Cambridge Institute for Sustainability Leadership (CISL)
Land degradation, UK farmers and indicative financial risk - Nature-related financial risk use case
April 2022 – The University of Cambridge Institute for Sustainability Leadership (CISL) in collaboration with NatWest Group has published a use case about the indicative financial risk from farming degraded land.
Land degradation puts UK farmers at risk during extreme weather events.
In collaboration with CISL, NatWest Group quantified to what extent UK farmer profits were at risk if producing crops on degraded land.
Following an extreme weather event, financial losses for farmers begin once crop yield declines reach and exceed 27 per cent for two consecutive years.
Whilst a 27 per cent or greater crop yield decline is very unlikely for those farming healthier, more resilient soils, research indicates it is possible for those on degrading land.
The vulnerability of those farming degrading land points to the existence of unmeasured credit risk to banks that requires further investigation.
The analysis showcased the financial materiality of land degradation, underscoring the need for lenders to incorporate factors like soil health into risk assessments and lending decisions. It also highlighted the need to actively engage with companies in the agribusiness sector to guide them to tackle nature-related risks in their business strategies.
Dr. Nina Seega, Research Director, Centre for Sustainable Finance, CISL said:
“Use cases, such as that undertaken with NatWest Group, point to the risk to agricultural firms connected to nature loss and demonstrate that the data and tools are already available to factor nature into lending decisions. By assessing nature-related financial risks we move toward a financial system that accounts for nature and helps prevent catastrophic nature loss.”
James Close, Head of Climate Change, NatWest Group said:
“Use cases and collaboration such as this help enable us to address sectors with greater exposure to environmental sources of risk, such as agriculture. The investigation of impacts on and from differing farming types and operations highlights where the most prominent nature-related financial risks are present in a highly diverse sector. As we grow our understanding of these risks it allows us to help customers put in place adaptation and mitigation measures which can both reduce environmental damage and also improve social and economic outcomes.”
Citing this Use Case
Please refer to this report as: University of Cambridge Institute for Sustainability Leadership (CISL) and NatWest Group, 2022. Nature-related financial risk: use case. Land degradation, UK farmers and indicative financial risk.
Authors
The authors of the report were Francesca Pedri, Fiona Goulding and Kyle Worgan at NatWest Group, in close collaboration with Grant Rudgley at CISL. Any views expressed are that of the authors and not necessarily held by NatWest Group. Andrew Voysey, Dr Nina Seega and Annabel Ross provided additional input and guidance on behalf of CISL.
