CoBank’s new loan signals a new wave of sustainable finance in agriculture

Agricultural lenders provide over $500 billion in financing to U.S. farmers, ranchers and supporting businesses each year. A new sustainability-linked loan announced today by CoBank — one of the largest agricultural credit providers in the U.S. — signals that major financial institutions are looking to direct more financing toward their customers’ sustainability efforts in innovative ways.

CoBank’s first sustainability-linked loan will provide Heartland Co-op with a slight interest rate reduction on its operating line of credit if the cooperative achieves goals to expand agricultural water quality practices with farmers. Environmental Defense Fund advised CoBank and Heartland on the environmental criteria for the loan.

For the agriculture sector to implement sustainable practices at scale, agricultural finance institutions must proactively support customers who are capturing industry and market demand for sustainability. Here’s how a sustainability-linked loan works and why CoBank’s leadership signals that agricultural lenders are ready to support their borrowers’ sustainability ambitions in new ways.

Co-investment in sustainability generates benefits for lenders and farmers

CoBank plays a critical role in the U.S. rural economy as part of the Farm Credit System, providing $148 billion in loans, including $38 billion to agricultural cooperatives. Through its new sustainability-linked loan partnership, Heartland will receive a slight interest rate reduction on their operating line of credit from CoBank if it achieves ambitious goals related to water quality conservation practices and farmer engagement.

If achieved, the annual targets would lead to a 33% increase in annual cover crop acres sold, reaching a total of 98,000 acres, and a 39% increase in farmer engagement by Heartland’s conservation agronomy team by 2028. The targets would also support the installation of more than 200 new edge-of-field saturated buffers and bioreactors that filter water and reduce nutrients reaching Iowa streams.

As demand for conservation services continues to grow, Heartland will need to build out their team to help manage and expand its programs. The financial benefits Heartland will receive if it achieves the targets of the loan will help the organization expand its conservation agronomy team while advancing their sustainability goals.

Many agricultural businesses, such as dairy and agricultural retail cooperatives, face financial risks and upfront costs when implementing sustainability initiatives. Sustainability-linked loans allow these businesses to share those costs and risks with their lenders, who also benefit from their customers staying ahead of market demands for sustainability and improving their financial resilience.

Innovative financial solutions are the next step in agricultural lenders’ sustainability journey

Sustainability has taken center stage in the agriculture sector, with investments from food companies and the U.S. Department of Agriculture helping to develop markets for climate-smart agriculture. Despite this momentum, agricultural finance institutions lag the broader agriculture sector on sustainability.

To catch up with the market’s ambitions, major lenders like CoBank have established sustainability teams in recent years. They are also working more closely with customers and stakeholders on solutions that support sustainability efforts.

Non-traditional financial institutions like Farmers Business Network were among the first to offer innovative agricultural loans that incentivize conservation practices. These market entries have garnered positive responses from farmers, encouraging major agricultural lenders to advance their sustainability strategies further.

Now, CoBank’s sustainability-linked loan demonstrates a new level of leadership in sustainability that we are excited for other agricultural lenders to follow.

Blended finance can spur more agricultural lenders into sustainability action

Sustainable agricultural practices can reduce risk and bolster profitability in the long term, however, farmers and agricultural businesses face short-term challenges in adopting them. Lenders can help overcome these financial barriers, but they also face challenges in absorbing the costs and risks from supporting the shift to more sustainable agricultural systems.

This is where collaboration in the form of blended finance can enable agricultural finance institutions to do more. Blended finance involves combining funds from partners with lower market return expectations with commercial lending funds. This allows the agricultural finance institution to offer more flexible terms to their customers and achieve greater sustainability investments than they could alone.

Heartland Co-op will have access to an interest rate reduction through CoBank’s sustainability-linked loan as well as additional grant support from the Great Outdoors Foundation, providing the necessary resources for the cooperative to achieve its ambitious conservation targets.

Another example of blended finance solutions is the effort of the Agriculture Finance Sustainability Coalition, which has mobilized agricultural finance institutions to tap into billions of dollars in funding from the U.S. Environmental Protection Agency’s Greenhouse Gas Reduction Fund.

New blended finance solutions that pair agricultural lenders’ capital with funding from impact investors, food companies or governments can start a wave of sustainable finance solutions, and this wave may be just on the horizon.