing a comprehensive framework for the assessment of all potentially material
environmental (and social) risks, dependencies and opportunities. In the mid-2000s, Weber,
Fenchel, & Scholz (2008) identified only four classes of environmental risk being considered by
banks: contamination liabilities; impacts of mandatory environmental regulations; changes in
buyer/consumer attitudes; and reputational risk due to being associated with projects seen as
environmentally or socially damaging by stakeholders. Furthermore, they found that most
attention was given to environmental issues in the rating (or risk identification) phase of the
credit management process, least in the costing (or risk evaluation) phase and an intermediate
level in the monitoring (or risk controlling) phases.
A recent survey of 36 financial institutions and 26 financial research providers undertaken for
the NCD (Cojoianu et al. 2015) found that although 42% of respondents claim to consider
natural capital risks in their credit risk assessment, there is no evidence that this is done
systematically. Lenders cited numerous difficulties in assessing natural capital risks including
the lack of suitable contextual methodologies, data, budgets and capacity. Currently, only
project finance transactions and related services can be benchmarked to an international
standard of environmental and social due diligence: the Equator Principles, which are applied
only to projects over US$10 million, or US$100 million for corporate loans.
The aforementioned body of research on sustainability performance and perceived credit risk
of borrowers goes some way toward explaining why banks might seek to incorporate
environmental risks and dependencies in their credit assessment processes. As Weber, Hoque,
and Ayub Islam (2015, 3) observe, “The rationale for using sustainability indicators for
predicting credit risks is based on the idea that good sustainability performance mitigates risks
arising through environmental and social impacts as well as through and stakeholder pressure
and regulation.” However, while high-level sustainability indicators may be available for larger
companies, usually based on research providers’ analysis of annual and sustainability reports,
“I guess, you know, there’s an assumption that we’ve made, that seems to be validated
by numerous case studies, that our more productive agribusiness customers are those
who manage their environmental resources better, and they seem to be one and the
same thing.” (Environmental finance professional, August 6, 2015).
The second area concerns the extent to which banks incorporate sustainability criteria in their
lending decision-making. It is generally agreed that banks have been incorporating some
environmental risks into their credit assessment processes, since the early 1990s (Weber,
Fenchel, & Scholz 2008). This was originally driven by legislation, such as the Comprehensive
Environmental Response, Compensation and Liability Act 1980 in the United States, which
imposed remediation liabilities on the owners of contaminated sites. As a result, early
environmental credit risk assessments tended to focus only on such specific liabilities, rather
than providing a comprehensive framework for the assessment of all potentially material
environmental (and social) risks, dependencies and opportunities. In the mid-2000s, Weber,
Fenchel, & Scholz (2008) identified only four classes of environmental risk being considered by
banks: contamination liabilities; impacts of mandatory environmental regulations; changes in
buyer/consumer attitudes; and reputational risk due to being associated with projects seen as
environmentally or socially damaging by stakeholders. Furthermore, they found that most
attention was given to environmental issues in the rating (or risk identification) phase of the
credit management process, least in the costing (or risk evaluation) phase and an intermediate
level in the monitoring (or risk controlling) phases.
A recent survey of 36 financial institutions and 26 financial research providers undertaken for
the NCD (Cojoianu et al. 2015) found that although 42% of respondents claim to consider
natural capital risks in their credit risk assessment, there is no evidence that this is done
systematically. Lenders cited numerous difficulties in assessing natural capital risks including
the lack of suitable contextual methodologies, data, budgets and capacity. Currently, only
project finance transactions and related services can be benchmarked to an international
standard of environmental and social due diligence: the Equator Principles, which are applied
only to projects over US$10 million, or US$100 million for corporate loans.
The aforementioned body of research on sustainability performance and perceived credit risk
of borrowers goes some way toward explaining why banks might seek to incorporate
environmental risks and dependencies in their credit assessment processes. As Weber, Hoque,
and Ayub Islam (2015, 3) observe, “The rationale for using sustainability indicators for
predicting credit risks is based on the idea that good sustainability performance mitigates risks
arising through environmental and social impacts as well as through and stakeholder pressure
and regulation.” However, while high-level sustainability indicators may be available for larger
companies, usually based on research providers’ analysis of annual and sustainability reports,
5
they are typically not applicable to smaller-scale loans such as those typical in the Australian
agricultural sector.
