How Agricultural Lenders Can Boost Climate Resilience

September 10, 2020

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(Environmental Defense Fund) ... A new report from EDF — Financing resilient agriculture: How agricultural lenders can reduce climate risk and help farmers build resilience [PDF] — describes climate risks to the agricultural lending sector and provides a path forward for lenders to support a more resilient agricultural system.

Key findings

Climate risks are a blind spot for lenders. The U.S. agricultural lending sector has not proactively assessed its climate risks. This is concerning, as agriculture is on the front lines of climate change and the broader financial sector is making strides in incorporate climate risk into decision-making.
Climate impacts pose financial risk. Because the agricultural sector faces substantial climate risk, agricultural lenders are also vulnerable. Weather damage reduces farmer earnings and can cause credit quality to decline, especially as weather impacts occur more frequently. Many lenders are also concentrated in agricultural regions and related businesses, magnifying their risk.
Crop insurance is not enough. While crop insurance is an important shock absorber for participating farmers and their lenders, it is not sufficient to protect farmers, lenders or the broader agricultural economy from climate risk over the long term.
Current loan offerings don’t value resilience. Short-term financial products such as annual operating loans don’t integrate the value of farmer investments in practices like no-till, cover crops and extended crop rotations that have measurable financial benefits in terms of cost savings and risk reduction. This disconnect undermines long-term profitability and resilience — for both farmers and their lenders.

Recommendations

Assess climate risk at the lending institution level. Lending institutions should assess their exposure to climate risk and adopt and implement strategies to monitor and mitigate climate risk.
Understand the role of conservation practices in managing climate risk. Lenders can gain valuable insights on the financial impacts of conservation adoption and learn about strategies to minimize costs and maximize benefits of conservation adoption.
Develop lending programs or products that support farmers in building climate resilience. Lenders should design lending programs and products to support farmers in transitioning to conservation practices that build resilience — for example, through multi-year loan terms and adjusted repayment periods — and incorporate data on the benefits of conservation practices in credit rating processes. READ MORE

3 steps for agricultural lenders to mitigate climate risk and finance resilience (Environmental Defense Fund)

Financing Resilient Agriculture: How agricultural lenders can reduce climate risk and help farmers build resilience (Environmental Defense Fund)

A Plan Is Offered for Lenders to Boost Agriculture's Climate Resilience (Solutions from the Land)

Managing Climate Risk in the U.S. Financial System, Report of the Climate-Related Market Risk Subcommittee (September 9, 2020; Commodity Futures Trading Commission)

Excerpt from Solutions from the Land: EDF also reports that current loan offerings don't value resilience. It notes, for example, that short-term financial products such as annual operating loans don't integrate the value of farmer investments in practices like no-till, cover crops and extended crop rotations. The disconnect between these practices – which have shown measurable financial benefits in terms of both cost savings and risk reduction – and ag lender policy undermines long-term profitability and resilience for both farmers and financiers.

Among the recommendations included in the report is for lending institutions to assess their own exposure to climate risk, then adopt and implement strategies to monitor and mitigate climate risk. Organizations must gain valuable insight from farmers on the financial impacts of conservation practices and their role in managing risks in order to find strategies that will minimize costs and maximize benefits of adopting conservation practices.

SfL commends EDF for an insightful roadmap that echoes its own lessons learned in ongoing engagement with ag lenders. In the past, SfL's work with agricultural banking institutions resulted in a series of recommendations – foreshadowing and reinforcing EDF’s findings – to the House Select and the Senate Democrats' Special Committees on the Climate Crisis, respectively, by the North America Climate Smart Agriculture Alliance (NACSAA).

By providing a platform for dialogue between farmers and lenders, encouraging ag lenders to consider programs and products to support farmers in building resilience, and hearing the barriers said lenders are facing in planning for new threats, NACSAA was able to offer policy makers perspective on the research, regulatory streamlining, flexibility and partnerships that could lead to specific enabling policies, such as use of carbon credits in ag borrowers’ cash flow statements or changes in risk weighting based on conservation practices.

It also heard directly from agricultural banking institutions about the need for more education and dialogue between ag lenders and borrowers across rural America to help farmers and financiers together face the expanding challenges of a changing climate.

The growing urgency of these conversations underscores SfL's long-held position that improving agriculture's climate resilience is essential to protect the sector's long-term productivity and profitability. Farmers and agricultural lenders across the nation are facing immense pressure from multiple sources. In the face of these challenges, it is of the greatest importance that growers and those in their supply chain, including lenders, proactively address those risks that can be mitigated. SfL stands ready to once more connect lenders and producers to develop mutually beneficial paths to mitigate climate risks while financing resilient agriculture. READ MORE