• How the agrifood sector is becoming more sustainable


    Climate change and the struggle to prevent it pose enormous challenges for agrifood production in Spain. In turn, improving the sustainability and resilience of the sector will be key to achieving the environmental targets set out in the European Green Deal. Agri-environmental indicators show that, despite some progress in recent years, the sector needs to tackle significant aspects, such as reducing the use of chemical pesticides, fertilisers and antimicrobials in agriculture, as well as improving animal health and welfare, increasing efficiency in the use of energy and water resources, promoting food consumption that is more sustainable and healthier and reducing food loss and waste, fostering a circular economy. The new CAP, with eco-schemes as its key measure, and the Next Generation EU funds will support the sector’s green and digital transition.



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    The threat of climate change and transition to a sustainable food system

    Spain’s agriculture has traditionally benefited from a privileged geographical location and climate but it is particularly vulnerable to climate change. Increased soil erosion, floods, droughts and wildfires, along with an increase in pests and diseases, are just some of the direct effects. In turn, primary sector activity also contributes to climate change: crop specialisation and intensification, the use of chemical inputs and the industrialisation of livestock production all have negative impacts on water, soil, air, biodiversity and habitat conservation.

    Agriculture contributes to climate change and, in turn, suffers directly from its consequences

    It must therefore move towards a new model that protects the natural resources on which it depends.

    EU countries are increasingly aware that they need not only to mitigate climate change but also adapt to it. Consequently, given growing concerns for the environment, the agrifood sector must move forward in its transition from a system that emits greenhouse gases (GHG), demands a large amount of natural resources and also pollutes them, to a new model, increasingly widespread, that provides healthy, nutritious food sustainably, protecting the natural resources on which agricultural activity itself depends.

    In addition to improving the sustainability of agrifood production and downstream distribution, another important lever for change is to promote healthier and more environmentally sustainable consumption patterns. For example, a diet with a larger proportion of vegetables, organic foods, seasonal and local produce. Similarly, the reduction of food loss and waste and promotion of the circular economy are also key factors in moving towards a sustainable food system, as stated in the European Commission’s «Farm to Fork» strategy.

    The Farm to Fork strategy

    The Farm to Fork strategy
    Source: European Commission.
    From the European Green Deal to the CAP Strategic Plans

    The EU is deploying a wide range of tools to provide stakeholders with mechanisms and incentives to support this transition to a sustainable food system and, in turn, to help achieve the targets set out in the European Green Deal. One important addition in the reformed Common Agricultural Policy (CAP), which will enter into force in January 2023, is the drafting of National Strategic Plans to establish priorities in terms of aid and incentives for the various production subsectors.6The star measure is eco-schemes, which are voluntary and reward sustainable practices. Spain’s Ministry of Agriculture has proposed two eco-schemes, with a budget of 1,107.49 million euros, which group sustainable practices into two areas: agroecology and low carbon agriculture. The first group includes activities such as pasture management using sustainable mowing, crop rotation and the maintenance of non-productive areas and other biodiversity aspects. The second group includes extensive grazing, conservation agriculture and the maintenance of living or dead vegetation cover.

    • 6. Spain’s Ministry of Agriculture, Fisheries and Food must submit its Strategic Plan to the European Commission by 30 December 2021.
    The new CAP, with eco-schemes as its key measure,

    together with Next Generation EU funds, will support the sector’s green and digital transition.

    In addition to the CAP, the European NGEU funds will also help to finance the green and digital transition of the primary sector. In particular, item 3 of Spain’s Recovery, Transformation and Resilience Plan, aimed at the environmental and digital transformation of the agrifood and fisheries system, provides for an investment of 1,502.8 million euros. The plan is based on four fundamental pillars: (i) improving efficiency in irrigation, (ii) promoting sustainability and competitiveness in agriculture and livestock farming, (iii) a digitalisation strategy for the agrifood sector and the rural environment, and (iv) modernising the fisheries sector, by promoting sustainability, research, innovation and digitalisation.

    Environmental indicators in the primary sector

    The European Commission has analysed the situation of individual Member States in relation to their contribution to each of the Green Deal ambitions. The table below lists these targets and the reference values of these indicators for the main countries.7

    To make Europe the first climate-neutral continent by 2050, the first milestone has been set for 2030: reduce greenhouse gas (GHG) emissions by at least 55% compared with the 1990 level. While GHG emissions from EU agriculture have fallen by a significant 20% since 1990, no progress has been made since 2005. And in Spain the situation has been reversed: emissions have increased since 1990 (6.5%) with just a modest reduction since 2005 (–3.7%).

