(Bloomberg) -- Banks will eventually start to impose higher interest rates on farmers and rural businesses that aren’t achieving satisfactory greenhouse gas reductions, a senior Rabobank executive predicts.

Banks including Rabobank already offer sustainability linked loans that require clients to agree to certain targets, which may include emissions, said Lara Yocarini, global head of rural and food & agri at the Utrecht-based lender.

“If a client has a sustainability linked loan with us and they actually meet those targets, they do indeed get a discount on their lending rate,” Yocarini said in an interview Thursday during a visit to New Zealand. 

For other customers, the current approach is to educate and work with them to achieve emissions reductions, but ultimately, if they don’t, they are likely to end up paying more, she said.

Agriculture is among the largest sources of greenhouse gases that lead to global warming, with nitrogen from fertilizer and methane from livestock coming under scrutiny from climate activists who say there are too many animals. In New Zealand, nearly half of all emissions come from farming.

Rabobank has a commitment to get to net zero by 2050, with interim targets set for 2030. Reducing its scope-3 emissions, which are those of its clients, will be a key driver in achieving those goals.

“As a bank, we need to hold capital depending on the risk that our clients represent,” Yocarini said. “Over time, as we get closer to that 2030 deadline, obviously clients who are unable or unwilling to transition and improve their carbon footprint will become for us as a bank a higher risk. And so just by virtue of that higher risk, probably the pricing will adjust.”

New Zealand’s Fonterra Cooperative Group, the world’s biggest dairy exporter, last month introduced a greenhouse gas emissions target for its farmers, saying its biggest customers like Nestle SA and Mars Inc. want their suppliers to be reducing their carbon footprint. Still, at this stage there is no proposal to pay more for milk from farms that achieve the goals or less to those that don’t. 

“What Fonterra is doing is absolutely in line with what we see most of the large dairy companies doing,” said Yocarini. “If you look at Danone, if you look at Arla, if you look at Friesland Campina, they’re all doing exactly the same things.”

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In the Netherlands, the government is seeking to halve nitrogen emissions and has offered to buy out some farmers. Rabobank has estimated that could mean 30% fewer cows within 15 years.

Yocarini is optimistic that with the right tools, most farmers will be able to limit greenhouse gas emissions without having to drastically cut herd sizes or leave the industry. The dairy industry is quite proactive globally in engaging with farmers to develop and implement tools to achieve emissions reductions, she said. 

That includes use of genetics, deploying different feeds and animal management, as well as building up carbon credits by planting trees.

In New Zealand, Rabobank partners with Fonterra, other local food producers and the government in AgriZeroNZ, which is working to develop techniques that will help reduce emissions.

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While farmers have been battling rising costs, high interest rates and volatile commodity prices, Yocarini anticipates some of those pressures may ease in 2024. But she also has an eye on the weather.

“El Nino is obviously a big one,” she said. “In Australia and New Zealand everyone’s sort of expecting a drought to start kicking in. In South America, especially Chile and Peru, they’re worried about having torrential rains early in the new year because that’s how El Nino tends to affect them, and that would really impact their harvest.”

Yocarini, who is also a director of Rabobank New Zealand, was visiting the country to speak at the bank’s Global Farmers Master Class, a program for 28 farmers from 12 different countries that aims to educate and stimulate thinking on the industry’s challenges and how to address global food security. 

She said the event proved to her that farming is a crucial industry that can take the steps necessary to achieve its climate ambitions.

“There is a growing world population that needs to be fed,” she said. “There’s still a huge amount of progress that we can make through technology, through innovation, through more sustainable practices.”

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