Major banks are setting climate targets. What the agricultural finance sector needs to know.

Many major banks have set targets to reduce financed greenhouse gas emissions in their loan portfolios to zero by 2050 (also known as net zero targets). They join a growing movement of companies throughout the agricultural supply chain to set ambitious targets to reach net zero by 2050 to prevent the most severe impacts from climate change.

The Banking for Impact on Climate in Agriculture (B4ICA) initiative recently published “An introductory guide for net zero target setting for farm-based agricultural emissions” that shares best practices for banks to set net zero GHG emissions targets for their agricultural loan portfolios. The guidance helps banks setting agricultural sector emissions reduction targets as part of their commitments to the Net Zero Banking Alliance ­— an alliance of 122 banks representing 40% of global bank assets that have committed to aligning their assets with net zero GHG emissions by 2050 or sooner.

The guidance was developed in collaboration with a group of multinational banks with agricultural portfolios, but its information is useful beyond the largest banks. Farmers around the world are served by an array of different financial institutions, including cooperatives and community banks. Even if these agricultural lenders do not have plans to set net zero emissions targets, there are three things they can learn from the net zero target setting movement and B4ICA guidance about how to build strategies and engage farmer borrowers on climate-related issues.

The transition to a net zero economy can present business risks and opportunities

The transition to reduce agricultural GHG emissions presents both risks and opportunities for farmers and their financial partners. A global survey of 167 agricultural finance institutions across North America, Europe and India conducted by EDF and Deloitte, shows that 86% of respondents expect the transition to a net zero economy will present material risks to their business. Meanwhile, 59% of respondents said that climate change will also present opportunities to their business.

Understanding the GHG emissions associated with different segments of agricultural loan portfolios can indicate which borrowers may face pressure from consumer trends or climate policy, and which borrowers may benefit from grant and market opportunities for reducing their emissions. Agricultural finance institutions may also need to answer questions about transition risk from investors and financial regulators.

There are simple ways to estimate the emissions in agricultural portfolios

Measuring the GHG emissions of an agricultural loan portfolio can be done using information about the types of agricultural production financed, the management practices and technologies employed on farms, inputs to farm production, energy use information, and soil and land data. EDF and Deloitte’s survey of agricultural finance institutions found that 68% of respondents collect at least some farm production practice data, but most will need to collaborate with external partners to understand the emissions of their portfolios.

The new guidance presents analytical approaches to estimate GHG emissions in agricultural loan portfolios. One approach is to use emissions factors, which are scientifically estimated GHG emissions figures for sets of agricultural activities. For example, rather than directly measuring the amount of GHG emissions from beef operation borrowers, lenders can estimate emissions by multiplying the emissions factor for beef cattle in the region by the number of cattle in each borrowers’ operations. This simplified approach allows agricultural lenders to estimate emissions based on a more limited data set.

Understanding climate topics can help with client engagement

Agricultural finance institutions are often trusted advisers and valuable sources of information for their farmer borrowers. To sustain these relationships, they must maintain fluency in major issues that impact farmers, such as climate stressors in their region and emerging market opportunities associated with climate-smart agriculture. They can also act proactively to support their farmer clients who are interested in adopting climate-smart practices.

For example, earlier this year Farmers Business Network launched a farm operating line that provides farmers a 0.5% interest rate rebate if they meet climate and water quality benchmarks set by EDF. Interested farmers quickly filled the initial $25 million fund, and FBN is now doubling the fund in its second year to engage more of their farmer members and connect them with additional funding from food companies and the U.S. Department of Agriculture.

Agricultural finance institutions can deepen their partnerships with their farmer clients by understanding the landscape of opportunities associated with climate-smart agriculture. The B4ICA guidance is a useful tool for lenders to understand the steps their peers in the agricultural finance sector are taking to address climate change in their portfolios and consider how this can inform their own climate strategies.