Insights from Natixis

Authored by:

Karen Degouve

Head of Sustainable Business Development, ESR

Natacha Kovshova

Originator EMEA, Green & Sustainable Hub Natixis

Climate change and natural capital loss are among the most critical challenges facing our global society, and environmental science shows that urgent action is needed from all stakeholders to build a more sustainable world. At Natixis, we recognize that the financial sector has an important role to play in transforming the economy. We have pledged to align our banking activity with the objective of the Paris Agreement on climate (limiting temperature rise to well below 2°C, striving for 1,5°C, compared to the pre-industrial era), mobilized all our business lines to protect biodiversity, and are committed to helping our clients across sectors achieve the transition to low-carbon, climate-resilient models through product innovation.

To monitor the climate trajectory of our balance sheet and accelerate our sustainable finance offer to clients, we have developed a unique proprietary tool called the Green Weighting Factor (GWF). The tool includes (i) a comprehensive methodology to assess the environmental impact and climate transition risk of each financing facility, using a life-cycle approach and resulting in an environmental rating (on a 7-level color scale from brown to green), and (ii) an internal capital allocation mechanism that links the amount of internal capital allocated to each transaction with its level of positive or negative impact on climate change and other material environmental impacts.

Green Weighting Factor

By using a favorable or adverse adjustment to risk weighted assets, the GWF adapts the expected return of each transaction depending on the environmental impact of the object being financed (project, asset, commodity, corporate). It therefore encourages financing solutions with the most positive impact (“green” transactions) and penalizes negative impact (“brown” transactions). With the GWF, Natixis became the first bank to actively manage the climate impact of its balance sheet in such a granular and systematic way. The GWF rating methodology was finalized in 2019 for all sectors financed by Natixis, including Food and Agriculture, and subsequently implemented in the bank’s processes for all business lines.

Agriculture is intricately linked with significant sustainability issues facing the world today, as the global food system is responsible for approximately 26%1 of global greenhouse gas (GHG) emissions. And the need to feed the growing world population is getting more and more challenging as agriculture is at risk from rapid climate changes. Moreover, unsustainable agriculture practices and land use changes may further threaten biodiversity and local ecosystems. Finally, while almost a quarter of the world’s population work in and live thanks to agriculture, certain smallholders are exposed to human rights violations and face poor living standards.

Global agricultural merchants such as LDC benefit from a unique – central – position in the food and agriculture value chain, supplying food processors and having direct access to cooperatives or individual farmers. They procure agricultural commodities around the world, and their supply chains may have a direct impact on land use, biodiversity and human rights in certain regions. We therefore expect these leading merchants and processors of agricultural goods to leverage their critical role in the supply chain to promote sustainable agricultural practices that protect the environment and biodiversity, support local communities and enhance the living standards of smallholder farmers.

Under Natixis’ GWF methodology, the environmental impact of agriculture and food processing activities is assessed through a combination of various criteria along the food value chain: first, an evaluation of each product’s effective contribution to a sustainable food system, taking into account both nutritional constraints for a growing population as well as planet boundaries; then, a measure of both direct (from cattle ranching and use of fertilizers, for example) and indirect (from land use change) GHG emissions required for crop and livestock production, as well as water impacts (notably freshwater withdrawal for irrigation) and biodiversity losses (generated by the development of monocultures and associated land conversions, and/or high fertilizer inputs).

Since the GWF applies a life-cycle approach, upstream and downstream transportation of both agricultural commodities and transformed products are also taken into account, as well as certifications when applicable. In addition, when we apply GWF methodology to a client’s full activity (in particular for a general corporate purpose loan), we also include in the overall assessment the company’s disclosures, strategy to decarbonize and other environmental transition commitments, to the extent that such forward-looking elements are sustained by past performance and/or actual transition capital expenditure.

For Louis Dreyfus Company, this methodology results in an overall “light green” rating in 2020.

Over the past 50 years, Natixis has built up a strong and diversified relationship with LDC, banking the group in various geographies and supporting different business lines. In particular, we are proud to be one of the Bookrunning Mandated Lead Arrangers of LDC’s sustainability-linked Revolving Credit Facilities in EMEA, and a Sustainability Coordinator of the pre-export finance facility for LDC’s juice business in Brazil. Both facilities tie LDC’s financing costs to the improvement of its environmental indicators, allowing LDC to align its financial and sustainability performance.

Sustainability topics being key for our two institutions, we have developed a strong dialogue with LDC management on those subjects. Responsible sourcing and traceability in particular have been at the center of our discussions with LDC’s sustainability and finance teams over the last years. We are convinced that building transparent value chains is a fundamental step to tackle deforestation issues and biodiversity erosion in soy and palm supply chains. We thus follow with great interest LDC’s initiatives in this space, such as the company’s reporting on its soy sourcing profile, palm traceability reports, supplier mapping and risk assessments, and information on certified volumes. We would encourage LDC to further link those valuable initiatives to financing tools, embedding ambitious indicators and targets in their facilities at group level to stay at the forefront of sustainability-linked finance.

Incentivizing farmers to adopt sustainable agricultural practices is another cornerstone of deforestation prevention, and LDC’s preferential long-term financing program in Brazil is key to engage producers in sustainable farming. Current industry challenges can be met only if various actors of the supply chain unite their efforts – from the farmers producing commodities to the retailers with direct access to final customers, but also governments, NGOs, banks and investors. LDC’s leadership position enables the group to unite and align stakeholders in the effort to help create a more resilient and sustainable global food system.

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