Joint Liability Model with Adaptation to Climate Change

TL;DR

This paper develops a holistic credit scoring system for farmers that incorporates sustainability and climate adaptation factors, using joint liability models and simulations to assess risk and optimal group strategies.

Contribution

It introduces the ESE score integrating ESG factors into credit evaluation and adapts joint liability models for climate-resilient agricultural finance.

Findings

ESE scores influence credit risk assessments.

Optimal group sizes depend on climate and sustainability factors.

Simulation results highlight benefits of incorporating ESE scores.

Abstract

This paper extends the application of ESG score assessment methodologies from large corporations to individual farmers' production, within the context of climate change. Our proposal involves the integration of crucial agricultural sustainability variables into conventional personal credit evaluation frameworks, culminating in the formulation of a holistic sustainable credit rating referred to as the Environmental, Social, Economics (ESE) score. This ESE score is integrated into theoretical joint liability models, to gain valuable insights into optimal group sizes and individual-ESE score relationships. Additionally, we adopt a mean-variance utility function for farmers to effectively capture the risk associated with anticipated profits. Through a set of simulation exercises, the paper investigates the implications of incorporating ESE scores into credit evaluation systems, offering a nuanced comprehension of the repercussions under various climatic conditions.