What ESG Reporting May Require of Risk Management for Banks in Agriculture
Risk management for banks is taking on a new role in an age of climate change and transition risk, especially in industries like agriculture, in which ESG (Environmental, Social, and Governance) reporting requirements are coming into play. Modern risk management practices for banks are shifting from purely financial considerations to include a broader set of decision-making criteria and business intelligence tools.
Some of these changes are driven by market factors, such as an interest in sustainable finance on the part of investors. But others are spurred by regulatory changes that are on the horizon, as governments attempt to address the impact of climate risk on the financial sector. As McKinsey explains in an article on risk management for banks:
“While the magnitude and speed of regulatory change is unlikely to be uniform across countries, the future undoubtedly holds more regulation—both financial and nonfinancial—even for banks operating in emerging economies.”
This post will consider the impact that new ESG reporting requirements may have on risk management for banks, especially in the agricultural sector.
Climate-related Financial Disclosures for Banks
The Recommendations of the Task Force on Climate-related Financial Disclosures was released in 2017 and is one of the most useful resources that American banks have to identify which regulatory requirements are likely to affect them in the years to come.
While this report isn’t legally binding, it may be used to inform federal regulations on climate-related disclosures. The Wall Street Journal reports that the Securities and Exchange Commission (SEC) is considering “whether climate-related disclosures should be filed in companies’ annual reports” as early as this year.
Banks can also turn to international regulatory bodies, such as the European Banking Authority, to get an early look at the kinds of ESG requirements U.S. regulators might impose. In the U.K., the Bank of England is undertaking a 2021 Biennial Exploratory Scenario to consider the likelihood of financial shock from climate change.
As McKinsey notes, if this scenario were enacted on real-world markets, it would “force many institutions to ramp up their capabilities, including the collection of data about physical and transition risks, modeling methodologies, risk sizing, understanding challenges to business models, and improvements to risk management.”
Financial institutions that can anticipate and plan for these changes now will be ahead of the curve when climate-related disclosures and other ESG reports are no longer optional. Those that have a fluid method for incorporating climate risk analytics into their own data will have even more of an edge.
Risk Management for Banks in Agriculture
It’s reasonable to expect that the U.S. will take inspiration from the TFCD report. In response to the SEC’s Request for Input on Climate Change Disclosure, BlackRock made the case that “mandatory disclosure should be aligned with the recommendations of the Task Force on Climate-related Financial Disclosures.”
In Appendix 4: Select Disclosure Frameworks, the TFCD explains that mandatory and voluntary reporting schemes already exist around the world, providing a standardized framework that organizations can use to structure their ESG reports. However, these frameworks differ in terms of what’s considered relevant and how it’s reported.
When it comes to agriculture, banks should take note of ESG frameworks that include mention of land and water use, since these factors are likely to be especially relevant over the coming decades. Currently, some frameworks only mandate the reporting of emissions and energy consumption, but the TFCD notes that “financial performance may also be affected by changes in water availability, sourcing, and quality.”
Ag banks shouldn’t wait until ESG reporting is mandatory to begin collecting data on these issues – by then, they may find themselves playing catch-up with organizations that have already integrated ESG data collection into their workflows.
In the report, the TFCD warns that “the lack of standardized data and metrics in the financial sector … complicates preparers’ ability to develop decision-useful metrics.”
It takes time for banks and other financial institutions to implement an ESG reporting framework and may require an investment in better data collection and aggregation tools. A lack of appropriate tools, the TFCD writes, “makes aggregation across an organization’s activities or investment portfolios problematic and costly.”
Using GIS Tools as a Solution
In order to meet these anticipated ESG reporting requirements, ag banks and lenders will need access to real-time, portfolio-specific data sets that address everything from water rights and water quality to drought risk and other material risks. This will give stakeholders the opportunity to improve their risk mitigation practices and take into account the geospatial nature of loan portfolio risk.
By incorporating GIS data into their workflows, ag lenders can work with borrowers to support sustainable agriculture adoption and water conservation practices, reducing their exposure to climate risk and making their farming operations more attractive to investors. Additionally, GIS tools can help with asset valuation, ensuring that the farmland in a portfolio is valued properly in light of changing weather patterns.’
How GIS Connect Can Help
AQUAOSO’s GIS Connect is the first data acclimation tool for ag lenders, Farm Credits, and other financial institutions. This cloud-based platform allows ag finance professionals to aggregate water and climate risk data into a central platform along with their own data.
GIS Connect is purpose-built for the agricultural industry and can generate custom reports and workflows that are tailored to an individual business. It empowers business-specific ESG reporting strategies while streamlining the data management process and putting existing financial data into context with external climate analytics and risk data sets.
By combining their own data with risk datasets into a single platform, ag finance professionals can identify opportunities to reduce risk and meet reporting requirements all in one place.
Users can integrate third-party data sets with a secure API, generate managerial reports, and collaborate with other team members, saving time and money, and bringing risk management for banks into the 21st century.
The Bottom Line
ESG reporting requirements for banks are on the horizon, and while regulators haven’t yet standardized them in the United States, ag banks and lenders can look to the Recommendations of the Task Force on Climate-related Financial Disclosures as an indicator of what’s to come. Ag finance institutions should pay special attention to reporting frameworks that cover water availability and water quality and develop strategies for reporting this data.
GIS Connect is a key tool in this process since it’s designed for monitoring water and climate risk in agricultural finance portfolios. Ag finance professionals can use it for cohort analysis, workflow management, team collaboration, and more – all while relying on bank-grade security to keep their data safe. Users can perform multi-parcel searches and run analytics by parcel, borrower, or operation, adding context to existing datasets and viewing their own data in a new light.
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