Following the Dutch government’s ambitious goals to reduce nitrogen emissions in the country’s agricultural sector, Rabobank has reclassified its exposure for the dairy sector in the Netherlands as vulnerable. This move highlights that the financial sector is still not ready for transitional risks on the road to net zero.
A new ambitious plan to cut nitrogen emissions in the Netherlands has led to Rabobank reclassifying its entire exposure in the Dutch dairy sector to Stage 2.
Rabobank is the largest financier in the Dutch agricultural sector, and this reclassification could impact the sector’s ability to reduce emissions and compete in a net zero world.
Banks need to be prepared for transitional risks as the world becomes increasingly ambitious in its climate targets.
New nitrogen reduction plan an “overhaul” for Dutch agricultural sector
The Netherlands has big plans to make dramatic reductions to its nitrogen emissions in the agricultural sector to tackle the country’s “nitrogen crisis”, but Rabobank sees this ambitious climate action as a threat to its loan portfolio.
The long-awaited plan from the Dutch government was published in June 2022, which called for unprecedented reductions which scale nitrogen emissions reductions targets across the country according to the area’s vulnerability. Most areas will require emissions reductions of up to 70%, with the most vulnerable areas requiring up to 95% reductions.
This ambitious plan has been called “the greatest overhaul of the Dutch agricultural sector in history”, and will contribute significantly to reducing the country’s emissions. The Netherlands is a leading agricultural exporter, and its agricultural sector accounts for 45% of the country’s nitrogen emissions.
When presenting the plan, the Minister of Nature and Nitrogen Policy Christianne van der Wal said she expects that about one-third of the Netherlands’ 50,000 farms will disappear as a result of these ambitious reduction requirements.
The new regulation will mainly impact cattle farms, along with pig, chicken and turkey farms. To provide a buffer of any losses, the Dutch government has reserved €270 million in subsidies for the dairy sector, €115 million for chicken and turkey farms, and another €115 million for pig farms.
In spite of these subsidies, many farmers across the country have been protesting the new regulation in the street and even in front of the Minister’s house, as they are concerned about the future of the sector with the new targets.
Rabobank reclassifies Dutch agricultural sector as vulnerable
Between the new targets and the farmer protests, Rabobank sees its loans in the Dutch dairy and agricultural sector at risk.
During the bank’s half-year financial report, it was announced that the Dutch dairy sector has been classified as a vulnerable sector, which Rabobank defines as having significant increase in credit risk and/or material increase in uncertainty.
The new classification migrates the full exposure within the Dutch dairy sector, a total of €10.3 billion, to Stage 2, meaning that a lifetime expected credit loss is taken despite substantial government support packages being made available. This is a 35% increase of Stage 2 exposures in Rabobank’s portfolio.
Rabobank has also made a management adjustment of €76 million for the overall Dutch agricultural sector as of 30 June 2022.
The bank said that this is just a preliminary reclassification made for prudency reasons due to a high level of uncertainty on the impacts of the nitrogen regulations on its Dutch farming and agricultural portfolio.
Further impact and scenario analysis will be taken by Rabobank in the upcoming months as the roll out of the Netherlands’ nitrogen reduction plans and support packages becomes more clear, and will reassess the migration of its dairy and agricultural assets in H2 2022.
Rabobank is the largest financier of the Dutch agricultural sector, with a market share of 80%. Its reclassification of exposures in the sector can therefore have a major impact on how farmers can adapt to the new regulations and operate more sustainably.
Banks need to prepare for transitional climate risks
Despite Rabobank’s reclassification of its Dutch dairy exposures, the bank said it is actually in support of the nitrogen emission reduction targets.
In their report Rabobank & Climate Change, the bank states that they are “committed to the goals of the Paris Agreement and the Dutch Climate Agreement and consider it our shared responsibility to take action”.
The bank sees that it can provide the biggest contribution through finance, knowledge, its network, and innovations. It is engaged with the Dutch government to map the costs and current available financing to support the transition.
For example in July 2022, Rabobank announced that it partnered with FrieslandCampina and Lely to install 96 Lely Spheres, a circular barn system that separates solid manure and urine and converts nitrogen emissions into fertiliser, in farms across the Netherlands to reduce nitrogen emissions.
As part of these efforts, the bank has also proposed to set up a €1 billion investment fund to help realise Dutch climate, water and nitrogen targets, with a specific focus on the most vulnerable areas and stimulating circular agriculture.
Could blended finance mitigate risk exposure?
In order to distribute risk, Rabobank also suggests using blended financing, which is a financing strategy using a combination of various types of investors across public and private sectors. The bank argues that blended finance can be used to finance projects that are not typically viable for commercial banks, which may be the case in the short-term as sectors are required to become more sustainable.
This strategy could be useful when mitigating risks from ambitious policies such as the nitrogen reduction requirements, because it reduces risks on their exposures and they can therefore continue to support sectors facing a transitional risk while working towards climate goals.
As the world moves at an increasingly rapid pace towards net zero, it is clear that banks need to find more efficient strategies to mitigate transitional risks as these will become more prevalent as countries become more ambitious.
Simply reclassifying sectors as a credit risk to reduce a portfolio’s exposure will not benefit anyone, as putting off the inevitable will only further increase exposure to physical climate risk, especially in sectors like agriculture that depend heavily on nature for profits.
