A big step forward in changing business models
Coffee is a fussy crop. Coffee bushes like to grow halfway up a mountain, just high enough to stay cool. That means that, as global temperatures have shifted upwards over the past 30 years, so have the coffee farms of Colombia, in the foothills of the Andes, where the best coffee-growing altitude is now about 200 feet higher than it was a generation ago.
Where does that leave the agribusiness firms that work with farmers to supply the world with coffee? Realising they need to work in a smarter way to understand the impact of climate on their work, says Craig Davies, head of climate resilience investments at the EBRD.
He’s one of the movers behind an innovative climate corporate management engagement with one of the world’s biggest agribusiness groups, Louis Dreyfus Company (LDC).
“The coffee’s said, ‘I want to be higher where it’s cooler’, and they’ve found that the existing coffee farms at the lower end of the mountain have become unproductive and they’re having to establish new places further up the mountain.
“And that’s a massive risk, because of all the established networks and their suppliers, the logistics, the transport routes … they have to reconfigure all of that because the new climate is literally making coffee grow further up the mountain.”
It was observing this type of natural change on the ground that led LDC to work jointly with EBRD and to embark on an adventurous new way of measuring and managing climate issues.
This dovetailed neatly with the EBRD’s expertise, as a leading green economy bank working across three continents, with a reputation for innovation and 2019 investments in green financing that made up a hefty 46 percent of its total lending.
The result? As part of a US$ 100 million financing facility for Louis Dreyfus Company , for agribusiness investment across eight countries where the EBRD works, an agreement with LDC in January to adopt an enhanced climate corporate governance approach.
This is in line with the guidelines of the international Task Force on Climate-related Financial Disclosures (TCFD), which asks companies to volunteer information to make stakeholders aware of climate-related financial risk – an approach seen as the next evolution of corporate thinking about climate action.
For companies that already routinely upgrade the technologies they use to minimise emissions, the next step is to start looking more closely at the broader behaviours that need changing – asking many more questions about climate risk management, so more information is gathered and more intelligent decisions can be made.
So a key part of the LDC-EBRD cooperation is that it will include the development of new tools for climate-related risk management and climate scenario stress testing of grain production in Ukraine and cotton production in Turkey.
These two countries and agricultural value chains – which in LDC’s case incorporate hundreds or even thousands of farmers and intermediaries, providing a significant demonstration effect - were chosen from within the EBRD regions of central and eastern Europe, central Asia and northern Africa for the specific challenges they represent, says Davies.
(Later, once the new tools for risk management are developed, the expectation is that they can also be usefully applied elsewhere in the LDC world – maybe even in Colombia’s coffee farms).
“What we will do with them is help them improve the way they use climate-related information in their decision-making – what are the risks and opportunities associated with climate change in those two areas,” Davies says.
“We think the cotton value chain is an interesting test case for physical climate risks, especially water stress, because cotton is a thirsty crop that uses a lot of water and Turkey is a country with less and less water.
“And we picked grain in Ukraine because we think it’s likely to be interesting from the point of view of risks associated with decarbonisation. Grain production is to some degree carbon-intensive – fertiliser is used, which is made from natural gases and emissions are involved in its production, and then you’ve got all the logistics and trucks – and Ukraine is a carbon-intensive country, much of whose electricity largely comes from burning coal.”
How to stress-test these and other value chains to see how they respond to different future climate scenarios is a hot topic – and a very new one - in the business world.
“Most companies don’t know how to do it. It’s a very new thing. We’ll be looking at climate scenarios including what if the global economy really has to decarbonise very quickly because of climate change concerns, what if we start seeing worsening physical impacts of climate change, from droughts to heatwaves, and where are the vulnerabilities you need to start addressing now, in terms of where you source your raw materials from, how you use energy, how you use water.”
In practice, what it will look like is “boots on the ground”, adds Davies – deploying implementing teams of external consultants, working in Turkey and Ukraine, who will learn from close up the vulnerabilities of the specific value chains in detail, which farms the raw materials come from to where the climate risks come from.
Policy responses may range from diversifying value chains to encouraging farmers in them to close off vulnerabilities – say, by irrigating more effectively. Future options may include supply chain financing, where farmers in the chain may have access to finance for such investments.
“There are no silver-bullet perfect answers to the questions we’ll be asking – the point is to establish within your business a mechanism for asking this kind of question, and feeding it through to your organisation so you can make better decisions.
“If you have board-level accountability for your climate-related information, it’s a very powerful governance mechanism.”
Improving climate corporate governance is a theme that is becoming a major organising principle for the EBRD’s green work. Four years into its five-year Green Economy Transition (GET) approach, under which it pledged to raise green finance from 25 to 40 per cent of its total investments by the end of 2020 – a goal it looks set to meet comfortably – the Bank is set to raise its ambition further for the next five years. Climate corporate governance will play a big part, says Davies.
“This is the next evolution – how do we as a transition bank support and promote behavioural change in companies? How do we help them behave differently in relation to the climate change challenge? Of course we will continue to invest in green technologies. That’s really important. But we’ve got to realise that that is no longer enough: we’ve got to change business models too.”