Bank-Shareholder Welfare and Sustainable Farm Lending

This paper discusses banks' potential to increase their shareholders' welfare by attaching more importance to the environmental performance of farm borrowers. Sustainable farm lending can give banks' shareholders direct ESG (environmental, social and governance) benefits that offset any reduction in bank profitability, but there is limited scope to do this as better ESG scores are likely to be associated with small reductions in banks' cost of equity capital. There are several ways in which shareholders can benefit indirectly from sustainable farm-lending practices. Firstly, banks can act as delegated monitors of farms' environmental performance on behalf of farms' customers. Secondly, banks can use sustainable lending to infer borrowers' private information about their default risk. Thirdly, facilitating changes in farming practices can increase farm values. Fourthly, farmers may be able to reduce short-termism by using sustainability-linked loans as commitment devices. All four possibilities potentially increase the value of banks' farm-debt portfolios. Finally, sustainable lending programmes that increase a bank's ESG score might increase the price it receives when it sells bonds to institutional investors, but the evidence reviewed here suggests that any cost savings will be small. The first four opportunities described here are more likely candidates for benefiting banks' shareholders