4 Factors of A Portfolio Footprint in Agricultural Finance

Sep 29, 2021 | Blog, ESG Reporting

4 Factors of A Portfolio Footprint in Agricultural Finance

21st-century data and risk management technologies in agricultural finance are kingpins of optimizing loan portfolios. One example of this is the enhancement of a business’s ability to track a portfolio footprint.

It’s becoming more and more common for businesses and financial institutions to track and consider their carbon footprint when making investment decisions, but that isn’t the only portfolio footprint to consider in agriculture. Water, soil, endangered species zones, and other factors all play a role in the sustainability of an agricultural portfolio.

By tracking and assessing these metrics now, ag professionals can build more sustainable lending portfolios, and be prepared for a diversifying risk landscape that may be implemented in the years to come. However, as one FDIC examiner explains:

“The vast majority of farm banks are small institutions… [and] extensive diversification within the loan portfolio may not be realistic or feasible. Instead, these institutions must engage in sound oversight of their agricultural credit concentrations.”

This article will explore four key aspects of a portfolio footprint in ag finance, and how ag professionals can use GIS technology to monitor and improve that footprint.

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What is a Portfolio Footprint in Ag Finance?

Farm Credits and ag lenders have a big role to play in how farmers operate. While it’s important for ag finance institutions to perform due diligence before approving a loan or closing a land deal, it’s also important to maintain relationships with existing borrowers and support their transition to more sustainable farming methods, thereby strengthening the resilience of a portfolio.

As the U.N. reports, “helping [small] farmers adapt to the impacts of climate change can … significantly reduce greenhouse gas emissions.”

However, carbon isn’t the only factor to consider when monitoring a portfolio footprint. A report by the Department of Energy explains that “Water-footprint accounting has been recognized as a useful method for assessing regional water-resource availability and use for water governance, policy analysis, and planning.“ Likewise, land use and soil quality are closely linked to a farming operation’s long-term sustainability.

While these disparate factors can be difficult to monitor, strategies such as data acclimation make it easier to draw value from this data. By keeping a close eye on the integrated and overlapping risk factors contributing to their overall portfolio footprint, Farm Credits and commercial lenders can be proactive about which farming operations to invest in and which risk mitigation strategies to pursue from quarter to quarter.



4 Portfolio Footprints to Consider in Ag Finance

Each of the following four components. Although these are just part of the solution to mitigating climate risk and other material risks in agriculture, they can go a long way towards revealing a loan portfolio’s true exposure to each type of risk:

  1. Water 
  2. Biodiversity
  3. Soil health
  4. Risk mitigation



The Water Footprint Network uses three categories of consumption to determine how water is used in the production of a crop or another product or service:


  • Green for water that comes directly from precipitation
  • Blue for water from surface and groundwater resources
  • Grey for the impact of runoff and pollutants on freshwater resources


Some agricultural producers may have a larger footprint in one category than others, so it’s important for lenders to ask themselves three key questions:


  • How much water do their borrowers use?
  • What kinds of crops do they grow and are they water intensive?
  • How viable are their water sources?


The third question is the most salient in times of drought and water scarcity, since two nearby farms with similar water requirements may be impacted differently if they have access to different types of water resources. A farmer with insufficient water rights in California, for example, may find themselves paying more for water transfers than a nearby operation that has invested in water storage infrastructure.



According to a report in Nature Sustainability, the expansion of agriculture around the world could threaten the habitat of up to 87.7% of species. At the same time,

“Proactive policies targeting how, where, and what food is produced could reduce these threats, with a combination of approaches potentially preventing almost all these losses while contributing to healthier human diets.”

The Public Policy Institute of California points out that some types of agricultural fields actually support wildlife, with flooded rice fields doubling as salmon habitats and alfalfa fields serving as a nesting ground for some types of bird species. With more than 350 endangered or threatened species in California alone, it’s imperative that agricultural producers pay more attention to where these habitats and their fields overlap.

Ag professionals can view endangered species zones using geospatial tools like GIS Connect, which presents them alongside other parcel-specific information.


Soil health

Soil health is closely tied to crop yield, as well as other aspects of a portfolio footprint, including water retention and biodiversity. Not only do healthy soils retain more water, they can also help to sequester carbon and reduce a farm’s CO2 emissions:

One analysis found that soybean farms in Brazil have a smaller carbon footprint than similar farms in the U.S.: “It is clear that despite higher land conversion rates, Brazilian soils release less CO2 emissions than United States soils,” they write, “in part due to “increased adoption of no-till practices, and reduced fertilizer use”.

Lenders can work with borrowers to transition to farming methods with a lower carbon footprint. Regenerative agriculture is the most effective, because it also supports water efficiency and drought resilience. However, financial institutions need to plan ahead to account for the multi-year timeframe it takes to implement these projects.


Risk mitigation practices

Finally, it’s important to consider which risk mitigation strategies are represented in an agricultural portfolio. When it comes to water risk mitigation, this may include investing in supply-side mitigation strategies such as conveyance infrastructure improvements, water banking, and groundwater recharge projects.

On the demand side, this might include investing in better irrigation infrastructure and regenerative farming. Ag professionals can download this Water Risk Mitigation report to learn more about how to de-risk their agricultural loan and investment portfolios.



Using GIS Connect to Measure Portfolio Footprint

Regardless of which factors an ag lender chooses to focus on, this information must be measurable within a portfolio as well as in the context of proprietary portfolio data.


But the risk and water data that is used for measurement is, more often than not, siloed. This complicates the process of incorporating risk data into a portfolio in a way that is actionable and easily digestible.

AQUAOSO’s GIS Connect platform uses geospatial technology to present this data in an easy-to-understand, map-based format. This allows users to visualize their portfolio in new and actionable ways and pull reports on a portfolio on a parcel-by-parcel level. Plus, users can integrate third-party risk data of their choosing to acclimate their existing bank data.

By combining multiple data sets into a single cloud-based platform – and viewing them all in an intuitive format – it becomes easier to see the factors that make up a portfolio footprint and put strategies in place to identify risks and mitigate them.



The Bottom Line

Lenders and investors are increasingly concerned about their portfolio footprint, which includes water resources and other impacts that an agricultural lending portfolio has on the environment and stakeholders.


In addition to building up a portfolio’s water and climate resiliency, monitoring these factors can help to reduce financial risk.

GIS Connect makes it easy to keep track of these datasets by compiling them into a single map with layers that can be turned on and off. This makes it possible to view watershed boundaries, endangered species zones, water, and soil quality, and more, and see how they impact a portfolio on a parcel-by-parcel basis.

Contact the team at AQUAOSO to request a demo, or download the free report on Water Risk Mitigation to learn more.

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