Using Risk Analytics Tools to Build Water and Climate Resilience in Agricultural Finance

According to the United Nations Environment Program Finance Initiative, climate impacts could lead revenues for agricultural borrowers to drop by 12-22% by 2040 and cause agricultural loan defaults to increase by 10-15%. 

The changing landscape of 21st-century agriculture brings new challenges for ag finance but also presents important opportunities. Technological advancements in GIS analysis and data management are revolutionizing how lenders and investors do business.

Financial professionals are ultimately risk professionals. By compiling highly granular data on intersecting environmental, operational, and regulatory factors, risk analytics tools provide parcel-specific insights to de-risk portfolios.   

This post will explore why climate and water stress lead to financial risk, how geospatial data solutions help financial institutions mitigate risk, and the dangers of continuing to do business as usual.

The landscape is changing quickly

The climate emergency is accelerating. 2021 has seen record-shattering heatwaves endanger harvests in the Pacific Northwest and California appears to be entering its driest period since the destructive 2012-2016 drought. Rapidly changing environmental conditions pose an urgent threat to US agriculture.

Drought

As the climate changes, droughts will increase in duration and intensity. Previously temperate regions will face new insecurities and areas already facing drought risk can expect more severe effects.

According to an American Farm Bureau Federation survey of 22 states – most west of the Mississippi – drought caused $1.99 billion in crop losses during 2020.

These damages represent an enormous liability for ag lenders and investors. Remaining informed on the potential for local and regional drought events is critical for financial professionals with the goal of mitigating risk to their ag portfolios

Water Stress

Drought, by definition, brings dryer weather and reduced precipitation. When the supply of water falls below demand, local water stress can have severe impacts on agriculture. As growers rely more heavily on groundwater, falling water tables make those unable to afford deeper wells vulnerable to water scarcity. In periods of high water stress, regulatory bodies may restrict pumping and cut back on deliveries – forcing growers to make radical choices between risking their harvest or fallowing otherwise productive land to conserve water.

In agriculture, water risk is inseparable from financial risk. Investment and lending institutions must remain informed not only on local policy shifts, but also how parcels in their portfolios rely on various sources of water – each of which may have different stress profiles.

Wildfires

A drier climate likewise increases the risk of crop-threatening wildfires.

2020 saw $931.6 million in agricultural damages from wildfires across California, Oregon, Washington, and Colorado.

As key contributing factors become more extreme in coming decades, fire will pose increasing risk to the ag sector.

Fueled by dry vegetation, stoked by offshore winds, and exacerbated by delayed seasonal precipitation, tracking local climate indicators and past burn activity can offer ag professionals critical insights on wildfire risk in a given area.

All of the problems above align with a certain type of solution: geospatial data

Geospatial data analytics empowers ag professionals to identify, understand, monitor, and mitigate climate-related risks. Environmental problems are inherently spatial and can be addressed through spatial approaches.

The same is true of governing bodies and their regulatory responses. By integrating granular data on various climate and policy indicators into a spatialized risk analysis tool, ag lenders and investors can perform more holistic risk evaluations.

The complex interactions between different climate factors lead to vastly different impacts depending on location. Tools unable to resolve parcel-to-parcel variations give an incomplete picture. Geospatial analytics is the future of ag risk management.

As explained by PWC, “Transforming geo-location data into location-based intelligence can help us uncover the ‘where’ factors of opportunities, risks, strengths, and weaknesses.” Whether conducting due diligence on a prospect or seeking to de-risk an existing portfolio, linking financial data and climate data through a geospatial platform empowers smarter decisions.

Geospatial systems also have another benefit: ease of access. Visualizing risk geographically offers intuitive access to insight. In the words of Nature Conservancy’s Chief Scientist, “We need maps to tell us the places where specific actions will deliver the greatest return on investment.” By locating risk and ROI projections spatially, financial institutions can likewise build portfolios resilient to rapidly escalating climate events.

What would happen without risk analytics tools, specifically in ag finance, vs what can be done with them

Without risk analytics tools that effectively integrate geospatial data, ag finance professionals expose themselves and their firms to steadily growing – and ultimately unnecessary – liabilities.

If climate risk is not truly understood, failed harvests will lead to failed businesses. Continuing to do business as usual is a dangerous proposition. The prevalence of debt-to-farm operations exposes ag finance to enormous risk from damaging climate-related events.

To manage climate risk within a portfolio, it first must be identified. Financial institutions that “acclimate” their data to better understand the risks associated with each of their borrowers can better pinpoint mitigation options. Lead by informed financing, the ag economy can become better equipped to face drought, flooding, wildfires, and regulations from groundwater restrictions to water delivery delays.

The Bottom Line

GIS supports the strategic decision-making required to navigate 21st-century challenges. Geospatial risk analytics tools help lenders and investors save time and money as they de-risk their portfolios. With climate change posing a growing threat to US agriculture, adopting spatialized approaches is crucial for financial institutions to remain competitive.

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 “acclimate” their data in a geospatial platform. It also provides location-based context for data that is easily accessible to loan officers, appraisers, risk professionals, and farmers, making a map worth a thousand email exchanges.

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, they can easily export PDF reports to share with other stakeholders.

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

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