Adapt or die: FLAG sectors face funding squeeze as lenders watch their climate game
“Lending conditions are becoming increasingly dependent on sustainability factors,” reports Niamh McCarthy, senior director of climate-related risks at Orbitas.
Orbitas’s new report, State of Climate Transitions: A 2024 Guide for Companies and Investors in the Land Economy, reveals that businesses tied to high-emission commodities like beef, soy, palm oil, rice, coffee, and cocoa are especially vulnerable to climate-related financial risks.
According to the report, the profitability of FLAG sector companies is increasingly threatened by accelerating responses to climate change from governments, the private sector, civil society, and consumers. These “climate transitions” are being driven by four critical trends: regulatory and policy expansions, rapid advances in technology, market shifts toward sustainability, and reputational risks.
These forces are reshaping the sustainability landscape. “It is imperative for businesses tied to high-emission commodities to adapt swiftly," McCarthy tells FeedNavigator.
Four key risk categories for FLAG sector profitability
The report categorizes the climate transition risks facing the FLAG sector into four main areas:
Legal and policy: With multiple regions and nations now mandating climate-related financial disclosures and growing incentives, trade policies and government commitments, companies and investors are navigating a regulatory landscape that increasingly rewards climate leaders.
Technology: Climate-smart solutions, such as precision agriculture and methane-reducing livestock feed additives, are providing new opportunities for mitigating emissions while increasing productivity.
Market: Shifts in consumer preferences toward sustainable products and stricter sustainability requirements are driving market leaders to adopt innovative, low-emission practices.
Reputational: Reputational concerns around environmental degradation and deforestation, from activist shareholders to concerned consumers, are increasing the pressures businesses face from their stakeholders.
Climate-related disclosures
A key takeaway from the report is the growing global momentum behind climate-related financial disclosures, with 35 regions now implementing policies that require transparency around emissions and supply chains.
These regulations are reshaping investment decisions, placing “a spotlight on high-emission companies” deemed to carry higher climate risks, Orbitas reports.
Last year Rabobank shared with this publication that a lack of global standardization in regulations was complicating efforts for companies and investors to navigate the evolving sustainability landscape.
But McCarthy notes that the Task Force on Climate-Related Financial Disclosures (TCFD) framework, which has grown from voluntary recommendations to mandated practice in multiple regions including the EU, Canada, Japan, and Singapore, is helping to plug this gap.
Frameworks like TCFD are increasingly providing a backbone for consistency, she adds.
New Zealand and the UK are mandating climate risk disclosures in line with the TCFD by 2023 and 2025 respectively. And the pressure on businesses to act on the TCFD’s recommendations will only increase with time, according to an overview by Deloitte.
“The trend toward mandatory disclosure regulations,” McCarthy continues, “is helping provide the clear, comparable information that investors need to make informed decisions.”
On the supply chain side, she references developments such the EU’s deforestation rule and the new due diligence obligations. “As these supply chain regulations expand, there may be greater regional consistency to ease the burden on those operating in this space.”
Industry must act now
McCarthy stresses the importance of timely action in mitigating climate transition risks. “The unknown is the speed and scale of climate transitions,” she warns.
With the intensifying impacts of climate change—such as extreme weather events and shifting precipitation patterns—there will be an accelerated response from policymakers and other stakeholders.
She urges companies to start evaluating their sustainability risks and emissions now, regardless of local disclosure requirements. “Even if the regions they operate in don’t yet require climate-related financial disclosures,” she explains, “it is in a company’s best interest to begin assessing risks, emissions, and potential supply chain opportunities now. By taking a proactive approach, companies can get ahead of mandatory disclosures, communicate effectively with investors, and demonstrate how they are managing disruptive risks while leaning into growth opportunities.”
Read more: Increasing pressure on lenders today
Read more: Trump's likely impact on climate policy
Read more: How green bond based financing is playing out in the Cerrado
Is there reason for optimism?
As whether she feels more optimistic about the global landscape today compared to three years ago when looking at developments in the food and agriculture sectors, McCarthy says that on the company side, there has been, without doubt, an increase in transition risks.
"In terms of market risks, more companies now face strict regulations around deforestation and higher standards for supply chain due diligence compared to a few years ago, which impacts their market access.
"The combination of increased transparency, especially with the use of satellite data, has provided much greater insight into activities than we had before, and this is closely tied to reputational risks.
"On the technology front, advancements are creating significant opportunities for companies that can make strategic investments to position themselves as market leaders. For example, in row crop agriculture, technologies like precision agriculture, farm automation, and robotics have the potential to reduce emissions by up to 70%, as highlighted in our report.
"Looking ahead to 2050, we expect land values to increase due to rising competition and the need for conservation. Climate-focused companies that can boost efficiency on existing land, rather than expanding onto new land, stand to gain the most from these shifts. Incentives are materializing for those who lead in this area."
She reiterates that climate-related financial disclosures have made significant strides in the past five years.
Overall, where there are heightened risks for companies operating in this space, new avenues for sustainable growth also exist, notes McCarthy. "For example, there’s a growing movement in alternative proteins and plant-based products. These technologies pose risks to traditional products but also offer exciting opportunities for companies looking to diversify into lower-carbon alternatives."
A roadmap for investors and FLAG companies
Orbitas has provided a roadmap of 16 strategic actions for navigating climate related risks and opportunities.
For FLAG companies, adopting climate-smart technology, reducing emissions, diversifying revenue, and embracing low-carbon opportunities can mitigate transition risks, lowering the cost of capital and boosting long-term stability.
Investors are encouraged to take eight steps to make their portfolios more resilient to climate transitions, such as expanding risk assessments, diversifying holdings, developing new strategies, and collaborating with stakeholders.
Orbitas is a Climate Advisers initiative that has been involved in risk analysis across the agriculture, land and forestry sectors since 2020. Since then, it has developed first-of-its-kind methodologies for quantifying climate transition risks and opportunities through economic modeling and financial stress testing.
