Climate change poses a multitude of financial risks, and financial executives increasingly call for the measurement, disclosure and mitigation of these risks.
The Federal Reserve recently Underline change in its annual financial stability report, warning that climate-related weather events could lead to price instability and other significant vulnerabilities in the financial system. The Fed report adds momentum to a growing wave of attention to climate-related financial risk.
Financial sector increases focus on climate
September report by a subcommittee of the US Commodity Futures Trading Commission also highlighted the risks of climate change for multiple sectors of the US economy and the financial institutions that serve them. President-elect Joe Biden is consider political actions to address these risks, including ordering the Securities and Exchange Commission to make climate-related financial disclosures mandatory for all publicly traded companies.
Meanwhile, several large banks, including Barclays, JPMorgan Chase and Morgan stanley have pledged to align their portfolios with the Paris Agreement and net zero emissions by 2050, and others are joining initiatives to refine the measurement tools used to assess financial climate risks.
Yet the vast majority of financial institutions serving agriculture – one of the sectors most vulnerable to climate change – have yet to take meaningful action. This includes large commercial banks, regional and community banks, and government sponsored businesses such as the Farm Credit System and the Agricultural Services Agency.
Climate risk affects agricultural lenders
Agriculture is one of the sectors most exposed to climate change because it depends on natural resources, such as soil and water, and predictable weather conditions, such as temperature and precipitation. Plant and animal production face both acute climatic risks, such as increasingly violent storms, and chronic climatic risks, such as increased droughts and heat.
Major flooding in the Midwest in 2019 demonstrated the financial vulnerabilities of the agricultural financial system to acute climate impacts. Following the devastation of agricultural production brought on by the floods, the share of agricultural credits in the region showing “major” or “severe” repayment problems has reached its peak. highest level in 20 years.
The impacts of climate change on the agricultural credit sector are only beginning to be understood, but all signs point to a substantial risk for credit institutions.
In July 2020 climatic resistance test, Rabobank – one of America’s largest commercial agricultural lenders – found that increased water stress could have significant impacts on their food and agriculture portfolio in the United States and Australia. A recent analysis by Four Twenty Seven, a Moody’s affiliate, found that climate change will lead to increased water stress on agriculture. The analysis found that by 2040, nearly a third of the world’s agricultural area will be affected by high water stress.
Another financial climate risk assessment conducted by an anonymous bank in collaboration with the United Nations Environment Program Finance Initiative found that by 2040 a business-as-usual emissions scenario could lead to lower incomes for the bank’s agricultural borrowers from 12 to 22% and lead to a decrease in the agricultural loan of the bank defaults increase by 10 to 15%. It’s all the more worrying that nearly half of all U.S. farm loans come from lenders with at least a quarter of their portfolios composed of outright debt transactions – with concentrated exposure to losses due to severe weather events. Climate change presents a multitude of risks for the agricultural finance sector. Here’s how to mitigate those risks. Click to Tweet
The way forward for a resilient agricultural economy
Fortunately, the US farm credit industry has an opportunity to act. A growing set of collaborative initiatives and financial assessment tools for physical climate risks can help the sector to catch up.
One of these initiatives, banking pilot projects led by the UNEP FI working group for climate-related financial disclosures, has developed a framework for banks to assess physical climate-related financial risks. Nonprofits, including Ceres and the Environmental Defense Fund, also engage with banks on climate risks and opportunities.
A recent report from EDF, Financing resilient agriculture, details how agricultural financial institutions can create new products and programs that help farmers transition to more climate-resilient production systems. Rabobank identified funding and facilitating this transition as a key emerging opportunity.
As farmers face unprecedented weather and economic challenges, the agricultural finance industry no longer has time to wait to address climate risks and invest in solutions that make crop and animal production more resilient. .
We need swift and bold leadership to put the US farm economy on a positive course, for farmers, financial institutions and all who depend on this dynamic sector.