Here are some of the implications of the executive order for agricultural finance institutions, and opportunities for these institutions for support a more resilient and prosperous food system.<\/p>\n
Implications for USDA lending policies and programs\u00a0<\/strong><\/p>\n The\u00a0executive order\u00a0mentions agriculture just once, requiring\u00a0the Secretary of Agriculture\u00a0to\u00a0consider approaches\u00a0to better integrate climate-related financial risk into the U.S. Department of Agriculture\u2019s\u00a0federal lending policies and programs.<\/p>\n Of approximately $374 billion in total farm debt, the\u00a0USDA\u2019s\u00a0Farm Services Agency provides\u00a0nearly 3% through direct loans and guarantees another 4% to 5% of\u00a0agricultural\u00a0loans\u00a0that are administered by other lenders.\u00a0The executive order could impact underwriting standards,\u00a0loan terms and conditions, and asset management and servicing procedures for these loans.<\/p>\n The executive order also\u00a0requires a\u00a0government-wide climate-risk strategy to identify and disclose climate-related financial risk to government programs, which\u00a0should\u00a0include\u00a0the\u00a0federal\u00a0crop insurance program \u2014 a key risk mitigation tool for many farmers and their lenders.<\/p>\n Implications for commercial banks and the Farm Credit System<\/strong><\/p>\n The vast majority of\u00a0agricultural loans for land and farm inputs are provided by commercial banks and the Farm Credit System, which together hold approximately 80% of agricultural debt. Banks and Farm Credit lending associations are regulated separately and therefore treated differently under the executive order.<\/p>\n The executive order requires the Financial Stability Oversight Council (FSOC)\u00a0to assess climate-related financial risk to the U.S. financial system and recommend actions by federal financial regulators to reduce risk, including plans to improve climate-related disclosures and other sources of data, and to incorporate climate-related financial risk into regulatory and supervisory practices. Climate risk assessment and disclosure is a key building block needed to ensure climate risks are measured and managed effectively, and a learning opportunity to share best assessment and mitigation tactics.<\/p>\nIt\u2019s time for agricultural business and financial leaders to respond quickly to meet the needs of farming for the future. <\/a><\/span>Share on X<\/a><\/span>\n The directive to the FSOC will primarily impact the federal regulators of commercial banks, a sector that includes both large, multinational banks and small community banks. While many large commercial banks are already embarking on climate risk assessment and disclosure efforts, a key question is what may be required of smaller banks that have less capacity to undertake these assessments.<\/p>\n The Farm Credit System is regulated by the Farm Credit Administration, which is not included in the executive order and does not fall under the FSOC. However, Farm Credit has historically\u00a0followed\u00a0the\u00a0Securities and Exchange Commission\u2019s\u00a0(SEC)\u00a0guidance\u00a0on risk\u00a0disclosure at the system-wide level. The SEC is included in the FSOC\u00a0and is\u00a0now\u00a0seeking\u00a0public comment\u00a0on climate-related financial disclosures.<\/p>\n If the Farm Credit System intends to continue following\u00a0the SEC\u2019s guidance, the\u00a0order\u00a0will also apply to Farm Credit at the national level. Its lending associations would not be required to disclose climate risks individually, though they would likely need to provide some information to roll up into the system-wide risk assessment.<\/p>\n Farm Credit should push forward<\/a> on climate risk assessment and disclosure to facilitate effective and financially sound decision-making by the system and its lending associations in the face of climate change.<\/p>\n How agricultural\u00a0financial\u00a0institutions\u00a0can assess\u00a0climate\u00a0risk<\/strong><\/p>\n Conducting climate risk assessments can help agricultural lending institutions\u00a0better understand climate risks to their lending\u00a0portfolios by measuring how climate impacts affect existing credit risk ratings and probability of default calculations.<\/p>\n Major financial institutions around the globe are increasingly recognizing their role in assessing and\u00a0disclosing\u00a0climate risk.