    • 7. «Commission recommendations to Member States as regards their strategic plans for the CAP», European Commission, December 2020.
    In relative terms, GHG emissions by Spain’s agricultural sector

    are lower than the EU average, which has set itself the target of at least 55% below 1990 levels by 2030.

    Despite this trend, it is important to note that, in relative terms, the sector is responsible for 12.0% of the economy’s total GHG emissions compared with an EU average of 12.7%. Furthermore, if we take into account the fact that the primary sector contributes 2.9% of GDP compared with 1.6% in the EU, the result is that GHG emissions by Spain’s agrifood sector per unit of GVA are significantly lower than the European average (1.2 kg/euro compared with 1.7 kg/euro in the EU).8 Similarly, emissions from agriculture per unit of agricultural land (tonnes of CO2 equivalent per hectare) are lower in Spain (1.6 compared with 2.5 in the EU).

    The second EU milestone is contained in the Farm to Fork strategy, which sets a target of 50% reduction in the use and risk of chemical pesticides by 2030. In recent years, Spain has significantly reduced the use of this type of chemical and the challenge is to continue moving in this direction. The target for antimicrobial resistance is a 50% reduction of the overall antimicrobial sales for farm and aquaculture animals by 2030, compared with the EU baseline in 2018. In this respect, Spain lags behind the EU average.

    On the other hand, Spain performs positively both in its share of agricultural land used for organic farming, an aspect we discuss in more detail in the next section, and the proportion of agricultural land occupied by highly diverse landscape features. In this case Spain, with 13.2% of its land, already exceeds the target of 10%.9

    • 8. Data from the European Commission’s Common Monitoring and Evaluation Framework (CMEF) for the CAP 2014-2020, https://agridata.ec.europa.eu/extensions/DataPortal/cmef_indicators.html
    • 9. EU Biodiversity Strategy 2030.

    European Green Deal targets and reference values

    European Green Deal targets and reference values
    Notes: GHG stands for greenhouse gases. UAA stands for utilised agricultural area. Source: CaixaBank Research, based on the European Commission’s COM (2020) 846.

    Nitrate pollution from agriculture remains one of the greatest pressures on the aquatic environment. In this respect, the EU has set a target of reducing nutrient losses by at least 50% by 2030 while ensuring there is no deterioration in soil fertility, an aspect in which Spain needs to improve considerably. An increasing number of EU countries are also affected by water scarcity, often caused by excessive abstraction of water for agriculture and livestock. Climate change will further aggravate the problem of water availability in many regions, including Spain.

    Finally, the new CAP establishes digitalisation as a priority across the board, believing that the transition towards a sustainable food system must be supported by knowledge, innovation and digitalisation. In this respect, one key factor in developing rural areas and reversing their depopulation is the availability of a fast, reliable internet connection. While there has been a notable increase in the proportion of households in rural areas with next-generation broadband access, there is still a significant gap with respect to urban areas. The goal is to cover 100% of the population by 2025.10

    • 10. This target is included in the Agenda España Digital 2025.
    58.7% of Spanish households in rural areas

    had access to fast broadband internet in 2019. The goal is to cover 100% of the population by 2025.

    The green and digital transition of European agriculture is also creating new business opportunities which the sector must take advantage of, for example by better aligning its production with evolving consumer tastes. Sustainability will become a competitive advantage for those companies and farms that achieve a balance between economic growth, environmental care and social well-being, while those that fail to comply with environmental standards will be penalised by increasingly demanding and environmentally aware consumers who identify with the most sustainable brands and products.

    A firm commitment to boosting organic production

    The commitment to more sustainable production schemes, such as organic farming,11 is relentless. Spain, with more than 2.44 million hectares of these crops in 2020, is the first country in the EU and the third in the world after Australia and Argentina. However, in terms of its share of utilised agricultural area (UAA), it is above the EU average, as noted in the previous section, but well below leading countries such as Austria, Estonia and Sweden, which exceed 20%. Four million additional hectares would be needed to achieve the 25% target set in the Organic Action Plan.

