3 Sustainable Finance Trends in U.S. Agriculture to Lessen Risk and Build Resilience

The most informed investments are the most secure investments. In the rapidly evolving world of US finance, remaining informed on the latest tools and strategies is key to understanding the ag lending and investment landscape. One approach continues to gain momentum.

Sustainable finance considers the environmental, social, and governance (ESG) implications of investment and lending decisions. 

Demand for sustainable finance is accelerating. With millennials, 90% of whom report preferring investments that align with their values, assuming a growing stake of US investment capital and the expansion of ESG reporting requirements, the practice is going mainstream. 

This rapid growth is possible because financial returns and ESG considerations have shared interests. Sustainable land stewardship relies on the same principles as sustainable portfolio stewardship: responding to the latest, most accurate information and mitigating risk. 

With climate change subjecting crops to more intense heat waves, acute flooding, and severe droughts, ag lenders and investors should understand how farmers can build resiliency to mitigate risk to harvest yields and preserve parcel property value. 

This article will review three trends that are of growing importance to sustainable ag finance:

• The Internet of Things
• Improved Irrigation
• Regenerative Farming 

In addition to their climate-smart approaches, these trends also share another defining feature: they empower cloud-based data management of ag portfolios to better evaluate financial risk.

3 Rising Opportunities for Sustainable Finance in Agriculture

The Internet of Things

The Internet of Things (IoT) can integrate and synergize aspects of an ag operation. By networking ag sector hardware together through smart technology, farming systems become more robust and climate-resilient. IoT empowers growers to respond more rapidly and precisely to equipment failures, weather risk, and ecological indicators. Moreover, it can increase efficiency and improves yields – returns that ultimately flow back to financial backers.

Smart meters are perhaps the biggest trend so far. Quantifying and geo-locating water consumption is critical for growers to manage an increasingly stressed resource. Whether calculating the opportunity cost of selling to the water market, complying with government withdrawal regulations, or measuring general efficiency, growers with smart meters possess valuable monitoring and reporting tools.

Meters are just the beginning. The internet of things grows more powerful the more it connects. By linking irrigation systems, soil monitors, and weather trackers, growers can precisely detect leaks, evaluate localized soil health, and anticipate environmental stressors. These data-driven insights empower growers to conserve water, steward soil, and build ecological resilience in the ways best suited to the localized needs of their plots.

The smart-irrigation market alone is set to double in size to $2.1 billion by 2025. While the cost of adoption remains high, the potential to decrease risk while increasing return makes it of growing interest to financial institutions in the ag sector.

Networked together through the cloud, aggregated data can inform both immediate and long-term decision-making to optimize environmental stewardship and financial return. As such, it should play an important role in sustainable finance initiatives.

The Right Irrigation

Of all agricultural infrastructure, irrigation may be the most important. Systems that deliver the water crops need when they need it – while reducing waste and overhead – are critical for minimizing environmental impact and maximizing profitability.

Knowing the irrigation system used on a particular parcel can help finance professionals evaluate water-related risk and partner with growers to invest in more efficient technology.

A 2021 report on smart water use by Sustainable Agriculture Research and Education (SARE) discusses various emerging irrigation methods and their comparative benefits.

More traditional sprinkler and MESA (mid-elevation spray application) systems deliver water principally to the crop canopies where water can easily evaporate before draining to the soil. In contrast, LESA (low elevation spray application) and LEPA (low energy precision application) systems deliver water much closer to the soil.

By spraying through a higher number of lower pressure nozzles situated below the canopy, less water is lost to evaporation and wind drift and optimize energy use since water is run at lower pressure. For similar reasons, drip and mobile drip systems that irrigate the soil directly have likewise become attractive options. The less water required for optimal irrigation, the less risk exposure to water stress events.

Growers utilizing the most efficient irrigation systems are positioned to incur lower costs and conserve natural capital, thereby working to mitigate water-related risk and build climate resilience. Integrating irrigation systems into parcel-specific risk models and working with growers to invest in mutually beneficial improvements represent valuable opportunities for sustainable finance in the ag sector.

Regenerative Agriculture

Many strategies growers implement to improve the climate-resiliency of their operations fall under the banner of “regenerative agriculture.” A set of principles, rather than a particular technique, the term encompasses methods that promote soil health, increase biodiversity, and reduce resource intensiveness. Together, these procedures can reduce the impact of damaging climate events, improve long-term yields, and inform the due diligence of sustainable, risk-conscious lenders and investors.

Regenerative farming enhances and preserves plot productivity. In practice, this takes many forms. Rotating various cover crops, for example, can affix nutrients, manage salinity, and help retain precipitation. Conversely, to mitigate the risk of waterlogging from irregular rainfall, growers can implement subsurface drainage, adjusting planting season, and introduce nitrogen management measures.

As the name suggests, regenerative agriculture is a form of land improvement. For example, compost from plant and animal waste can improve soil fertility and manage nutrient levels in degraded fields. There is also mounting evidence that in the right circumstances regenerative ag can reverse desertification and transform low-value land assets into fertile, high-value ones.

Indeed, according to research by the National Resource Defense Council: “Due partially to improved soil health, our interviewees found that the overall health and yields of their crops improved as a consequence of their regenerative farming techniques. Cost-savings from reduced use of chemicals, including fertilizers, herbicides and pesticides, and antibiotics, had a positive impact on farm and ranch profitability.”

Given the potential for risk reduction, regenerative agriculture practice can function as an important parcel indicator for Ag finance institutions as they evaluate their portfolios.

Cloud-Based, Better Data Management

Each of these three sustainable finance trends has a part to play in cloud-based, data-driven portfolio management decisions.

Parcels that employ regenerative ag, efficient irrigation, and IoT present less climate-related risk than their competitors. Ag creditors seeking to de-risk their portfolios can benefit from granular data on the details of agricultural operations.

Applying the principles from IoT on a macro-level, integrating financial, environmental, operational, and regulator data into a single management system empowers ag financial professionals to act with greater agility and long-term vision.

Utilizing the inherently geospatial nature of these datasets, lenders and investors can evaluate risk considering all the relevant factors together at the parcel level.

As touted in the World Business Council for Sustainable Development’s (WBCSD) February 2021 report on “Transformative Investment in Climate-Smart Agriculture:”

“Data-derived insights from verified, field-level data connected to large, aggregated data sets can help reduce the risk of transitioning to new practices and better quantify the potential risk and reward of practice changes.”

Those with accurate, actualized data are empowered to make smarter choices. As the WBCSD report goes on to add, “The ability to layer datasets with geospatial visualization can create powerful decision support tools.” Growers informed by geo-spatial data can monitor, anticipate, and mitigate climate-related risks to operations. So too can their creditors.

Investing in cloud-based agriculture is an investment in financially and environmentally sustainable agriculture.

The Bottom Line

The latest trends in sustainable agriculture are opportunities for sustainable finance. Growers utilizing IoT, smart irrigation, or regenerative agriculture are growers actively working to mitigate climate-related liabilities and build resilient operations.

Investors and lenders should consider parcel-specific practices when de-risking their portfolios.

While growers wish to transition to new sustainable technologies, many lack the financing to do so. Financial institutions using insights from cloud-based data management are well-positioned to respond to the changing agricultural landscape, realize growing ESG goals, and strengthen their portfolios.

AQUAOSO’s GIS Connect platform is specifically designed for the agricultural industry, giving ag banks, lenders, and other ag professionals the tools they need to collect and analyze ESG data. 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.

Get in touch with the team at AQUAOSO to get started, or sign up for the newsletter to receive the latest water security news for the agricultural industry.

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