mathematics Article A Case Study of the Impact of Climate Change on Agricultural Loan Credit Risk Jagdeep Kaur Brar 1,* , Antoine Kornprobst 2 , Willard John Braun 3 , Matthew Davison 2 and Warren Hare 4   Citation: Kaur Brar, J.; Kornprobst, A.; Braun, W.J.; Davison, M.; Hare, W. A Case Study of the Impact of Climate Change on Agricultural Loan Credit Risk. Mathematics 2021, 9, 3058. https://doi.org/10.3390/math9233058 Academic Editor: Marianito Rodrigo Received: 18 October 2021 Accepted: 24 November 2021 Published: 28 November 2021 Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affil- iations. Copyright: © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). 1 Department of Mathematics & Statistics, University of British Columbia, Okanagan Campus (UBCO), Kelowna, BC V1V 1V7, Canada 2 School of Statistics & Actuarial Sciences, University of Western Ontario (UWO), London, ON N6A 3K7, Canada; akornpro@uwo.ca (A.K.); mdavison@uwo.ca (M.D.) 3 Department of Computer Science, Mathematics, Physics and Statistics, University of British Columbia, Okanagan Campus (UBCO), Kelowna, BC V1V 1V7, Canada; John.Braun@ubc.ca 4 Department of Mathematics, University of British Columbia, Okanagan Campus (UBCO), Kelowna, BC V1V 1V7, Canada; Warren.Hare@ubc.ca * Correspondence: jkaur87@student.ubc.ca Abstract: Changing weather patterns may impose increased risk to the creditworthiness of financial institutions in the agriculture sector. To reduce the credit risk caused by climate change, financial institutions need to update their agricultural lending portfolios to consider climate change scenarios. In this paper we introduce a framework to compute the optimal agricultural lending portfolio under different increased temperature scenarios. In this way we quantify the impact of increased temperature, taken as a measure of climate change, on credit risk. We provide a detailed case study of how our approach applies to the problem of optimizing a portfolio of agricultural loans made to corn farmers across different corn producing regions of Ontario, Canada, under various climate change scenarios. We conclude that the lending portfolio obtained by taking into account the climate change is less risky than the lending portfolio neglecting climate change. Keywords: credit risk; climate change scenario; conditional value at risk; optimal lending portfolio 1. Introduction The impacts of climate change are manifesting through rising sea levels, reduced ice cover, extreme weather events, erratic weather patterns, and record-breaking temperatures across the globe. The Intergovernmental Panel on Climate Change (IPCC) forecasts a temperature rise of 1.4 to 5.5 Celsius degrees over the next century. The IPCC projects that a temperature increase of 1 to 3 degrees over 1990 levels will not only have differential impacts across regions, but it may also have varying impacts across different economic sectors. Agriculture, due to the strong dependence of crop yields on both weather and climate, is one of the most climate sensitive sectors and is the focus of the current study. This study examines how climate change models can be used in portfolio optimization of loans to the agricultural sector, and how climate change impacts credit risk. The impact of climate change on the regional and global production of cereals in- cluding wheat, rice, maize (which we call corn in this study), and soybean is performed in [1] which shows that a large increase in global temperature may cause a substantial decrease in crop production both globally and across many regions by 2080. This result is supported by [2], which demonstrates the negative impact of rising temperatures on the global production of wheat, corn, and barley. Climate change impacts food production both through temperature changes and precipitation changes. A study [3] analyzed the impacts of future climate scenarios of 2 degrees warming and 20% precipitation decline on corn yield at nearly 200 Sub-Saharan Africa sites, using the CERES corn model. The study predicts an impact of between 11.4% Mathematics 2021, 9, 3058. https://doi.org/10.3390/math9233058 https://www.mdpi.com/journal/mathematics