What ESG Risk Analysis Should Look Like for Agricultural Finance
Business risk from environmental, social, and governance (ESG) issues is growing. As risk events mount, regulation increases, and investors and customers become more ESG conscious, risk analysis without ESG integration will remain incomplete. Ag finance is no exception.
The EPA continues to warn US agriculture that “climate change could make it more difficult to grow crops, raise animals, and catch fish in the same ways and same places as we have done in the past.” The future returns of the ag sector are tied to how growers mitigate risk to their crops and understanding where environmental risks from climate change are most pronounced.
ESG risk analysis is critical to identify potential liabilities from climate change, as well as labor and customer relations. Ag finance professionals supported by the granular data systems will be well-positioned to maintain robust portfolios.
This article will first explore the consequences of ignoring opportunities for ESG risk analysis then describe how proper data management and support tools can help financial institutions integrate ESG into risk management practices.
Ag Finance Without ESG Risk Analysis
Firms not conducting ESG risk analysis will face difficulty competing with those that do. While ESG as a label is rather abstract, the consequences of the risks it describes are quite material.
Given the potential damages incurred, certain risk events can cause otherwise stable borrowers to default. Lenders with insufficient environmental risk data will be unable to conduct necessary due diligence.
Worse still, long-term shifts in climate, water access, and soil health risk turning previously sound ag investments into stranded assets. Parcels facing significant markdowns have limited value as collateral and pose financial risk to ag portfolios. Without ESG risk analysis ag finance institutions could be burdened with toxic assets of minimal future yield.
Even if base ESG risks are identified, finance professionals also need a clear analysis of the transition risks associated with building portfolio resiliency. For example, while part of a growing trend in sustainable finance, smart irrigation systems require significant capital investment to install. Full ESG risk analysis integrates transition risk inherent to adopting appropriate mitigation options.
Firms foregoing ESG risk analysis likewise jeopardize their social capital. Investors and customers are growing increasingly conscious of where they put their money. Institutions that do not provide comprehensive ESG reporting may lose clients to those that do.
A lacking ESG analysis limits perceived transparency in reporting and keeps areas for improvement hidden. Ignorance to the true extent of ESG risk hinders those attempting to set appropriate ESG targets. Likewise, without a blueprint of where and how ESG risk manifests within a portfolio, improvement remains difficult.
Should ESG reporting standards become compulsory, unprepared finance institutions may have to scramble to build out adequate reporting capacity. Failures to meet reporting requirements may strain relationships with regulators and clients alike – hindering the firm.
Those who do not conduct ESG risk analysis can endanger both their reputations and their bottom lines. Responding to growing risk with commensurate levels of analysis is vital for success in the 21st-century marketplace.
McKinsey & Company puts it well: “Taking proper account of investment returns requires that you start from the proper baseline. When it comes to ESG, a do-nothing approach is usually an eroding line, not a straight line.”
Analysis Begins with Data
Finance professionals wishing to implement ESG risk analysis can benefit by acclimating their data early. Geospatial data management tools that use 3rd party data to add risk context to 1st party data offer a firm foundation for ESG analysis. Granular data linked to financial details at the parcel level can offer portfolio-specific insights – insights that ultimately produce more informed financial decisions.
ESG issues are various and ever-shifting. Precise, up-to-date information enables the agile movement required to adapt and compete. Moreover, the right data management can unlock measurable, reportable risk mitigation options. Informed ESG risk analysis empowers financial institutions to proactively build resilience within their portfolios and take action to meet ESG targets.
The best decision support tools are those purpose-built for their users. Designed specifically for ag lenders and investors, Aquaoso’s GIS Connect tool can kickstart ESG risk analysis by acclimating financial data.
ESG Risk Analysis As A Tool of Financial Success
With climate change and water issues worsening, ESG risk analysis of a portfolio can make an ag finance institution increasingly more competitive than its unprepared peers.
As once again noted by McKinsey, “Companies that perform poorly in environmental, social, and governance criteria are more likely to endure materially adverse events.
Risk discovery powered by geospatial data can reveal where and how on-the-ground mitigation options can best be implemented. Investments in resiliency building with measurable outcomes can help achieve ESG targets and ultimately improve the bottom line.
Properly leveraged, the right tools can save both time and money. Effective analysis empowers organizations to make better loans and investments – minimizing risk and maximizing returns. Moreover, utilizing data management tools enables finance professionals to conduct necessary analyses more efficiently. Outpacing the competition leads to outperforming the competition.
The Bottom Line
Ag finance in the 21st-century is developing to be a pivot-or-parish environment. As climate change and water stress interact to escalate risks that are both dynamic and hyperlocal, ESG risk analysis forms an important component of a financial institution’s toolset.
Beyond aiding reporting and ESG target realization, identifying, monitoring, and responding to ESG risks supports smarter business decisions. Lenders and investors seeking to reduce risk and build resiliency in their portfolios stand to benefit substantially from ESG risk analysis.
AQUAOSO’s GIS Connect platform is specifically designed for the agricultural industry, giving ag banks, lenders, and other ag professionals the integration platform they need to understand physical and material risk data in the context of their portfolios.
Users can integrate internal and external data sets using a secure API, and view it in a geospatial format to add context to lending decisions. Plus, AQUAOSO solutions allow easy exportation of PDF reports to share with other stakeholders.
Agricultural risk is inseparable from climate risk. As the climate continues to change with average temperatures increasing, more volatile swings in weather and more prolonged stress periods are set to define how growers and investors plan for the future. These...
The past few decades have seen a shift toward digital transformation in banking, but not all financial institutions are moving at the same pace. According to Forbes, “Banks have a long, long way to go,” with nearly half of the banks in one survey reporting that they...
The world’s economies live in the age of information. Data about every aspect of life is being generated and recorded at an unprecedented rate. This revolution of information unlocks untold insights into complex mechanisms that animate the modern economy. The sheer...