Very little research has been published on the incorporation of environmental risks and
dependencies into credit assessment for smaller-scale loans in any sector, or for any scale of
loans in agriculture in particular. A search across all academic databases subscribed to by the
University of Oxford using the keywords ‘environmental’, ‘credit’, ‘risk’ and ‘agriculture’ yielded
only 80 results, only a few of which were found to be relevant. For example, Georgopoulou et
al. (2015) develop a framework to assess the risk of climate change to lending across several
Greek industries, including wheat farming, using the loan portfolio of a Greek bank as a case
study. The authors use climate and agronomic modelling to make the case for materiality of
climate change to the agriculture sector, and conclude that the physical risks from climate
change to Greek crop farms are between 7.4-12.4% of their annual turnover. However, they do
not provide an evidence base for the assessment of more granular risk factors (e.g. rainfall
availability), but rather rely on a generic crop yield simulation model. The emphasis is on
calculation of portfolio-level exposure to systemic risks, as opposed to individual loan
assessment. Similarly, Do et al. (2016) find evidence that banks are considering drought risk at a
systemic level, increasing loan interest rates to large agricultural enterprises by up to 6 basis
points for every step increase in regional drought level in the 12 months prior to loan
origination. Zeidan et al. (2015) propose a sustainability credit score system for the sugar
industry in Brazil, based on six dimensions: economic growth, environmental protection, social
progress, socio-economic development, eco-efficiency and socio-environmental development.
Whilst taking a higher-level sustainability focus, this study is the most complementary to our
own in terms providing a basis for the evaluation of such risks for a specific sector and country.
In summary, there is an almost complete absence in the literature of detailed assessments of
how environmental and natural capital risks can be identified and included in the credit risk
assessment process for smaller-scale (e.g. US$0.5-2 million) bank loans. This is true across
industries, and for agriculture in particular. Our paper complements the top-down approach
taken by Zeidan et al. (2015) by developing a bottom-up, robust evidence base on why and how
different natural capital risks and dependencies are likely to affect the financial performance of
wheat farms in Australia, how these risks can be managed, and how the resultant managed risk
can be assessed by a lender.
3 Methodology
We followed a multi-stage approach to identifying, prioritizing and researching the natural
capital risks and dependencies applicable to Australian wheat farm lending, from a lender’s
perspective. First, we searched the publicly available environmental risk methodologies of 66
financial research providers and consultants identified by Cojoianu et al. (2015) for
they are typically not applicable to smaller-scale loans such as those typical in the Australian
agricultural sector.
Very little research has been published on the incorporation of environmental risks and
dependencies into credit assessment for smaller-scale loans in any sector, or for any scale of
loans in agriculture in particular. A search across all academic databases subscribed to by the
University of Oxford using the keywords ‘environmental’, ‘credit’, ‘risk’ and ‘agriculture’ yielded
only 80 results, only a few of which were found to be relevant. For example, Georgopoulou et
al. (2015) develop a framework to assess the risk of climate change to lending across several
Greek industries, including wheat farming, using the loan portfolio of a Greek bank as a case
study. The authors use climate and agronomic modelling to make the case for materiality of
climate change to the agriculture sector, and conclude that the physical risks from climate
change to Greek crop farms are between 7.4-12.4% of their annual turnover. However, they do
not provide an evidence base for the assessment of more granular risk factors (e.g. rainfall
availability), but rather rely on a generic crop yield simulation model. The emphasis is on
calculation of portfolio-level exposure to systemic risks, as opposed to individual loan
assessment. Similarly, Do et al. (2016) find evidence that banks are considering drought risk at a
systemic level, increasing loan interest rates to large agricultural enterprises by up to 6 basis
points for every step increase in regional drought level in the 12 months prior to loan
origination. Zeidan et al. (2015) propose a sustainability credit score system for the sugar
industry in Brazil, based on six dimensions: economic growth, environmental protection, social
progress, socio-economic development, eco-efficiency and socio-environmental development.
Whilst taking a higher-level sustainability focus, this study is the most complementary to our
own in terms providing a basis for the evaluation of such risks for a specific sector and country.
In summary, there is an almost complete absence in the literature of detailed assessments of
how environmental and natural capital risks can be identified and included in the credit risk
assessment process for smaller-scale (e.g. US$0.5-2 million) bank loans. This is true across
industries, and for agriculture in particular. Our paper complements the top-down approach
taken by Zeidan et al. (2015) by developing a bottom-up, robust evidence base on why and how
different natural capital risks and dependencies are likely to affect the financial performance of
wheat farms in Australia, how these risks can be managed, and how the resultant managed risk
can be assessed by a lender.
