Developing an evidence base for assessing natural capital risks and dependencies in lending to Australian wheat farms

Abstract

Farmers are highly dependent on stocks of natural capital, and lenders are in turn exposed to natural capital through their loans to farmers. However, the traditional process for assessing a farmer's credit risk relies primarily on historical financial data. Banks' consideration of environmental factors tends to be limited to major risks such as contaminated land liabilities, and to large project and corporate finance, as opposed to the smaller loans typical of the Australian agricultural sector. The relevant risks and dependencies for agriculture vary by sub-sector and geography, and there is a lack of standardized methodologies and evidence to support risk assessment. We provide an evidence base to support natural capital risk assessment for a single sub-sector of Australian agriculture-wheat farming. We show that such an assessment is possible, with a combination of quantitative and qualitative inputs, but the complexity and interconnectedness of natural capital processes is a challenge, particularly for soil health.

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Implementing natural capital credit risk assessment in agricultural lending

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Evaluating physical climate risk for equity funds with quantitative modelling – how exposed are sustainable funds?

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“…How to integrate environmental risks into credit management processes is however still a challenge since the risks depend local conditions and sub-sector characteristics (Cojoianu et al 2017). Cojoianu et al (2017) suggest a framework to guide banks to a bottom-up evaluation of environmental risk for smaller scale bank loans. The study focuses on wheat farming in Australia, but suggests that the same approach could be applied to develop frameworks also for other sub-sectors and geographies.…”