The Environmental Defense Fund (EDF) has produced a timely report that not only details the risks that agricultural lenders face from climate change, but also points out the opportunities that they have to support the long-term profitability of those who work the land.
The report claims that climate risks pose a blind spot for lenders, who have not proactively assessed their own risks. The hesitancy to act is concerning, given that agriculture is on the front lines of climate change. The report also notes that those in the financial sector beyond ag lenders have already been making strides to incorporate climate risk into their decision-making process.
Given the financial risks that the changing climate imposes – reduced farm earnings and declines in credit quality, especially in agricultural regions where lenders and related businesses tend to be concentrated – crop insurance is not enough. Crop coverage offers a “shock absorber” for participating farmers and their lenders, but it is insufficient to protect farmers, lenders or the broader agricultural economy from climate risk over the long term, the report asserts.
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.