Financing Sustainable Agriculture Through Climate Fintech
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
The Important Role of Agriculture in Sustainable Development
In 2019, agriculture was responsible for creating 10% of the nation’s greenhouse gas emissions.
Practices that involve tilling, synthetic fertilizers, and inefficient irrigation systems all contribute to the production of nitrous oxide. The use of livestock on farmland represented 26% of overall methane emissions in the country and, “when and manure emissions are combined, the Agriculture sector is the largest source of CH4 emissions in the United States.”
Moving toward a climate-resilient future cannot be done without the ag industry modernizing to help reverse climate change.
Financing sustainable agriculture practices come with short-term problem-solving solutions, but it also comes with the added benefit of building resilience in the long-term for climate-driven impacts that are to come.
Crucial Ways Agricultural Bank Services Can Contribute to A Sustainable Ag Economy
Community banks have the financial capacity to open new doors of sustainable agricultural practices, like regenerative farming, for smart farmers looking to build on-farm resilience. The end result will help in maintaining the longevity of a successful farm operation and even allow institutions to enter new carbon credit markets.
With over one hundred years of direct experience working with agricultural entrepreneurs, Farm Credits, and other ag banks, know what it takes to mitigate risk and help farmers. Managing over $180 billion in assets proves that they efficiently understand the uncertainties that can come with working in the ag industry.
With the enablement from ag banks and sustainable practices, operations have a chance at building resilience together.
Lenders that partake in financing sustainable agriculture can incentivize farmers with carbon credits, created to promote increased levels of carbon sequestration on farmland. These credits can also be sold to corporations that want to offset their respective greenhouse gas emissions. With a higher chance of being more successful— allowing producers to participate more freely with their local communities.
Sustainable Agriculture Practices That Need Financial Capital
At the recent COP26 summit, over 95 countries came to an agreement on reducing greenhouse gas emissions by 30% within the next nine years. In 2019, the agriculture industry was responsible for 10% of total greenhouse emissions. Moving towards a climate-smart agriculture industry can’t be done without help from the financial sector.
This article takes a closer look at what financing sustainable agriculture can look like in the quest for increased resilience:
- Regenerative Agriculture
- No-till farming
- Cover Cropping
These sustainable agriculture practices increase levels of environmental resilience and have the potential to unlock new financial assets like carbon credits that can be sold for a profit. Farms that embrace holistic ag practices increase their efficiency, while lowering costs.
2022 Sustainable Agriculture Trends for Ag Finance to Be Aware of
Navigating the rapidly changing nature of agriculture can often be tricky, making key decisions can get pushed aside by record weather events and ESG reporting. These rising environmental threats show that one thing is for certain— the unmistakable need for financing sustainable agriculture.
Ag banks can leverage their existing strong borrower-lender relationships to work with their borrowers and find out what sustainable agriculture trends work best for them on a case-by-case basis. These trends focus on creating resilience through better efficiency and a holistic approach to farmland.
- Regenerative Agriculture
- No-till farming
- Cover Cropping
Farmers need help financing sustainable agriculture in order to fight back against soil erosion or a loss in the biodiversity of their soil. Big corporations like General Mills and PepsiCo have already begun to establish their own sustainable agriculture practices. Ag banks that pair robust risk mitigation plans with sustainable agriculture trends will remain competitive amongst the rest.
How Fintech Can Strengthen A Borrower-Lender Relationship in Agriculture
Modern farmers are entering the ag industry with strategic mindsets that are focused on the digitization of workflows. By utilizing the power that comes with broadband internet, ag entrepreneurs can optimize their on-farm practices and do more with the data that is available to collect.
In order to accelerate the adoption of sustainable agriculture, ag banks and their borrowers need to have a mutual understanding of things that work to generate resilience in their assets. New technologies have the ability of aggregating datasets for a new level of actionable insights derived from contextualized parcel-specific risk.
Financing sustainable ag practices requires strong borrower-lender relationships wherein both parties are in open communication about what can be used to de-risk investments and create a cleaner future for agriculture.
Climate fintech is for banks and other financial institutions that work with producers in the industry to get a better look at risks within their portfolios. Analyze, track threats with accuracy and speed while staying ahead of the rest.