ANN ARBOR, Mich. (Oct. 21, 2024) – Though fertilizer runoff can cause water pollution, the demand for high crop yields often stymies conservation practices. One possible answer lies with encouraging private financiers to incentivize farm sustainability efforts by identifying the full lending risks associated with fertilizer emissions. The Foundation for Food & Agriculture Research is providing a $600,000 Seeding Solutions grant to the University of Michigan (UM) to explore this potential solution by linking a water quality modeling and monitoring system in the Lake Huron drainage basin to sustainability-based financial products for farmers. The Great Lakes Protection Fund is providing matching funds for a total investment of $1,200,000.
Researchers led by Dr. Peter Adriaens, professor of civil and environmental engineering at UM, are determining how water quality can be tracked, linked to individual farms and used to assess financial risk for lenders. Linking a farm’s fertilizer emissions – as carbon equivalents – to lending and the agricultural bond market reflects the broader cost of farm operations by factoring in downstream pollution risks and mitigation costs. These estimates improve transparency, allowing lenders to determine the risks associated with individual farms and set loan terms accordingly.
The researchers intend to develop financial products that encourage sustainable water management, such as reduced fertilizer use and other soil health and conservation practices. Farmers practicing sustainable agriculture would enjoy the benefits of lower financing costs and insurance risk pricing benefits while contributing to cleaner water in the Great Lakes region and beyond.
“The challenge of balancing the costs and benefits of water conservation practices continues to hinder widespread adoption,” said Dr. Kathy Boomer, FFAR scientific program director. “Dr. Adriaens’ team collaboration with financial institutions to quantify risks and develop tailored incentive programs, represents an innovative approach to encouraging the adoption of conservation practices.”
“With over $20 billion in lending through farm credit, and an estimated billion tons of carbon equivalents in Great Lakes nutrient runoff alone, sustainability-linked financing in agricultural practices presents a major opportunity affecting cost of capital for farmers,” said Dr. Adriaens. “The financial benefits are predicated on high-fidelity monitoring, reporting and verification (MRV) of performance impacts, both in the food chain of capital and the supply chain of food.”
“Our team, with partners in industry and agricultural finance, has been working on creating a digital twin of the farm, and linking granular farm emissions information over the blockchain into financing and risk underwriting channels,” Dr. Adriaens continued.
For more information about this research, visit the Performance-Based Financing for Sustainable Water Management grant page on FFAR’s website.
