A Sustainable Agrifinance Solution? Lending to Reward Environmental Performance

​California’s agricultural industry is a major contributor to the state’s economy as well as local and global food supply. In the Salinas Valley, over-pumping for agriculture has contributed to significant groundwater overdraft, and agricultural fertilizers have leached into aquifers and degraded water quality. Statewide water management regulations that address these issues have compliance costs which are expected to increase. In the face of mounting industry and environmental compliance costs, agricultural lending firms may play a role in supporting, expediting, and simplifying farmers’ ability to improve their environmental performance in compliance with California water policies, however, information regarding how agricultural lenders incorporate natural resource issues into their risk assessments is limited. The objectives of this project are to a) understand how the agrifinance industry accounts for environmental risk, and identify unrealized opportunities for improvement; and b) determine the most profitable loan-incentive product(s) for both borrowers and lenders. In pursuing these objectives, we contribute to existing knowledge regarding lender incorporation of environmental-based risk considerations in the risk assessment process. Industry interviews coupled with an online questionnaire provide opportunity for both qualitative and quantitative assessment of the agrifinance industry’s stance on environmental risk, and evaluation of the industry’s readiness and willingness to consider loan products that incorporate environmental performance metrics. A financial model incorporating loan-incentive combinations allows for the analysis of both borrower and lender benefits under varied parameters. Ultimately, a range of potential impacts to groundwater quantity and quality of the Salinas Valley are estimated.

Acknowledgements

Scott Jasechko, Assistant Professor, Bren School

Agricultural Lending Advisory Committee: Emily Gardner, Jessica Nesbitt, Alex Echols, Brett Melone, Nathan Weller, and Massey Bambara