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How food and agriculture companies and banks respond to climate risk can make their businesses more competitive and spur new investments that help farmers and ranchers become more resilient to climate change. A final rule from the Securities and Exchange Commission will require publicly traded companies to disclose climate-related risks to investors, including the financial risks they incur due to physical damages caused by more extreme weather. While agriculture stakeholders focused heavily on the 2022 proposed rule’s supply chain emissions disclosure requirements that were ultimately removed from the final rule, the implications of other parts of the rule focused on disclosing physical climate risks continue to be overlooked.
The physical climate risk disclosure requirements could help direct new adaptation investments to support farmers and ranchers on the frontlines of increasingly severe droughts, floods, and fires. More resilient farms and ranches are essential to more resilient supply chains and lending portfolios.
Farmers and ranchers are no strangers to dealing with changing weather, but recent years have made clear that severe weather events are happening more often and causing more damage. The wildfires that are currently raging across the Texas Panhandle resulted in the devastating loss of tens of thousands of livestock. This further exacerbated the challenges for businesses already scaling back operations due to feed shortages caused by prolonged drought across the plains.
Climate risks are financial risks — for farmers, food companies, financial institutions, and investors. Extreme weather events that are fueled by climate change create cascading effects across the U.S. economy and threaten the foundations of food production and supply chains.
A recent study published by Kansas State University, Cornell University, and the Environmental Defense Fund shows how severe weather financially impacts Kansas farms. It found that the number of days with extreme heat so severe that it kills crops has increased over the last four decades and is projected to increase by 58% by 2030. Over the last four decades, for every 1⁰C of warming, net farm income decreased by 66%.
Results such as these highlight the importance of actionable information on those risks to help farmers, companies, and banks identify and adapt to climate risks.
Companies and banks in the agriculture sector have a growing set of tools to model how climate change will impact crop and livestock production and present risks to their businesses. They can combine climate models with crop models and water risk tools to identify U.S. regions and crops that face the greatest risks. For example, through one of these models, researchers found that Kansas corn yields could decline by up to one-third under a moderate climate change scenario — information that is material to companies and banks across the agriculture supply chain.
However, these tools can be used for more than measuring and disclosing climate risks. They can be used to identify how alternative crops could perform in areas that face increasing risks from droughts and water shortages. For example, recent modeling by EDF found that less water-intensive crops like sorghum, rye, and oats could be grown in Kansas to continue robust crop production in the face of increasing temperatures and limited water supply. However, farmers need financial support to make this transition profitable.
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By expanding the climate risk disclosure process to consider climate-resilient options, companies and banks can pinpoint the investments, incentives, and system changes required to assist the farmers and ranchers they depend on in adapting to climate challenges.
For agricultural companies, these investments could include researching and developing ingredient alternatives that use more climate-resilient crops. It could consist of incentive programs for in-field practices, like cover crops, that reduce the impacts of heavy rainfall on crop production. It could also include investments in technical assistance and field-level water data to help farmers manage and reduce water scarcity risks. For banks, addressing climate risk in their loan portfolios could mean providing lower-cost loans for equipment or infrastructure that make farm businesses more resilient to climate impacts. For insurance companies, investing in climate resilience could mean premium discounts for practices that confer resilience or additional recovery funds for investments in climate-adapted infrastructure.
Farmers and ranchers have repeatedly demonstrated that they are resilient and innovative, but they also need support in making the shifts that support the entire sector’s future resilience. Because it will advance the agriculture sector’s understanding of climate risks, the SEC disclosure rule could lead to greater investments in solutions that farmers and ranchers need to adapt to a rapidly changing climate. By investing in climate adaptation solutions, we can create a resilient future for all farmers and ranchers.
Vincent Gauthier is manager for Climate-Smart Agriculture at the Environmental Defense Fund and works with farmers, agricultural organizations, and food companies, conducting research on financial mechanisms and policies for boosting climate resilience in U.S. agriculture.