3 Methodology
We followed a multi-stage approach to identifying, prioritizing and researching the natural
capital risks and dependencies applicable to Australian wheat farm lending, from a lender’s
perspective. First, we searched the publicly available environmental risk methodologies of 66
financial research providers and consultants identified by Cojoianu et al. (2015) for
6
environmental risk factors specifically relevant to the agricultural sector. As we found that
coverage of agriculture was limited to just nine research providers, we also conducted a desk
review of 34 publications from financial institutions related to environmental risks, published
between 2006 and 2016, to identify high level environmental risk factors which were
considered to be material across a broad range of industries. Those most applicable to
agriculture are listed in Table 1 below.
The next step was to determine which of these risks were of most importance for wheat
farming, in the Australian context in particular. To do this we triangulated evidence from three
different sources: a review of 39 relevant academic papers shortlisted from a set of 974 papers
containing the keywords ‘wheat’, ‘Australia’ and ‘yield’ in the Scopus database; a review of
online publications from Australian industry-specific bodies (such as the Grains Research and
Development Corporation, GRDC) and relevant government agencies; and a set of four
interviews with Australian agribusiness professionals, credit managers and environmental
finance professionals. Typically, industry body publications proved the most useful in
demonstrating the materiality of specific environmental risks to the wheat industry, given their
focus and access to information specific to the Australian context.
A risk was considered material if it was clearly capable of being a significant determinant of
either yields, prices or costs, either in the short- or long-term. It was not practicable to set
quantitative thresholds for significance, but where possible we have provided quantitative
evidence in support of our judgment. We consider historical average conditions to be the
baseline: a risk is therefore only significant if it results in a deviation (in a negative direction)
from this baseline, either in the short- or long-term. It should be noted that risk is the product
of the probability of occurrence and the magnitude of impact, and it is therefore appropriate to
include some factors which are low impact but high probability, and vice versa. In addition,
some factors have been included on the basis of externalities which are currently not fully
priced, but which may become more appropriately priced in the medium to long term.
Finally, to keep this paper concise, we excluded weather, climate, energy and air emissions
risks, as these are already relatively well understood. The results of these steps are summarized
in Table 1 below. Factors relevant to wheat farming are highlighted in gray, with light gray
indicating the factors that are considered material, but not included in the following discussion.
Table 1: Agriculture – Environmental and Natural Capital Risk Factors
Thematic Area Risk Factor Sub-Risk Factor
Water
Water Availability Growing Season Average Rainfall (Lower Quantity or Increased Variability
Excessive Rainfall
Water Use Efficiency Crop Water Use Efficiency
Pasture Water Use Efficiency
environmental risk factors specifically relevant to the agricultural sector. As we found that
coverage of agriculture was limited to just nine research providers, we also conducted a desk
review of 34 publications from financial institutions related to environmental risks, published
between 2006 and 2016, to identify high level environmental risk factors which were
considered to be material across a broad range of industries. Those most applicable to
agriculture are listed in Table 1 below.
The next step was to determine which of these risks were of most importance for wheat
farming, in the Australian context in particular. To do this we triangulated evidence from three
different sources: a review of 39 relevant academic papers shortlisted from a set of 974 papers
containing the keywords ‘wheat’, ‘Australia’ and ‘yield’ in the Scopus database; a review of
online publications from Australian industry-specific bodies (such as the Grains Research and
Development Corporation, GRDC) and relevant government agencies; and a set of four
interviews with Australian agribusiness professionals, credit managers and environmental
finance professionals. Typically, industry body publications proved the most useful in
demonstrating the materiality of specific environmental risks to the wheat industry, given their
focus and access to information specific to the Australian context.
A risk was considered material if it was clearly capable of being a significant determinant of
either yields, prices or costs, either in the short- or long-term. It was not practicable to set
quantitative thresholds for significance, but where possible we have provided quantitative
evidence in support of our judgment. We consider historical average conditions to be the
baseline: a risk is therefore only significant if it results in a deviation (in a negative direction)
from this baseline, either in the short- or long-term. It should be noted that risk is the product
of the probability of occurrence and the magnitude of impact, and it is therefore appropriate to
include some factors which are low impact but high probability, and vice versa. In addition,
some factors have been included on the basis of externalities which are currently not fully
priced, but which may become more appropriately priced in the medium to long term.
Finally, to keep this paper concise, we excluded weather, climate, energy and air emissions
risks, as these are already relatively well understood. The results of these steps are summarized
in Table 1 below. Factors relevant to wheat farming are highlighted in gray, with light gray
indicating the factors that are considered material, but not included in the following discussion.
Table 1: Agriculture – Environmental and Natural Capital Risk Factors
Thematic Area Risk Factor Sub-Risk Factor
Water
Water Availability Growing Season Average Rainfall (Lower Quantity or Increased Variability
Excessive Rainfall
Water Use Efficiency Crop Water Use Efficiency
Pasture Water Use Efficiency
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