    • 11. Organic farming is a system of agrifood production and management that combines the best environmental practices, a high level of biodiversity and preservation of natural resources and the application of high animal welfare standards, so that products are obtained from natural substances and processes (MAPA).

    Share of utilised agricultural area under organic farming

    Last actualization: 13 October 2021 - 16:38

    Regarding organic operators,12 almost 90% out of a total of 50,047 in 2020 were primary producers while the rest were industrial operators and traders. However, the number of operators is growing much faster (more than double) further down the food chain.

    • 12. An organic operator can be an individual or company and must meet certain requirements to be able to produce, process, prepare or package food of agricultural origin in order for it to be marketed using the terms ecological, biological or organic. In Spain there is a General Register of Organic Operators (REGOE) that collates the information provided by each autonomous region.

    By region, Andalusia leads the field both in terms of land under organic farming, with more than 45% of the total, and in terms of organic livestock farms, with almost 60%. By type of crop, cereals for grain production come top (43% of the total) and, by type of livestock, cattle (48%). Compared with other countries, the Spanish agrifood sector is the world’s leading organic producer of olive oil and wine and the second for citrus fruits and vegetables.

    However, one of the challenges facing organic production in Spain is the low domestic consumption: per capita consumption of these products in 2019 stood at 50.2 euros, a far cry from countries such as Denmark or Switzerland, which exceed 300 euros. As a result, most of Spain’s organic produce, around 60%, is exported.13 The change in habits brought about by the pandemic has boosted healthier, more sustainable and local consumption, so the trend in domestic consumption of organic produce is clearly upward.

    • 13. Sociedad Española de Agricultura Ecológica (SEAE), MAPA (2021), «Análisis de la caracterización y proyección de la producción ecológica española en 2019» and Ecovalia (2021), «Informe anual de la producción ecológica en España».
    Organic farming in Spain, on the rise

    Area under organic farming

    Last actualization: 13 October 2021 - 16:38

    Organic operators in the primary sector (producers)

    Last actualization: 13 October 2021 - 16:39

    Organic operators in the secondary sector (manufacturers and processors)

    Last actualization: 13 October 2021 - 16:40
    Destacado Economia y Mercados
    Destacado Analisis Sectorial
    Destacado Área Geográfica

Understanding climate risks and their impact on the financial sector

We set aside the opportunities provided by the agenda to curb climate change to focus on analysing the impact of climate risks on the financial sector.

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No one should be surprised at this stage to read that climate change is a phenomenon that will have a profound impact on economic activity. As a key component of the economic gears, the financial sector can help to mitigate the impact of climate change, but it can also suffer from its effects. In this article, we set aside the opportunities provided by the agenda to curb climate change in order to focus on the second issue, analysing the impact of climate risks on the financial sector.

Climate risks: how to identify and quantify them

The financial sector’s exposure to climate risks is distinguished according to their origin. On the one hand, there are transition risks, which encompass the losses that can be caused by technological or regulatory changes or shifts in consumer preferences aimed at meeting climate targets. Examples include those faced by companies engaged in the exploitation or distribution of coal for energy generation, the fossil fuel that produces the most greenhouse gas emissions (GHG). To meet the European Commission’s emission reduction targets (55% by 2030 compared to 1990 levels), these companies will need to adjust their production processes to adapt to a new regulatory environment.

To assess the importance of this risk to the euro area’s financial sector as a whole, we must first clarify whether the economic sectors that have been granted the highest volume of credit are also the most polluting, as it is reasonable to assume that companies with higher emissions will be more sensitive to the changes associated with the energy transition. However, it is not currently easy to obtain this information, as only a minority of companies disclose data about their emissions. According to the latest data from the Task Force on Climate-Related Disclosure (TCFD), in 2019 only 26% of the 1,700 companies included in its global sample reported their GHG emissions according to the scope classification,1 and 33% published climate targets. To overcome this difficulty, in a recent exercise the ECB estimated the GHG emissions in 2018 of the non-financial companies that have received the bulk of bank financing.2 Through this exercise, the ECB has concluded that bank loans to the mining and energy sector (jointly responsible for around 20% of total emissions) account for just 5% of the stock of loans to non-financial companies, a relatively low exposure. However, credit to the manufacturing sector accounts for 20% of the total, while its emissions account for 40% of the total, suggesting that exposure in this sector could be a source of climate risk on aggregate (although it should be noted that emissions vary widely within this sector).

