Financing Sustainable Agriculture Through Climate Fintech

The economic and societal story of agriculture’s importance develops further in the 21st Century. A changing farmer and consumer demographic, increasingly destructive weather patterns, and forthcoming regulations are intensifying the economy and peoples’ need for financing sustainable agriculture.

With each passing year, rising temperatures and extreme weather events are putting more strain on the industry. Across the globe, industry leaders are heeding the call of adapting to long-term climate change. Financial entities and tools have a critical role to play in distributing and directing the flow of necessary capital to create climate-resilient agriculture that will, at the same time, be able to meet the demands of a larger population.

 

Financing sustainable agriculture is an ever-important yet complicated necessity in the ag space. Its success or failure can determine the health of communities, businesses, countries, societies, economies, and the world. The good news is that it is a growing top-of-mind concern in verticals ranging from finance to food and beverage companies. It is both intriguing and difficult; exciting and crucial. And best of all – it is entirely possible and scalable.

 

 

Agriculture Can Make or Break Climate Resilience – Financing Sustainable Agriculture is Key

 

Following an increasing demand for food and an accelerated rate of productivity in the 20th Century, industrial agriculture practices developed to feed a growing population. This change also had serious climate-related externalities. Industrial agriculture practices brought forth a set of impacts to the very environment the ag economy needs to function. As an industry that relies heavily on environmental resources, the role of agriculture in sustainable development has the ability to make or break worldwide goals of creating long-term climate resilience.

This is the case for industrial agriculture’s combination of monocropping, tillage, the use of chemicals in fertilizers, among other practices. To be clear, the climate impacts that these practices make ought to be recognized as inadvertent. Industrial agriculture came at a time when the post-war population was booming and a rapidly increasing quantity of mouths needed to be fed. It is understandable that the U.S. economy developed practices that are now known as industrial agriculture.

Half the planet’s habitable land is currently dedicated to farming. To put that into another perspective, 38% of global land (five billion hectares) is used for agriculture, up from 2016’s seven hundred million hectares.

As some forms of agriculture increase in usage, so will the threat of emissions. The United Nations’ Food and Agriculture Organization writes, “Land conversion from natural ecosystems to agriculture has historically been the largest cause of greenhouse gas emissions.”

Emissions are calculated by using metric tons of carbon dioxide equivalent, where one ton equates to one thousand kilograms. Depending on the quantity involved, the metric unit used is either MTCO2e or MMTCO2e, the latter denoting millions. From 2001 to 2011, global emissions rose from 4,684 to 5,335 MTCO2e— an increase of 14%. The ag industry’s impact on the United States resulted in an increase of 9.8% in emissions between 2012-2019; and agriculture alone was responsible for producing 628.6 MMTCO2e, representing 9.6% of total U.S emissions in 2019.

 

Learnings from the past can be used as momentum to spur the world into the future, which is what is now important. Historically, using these learnings to excel in the future is part of what has spurred the development and progress of the human species.

 

Financing Sustainable Agriculture in 3 Steps

1. Recognizing the problems; what and who are at stake? What would the future look like for people, businesses, and economies if sustainable agriculture is funded at scale?

2. Finding the financial solutions to overcome the barriers of transitioning

3. Implementing these solutions and making them accessible

Modern-day farmers have to navigate environmental and economic challenges while simultaneously managing their operations; they have their hands full. Many farmers recognize the financial benefits of transitioning to sustainable practices such as cover cropping or regenerative but lack the necessary capital to do so.

Ag finance institutions strive to expand their portfolios while at the same time, lower their risk. They benefit from creating stronger borrower-lender relationships and provide the capital needed for farmers to implement tailored solutions for their operations. Reduced on-farm risk generally can translate to reduced portfolio risk. For financial institutions, understanding the benefits of utilizing fintech as a tool to expand their portfolios while decreasing risk is an invaluable mindset that will help them stay relevant in a digitizing world.

 

The key now is to combine the needs of these two closely interlinked parties to create a solution that works for both of them. This is where climate fintech begins to shine.

 

Farming operations that adopt sustainable solutions can have the added benefit of intrinsic resilience against extreme weather events— which are expected to increase in the coming years. According to Carlos Mera, a Rabobank analyst:

 

By funding sustainable practices lenders will be able to maintain stronger assets, with new opportunities like carbon credits. Ag entrepreneurs will be able to see higher yields and charge a premium for regenerative-grown crops.

 

 

The Stakes Are High

 

As the industry continues to expand, one message rings clear, the future of agriculture must be sustainable for the benefit of both ag finance institutions and farmers.

 

The economic impacts of climate change can be devastating. There have been twenty flooding occurrences within the last ten years, each of them averaging a cost of $3.3 billion— together they amounted to $66.8 billion. Furthermore, the total costs of all weather and climate-related disasters reached $1,063.4 billion.

In just thirty years, 90 weather-related events have amassed over $1 billion worth of damages. Drought impacts 185 million acres of crops and can lead to crop failures.

Building climate-resilient agriculture benefits financial institutions with more resilient portfolios, and farmers can see more profitable agriculture business with higher crop yields as a by-product of increased biodiversity and higher levels of organic matter.

While a major barrier is the cost it takes to switch to more sustainable agriculture practices, climate fintech plays a crucial role in mitigating this issue and the results that come with financing sustainable agriculture are long-term and benefit a farm. If the borrower benefits, then the lender can benefit via reduced risk of default.

 

Innovation is paving the way for proactive individuals who don’t want to be left behind, financing sustainable agriculture shows the ability to adapt in an increasingly uncertain climate.

 

Innovation can be aimed to maximize risk mitigation strategies for stakeholders who want to win in the 21st century. Soil types, water quality, wildfire risk, and more are just a few examples of data that can be collected and used in decision making processes. Conversion to sustainable frameworks requires this kind of accurate and timely data that traditional methods fail to keep up with.

The beauty of sustainable agriculture is that it not only increases resilience to climate and weather-related events but also acts as an engine to reverse climate change, itself.

 

In the end, the agricultural economy and the planet’s climate and environment are in a symbiotic relationship. One will always impact the other. Financing sustainable agriculture can be one of the most important accomplishments of the 21st Century. With climate fintech, agribusinesses won’t be limited to practices that negatively impact their own operations.

 

This explorable guide sheds light upon why financing sustainable agriculture is so crucial to all parties involved, how it can be done, and what the right climate fintech solutions look like.

TABLE OF CONTENTS

• The Role of Agriculture in Sustainable Development
• Crucial Ways Agricultural Bank Services Can Contribute to A Sustainable Ag Economy
• Sustainable Agriculture Practices That Need Financial Capital
• 2022 Sustainable Agriculture Trends for Ag Finance to Be Aware of
• How Fintech Can Strengthen A Borrower-Lender Relationship in Agriculture