Implementing natural capital credit risk assessment in agricultural lending

Agriculture has critical impacts and dependencies on natural capital, and agricultural lenders are therefore exposed to natural capital credit risk through their loans to farmers. Currently, however, lenders lack any consistent methodology for assessing natural capital credit risk in agriculture, and are challenged by the fact that the relevant risks vary considerably by agricultural sector and geography. This paper develops a natural capital credit risk assessment methodology based on a bottom-up review of the risks associated with natural capital impacts and dependencies for Australian beef cattle farming. It demonstrates that implementing natural capital credit risk assessment is feasible in agricultural lending, using a combination of quantitative and qualitative inputs. Implementation challenges include the complexity and interconnectedness of natural capital processes, data availability and cost, spatial data analytical capacity and the need for transformational change both within lending organisations and across the banking sector.