On the other hand, physical risks, which could lead to damage to assets through more frequent and severe adverse weather events (such as fires, floods, heat stress or storms), must also be taken into consideration. It is estimated that the economic losses resulting from extreme weather events amounted to 1% of the euro area’s GDP in 2019, a figure that could increase over the coming years if these events become more frequent.

  • 1. Emissions are distinguished between those directly resulting from the company’s activity (scope 1), those caused by energy consumption (scope 2) and those generated throughout its value chain, from obtaining raw materials through to the use of its products or services by consumers (scope 3).
  • 2. This exercise takes into account companies with bank loans of more than 25,000 euros, which together account for 4 billion euros and 80% of all credit to non-financial companies. See «Climate-related risks to financial stability». Financial Stability Review (2021).
Euro area: natural disasters

Similar to transition risks, the main channel through which physical risks can impact the financial sector is through the sector’s exposure to companies most likely to see their activity or assets heavily affected by these risks. For instance, this would include a company with a factory located in an area that is potentially prone to flooding or particularly vulnerable to fire. If these events end up materialising, then these companies’ capacity to generate revenues would be reduced, thus denting their credit rating.3 As with transition risks, quantifying exposure to physical risks is not an easy task, but some significant initial steps have been taken in this direction. Following the methodology proposed by the Network for Greening the Financial System,4 the ECB has used the locations of non-financial companies identified in the analysis of exposure to transition risks and has run them through climate models to estimate their vulnerability to adverse weather events. On this basis, it estimates that 5% of the euro area’s stock of corporate bank credit is either already highly exposed to these risks or will be by 2040, while 25% of the balance could see its exposure to these risks increase. By region, in central and northern Europe the main risk is derived from potentially flood-prone areas, while in southern Europe the main risks are fires and heat stress.

  • 3. Normally, in the event of default banks can execute the guarantees (or collateral). However, it is important to note that these are also subject to climate risks, of both the physical and the transition variety.
  • 4. See «Case studies of environmental risk analysis methodologies». NGFS Occasional Paper (2020).
What are the next steps?

For financial-sector entities, taking environmental risks into account in their decision-making processes is key for protecting their balance sheets and overall financial stability. To date, with a lack of information and inadequate standardisation in calculating and modelling these risks, financial institutions have only taken them into account on a voluntary basis. However, in 2022 euro area financial institutions will need to assess their exposure to these risks through climate stress tests for the first time, as part of a mandatory exercise that will serve as a learning process for both banks and the supervisor.5 In these tests, banks will need to assess their balance sheets over a broad time horizon under various climate scenarios: (i) an orderly transition scenario (climate policies are implemented gradually, allowing the climate targets to be met and limiting the costs of physical and transition risks); (ii) a disorderly transition (policies are implemented late and abruptly, so the costs of transition risks are higher than in the orderly transition), and (iii) «hot house world» (no new policies are implemented and the climate targets are not met, so there are no transition costs but physical costs are extremely high). To get the ball rolling, the ECB has already published preliminary conclusions for the euro area as a whole, showing what the aggregate impact of each scenario would be on the probability of default in various economic sectors. The results show how it is in the last scenario in which the probability of default increases the most for all sectors of the economy. In other words, the physical risks of inaction are potentially more costly to the financial sector than those arising from transition risks. The next step is to be performed individually by the banks in 2022.

While these stress tests will be very useful for marking the way forward in the coming years and for influencing today’s financial institutions’ decision-making,6 the current scarcity of climate information and the path towards improving its quality will render these tests insufficiently complete or representative. For this reason, their results are not expected to affect capital requirements, although they could lead to some recommendations from the banking supervisor. Thus, while much work remains to be done in identifying climate risks, progress is gradually being made in the right direction, both in terms of making the financial system more resilient to climate change and in ensuring that it contributes to the decarbonisation of the economy.

  • 5. The Bank of England has recommended that the United Kingdom’s major banks perform this same exercise during the second half of 2021.
  • 6. A recent ECB study shows that banks which performed financial stress tests in 2016 reduced their credit risk compared to those that did not. See C. Kok et al. (2021). «The disciplining effect of supervisory scrutiny in the EU-wide stress test». ECB Working Paper Series, nº 2551.