\u00a0However, agriculture is\u00a0lagging behind\u00a0other sectors.<\/p>\n Commercial agricultural lenders and the Farm Credit System\u00a0can\u00a0advance climate risk assessment frameworks and tools in collaboration with nonprofit partners and financial climate risk software companies. These frameworks will need to be adapted to fit the capacity and needs of both large and small lenders.<\/p>\n The\u00a0United Nations Environment Program Finance Initiative\u00a0has developed and piloted frameworks for commercial banks to measure the financial risk of climate change to their portfolios. U.S. agricultural\u00a0lenders\u00a0can\u00a0start\u00a0adapting\u00a0these frameworks for their agriculture portfolios in collaboration with firms that develop software\u00a0to\u00a0measure\u00a0climate risks to bank portfolios and better factor these risks.<\/p>\n How agricultural finance institutions can mitigate\u00a0climate risk<\/strong><\/p>\n There are several paths to risk mitigation, including but not limited to divesting from the riskiest types of farming or agricultural regions,\u00a0increasing reliance on\u00a0federally subsidized\u00a0risk mitigation programs like crop insurance, and\u00a0collaborating with producers to reduce risk by building resilience to climate impacts.<\/p>\n The first two options would address some of the financial consequences of\u00a0climate risk but would do nothing to address the underlying risk itself\u00a0and would be devastating to producers, particularly the\u00a085% of U.S. farms not enrolled in crop insurance.\u00a0And studies show that the cost of the federal crop insurance program could increase by 40%\u00a0in the next 30 years if climate change continues unabated.<\/p>\n Ultimately, the\u00a0most responsible approach to reducing long-term\u00a0climate-related financial risks in agriculture includes helping farmers\u00a0both\u00a0mitigate\u00a0agricultural greenhouse gas emissions\u00a0and build\u00a0resilience to climate impacts such as drought and extreme rainfall.\u00a0Fortunately, many of the same farm management changes can do both<\/a> by rotating a variety of crops and livestock, building the health of the soil and managing water efficiently.<\/p>\n Now it\u2019s just a matter of agricultural\u00a0business and\u00a0financial\u00a0leaders responding\u00a0quickly to meet the needs of\u00a0farming\u00a0for the future.<\/p>\n","protected":false},"excerpt":{"rendered":" It\u2019s time for agricultural business and financial leaders to respond quickly to meet the needs of farming for the future. <\/p>\n","protected":false},"author":43409,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[120554],"tags":[106480,120338,113297,421],"coauthors":[],"class_list":["post-12876","post","type-post","status-publish","format-standard","hentry","category-agriculture","tag-climate-risk","tag-farm-credit","tag-farm-finance","tag-usda"],"acf":[],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/blogs.edf.org\/growingreturns\/wp-json\/wp\/v2\/posts\/12876","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.edf.org\/growingreturns\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.edf.org\/growingreturns\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.edf.org\/growingreturns\/wp-json\/wp\/v2\/users\/43409"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.edf.org\/growingreturns\/wp-json\/wp\/v2\/comments?post=12876"}],"version-history":[{"count":1,"href":"https:\/\/blogs.edf.org\/growingreturns\/wp-json\/wp\/v2\/posts\/12876\/revisions"}],"predecessor-version":[{"id":15623,"href":"https:\/\/blogs.edf.org\/growingreturns\/wp-json\/wp\/v2\/posts\/12876\/revisions\/15623"}],"wp:attachment":[{"href":"https:\/\/blogs.edf.org\/growingreturns\/wp-json\/wp\/v2\/media?parent=12876"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.edf.org\/growingreturns\/wp-json\/wp\/v2\/categories?post=12876"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.edf.org\/growingreturns\/wp-json\/wp\/v2\/tags?post=12876"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/blogs.edf.org\/growingreturns\/wp-json\/wp\/v2\/coauthors?post=12876"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"](\"https:\/\/blogs.edf.org\/growingreturns\/wp-content\/blogs.dir\/52\/files\/2017\/02\/USDA-Flickr-user-Brian-Menges-1024x681.jpg\")
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