Agricultural lending challenges amid climate change has been saved
Perspectives
Agricultural lending challenges amid climate change
Help agricultural (AG) finance lenders take action
What are the biggest challenges stopping agricultural finance institutions from lending more support to borrowers in the face of climate change? Dive into our survey to identify three types of barriers holding AG lenders back—and discover how these challenges can be overcome.
A challenging call to action
As climate change will increasingly impact global food and agriculture systems, financial institutions will have a crucial role in helping farmers and agriculture businesses adapt to this changing environment.
However, many financial institutions have reported facing barriers to taking more action to address climate impacts. A recent Deloitte and Environmental Defense Fund survey of 167 agricultural finance institutions found that the biggest barriers fall into three categories—information, motivation, and capability.
The Impacts of Climate Change on Agricultural Finance
Figure. Top challenges preventing agricultural finance institutions from taking more action to address climate impacts
Information
The most commonly reported barrier holding back financial institutions’ action on climate risks in agriculture is a lack of data to effectively integrate climate risks and opportunities into business strategies. Banks can overcome this barrier by working with third-party climate and weather data providers, as well as collecting data on the extent of their clients’ climate-smart business practices. This data can be used to assess how climate risks faced by an AG lender’s customers may change over time and, in turn, how this may affect borrowers’ productivity and profitability—allowing lenders to proactively identify portfolio risks and support clients who can benefit from climate adaptation or mitigation measures.
Motivation
The lack of a clear ROI to motivate investments to address climate risk and impacts was also widely cited by AG lenders responding to the Deloitte and Environmental Defense Fund survey. Upon examination, respondents’ perception of a lack of ROI appeared to be linked to low levels of client demand and the presence of government hurdles. Together, these challenges appear to lower the motivation to factor climate change into their business decision-making process. However, interviews with bank representatives conducted as part of the survey indicated that client demand is growing, and policy signals are directing AG lenders to take a more proactive role in supporting their borrowers with climate adaptation and mitigation. Financial institutions can get ahead of regulatory actions and capture emerging demand for climate-smart agriculture lending products by conducting climate risk assessments and engaging with their borrowers about credit needs.
Capability
In terms of capability challenges, surveyed financial institutions mainly report lacking human resources who are equipped with sufficient sustainability and agricultural knowledge and skills. By providing employees with access to educational resources or hiring environment, social, and governance specialists, businesses can begin to fill the gap in this area. Additionally, building a climate risk team can allow financial institutions to design and implement climate change-related goals, frameworks, and risk management practices. Agricultural lending institutions can begin addressing their capability gaps by forming partnerships with non-governmental organizations (NGOs) and professional service providers to cocreate solutions.
By working to address these information, motivation, and capability barriers, agricultural lending businesses can support their borrowers in mitigating climate risks while taking advantage of opportunities to provide innovative products and services to clients. Although the focus of this survey was on agricultural finance institutions, lenders serving other sectors can leverage these early lessons to become more prepared for climate challenges in their own portfolio industries.
To learn more about the impacts of climate change on agricultural finance, refer to the full report: The impacts of climate change on agricultural finance. To learn more about strategies for addressing climate risks and opportunities, refer to the full report: Strategies to address climate risks and capture opportunities.
Get in touch
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Steve Watkins |
Karen Moik |
