Paper: arXiv 2404.13818

Authors: Jiayue Zhang, Ken Seng Tan, Tony S. Wirjanto, Lysa Porth

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.

Complexity vs Empirical Score

  • Math Complexity: 6.5/10
  • Empirical Rigor: 3.5/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper introduces an innovative theoretical framework integrating agricultural ESE (Environmental, Social, Economics) scores into joint liability microcredit models using mean-variance utility functions. However, its validation relies primarily on synthetic simulation exercises rather than empirical backtesting on real-world agricultural credit datasets.

Research Flowchart

  flowchart TD
    A[Research Goal: Adapt ESG credit scoring for farmers under climate change] --> B[Input Data: Agricultural sustainability variables & climate risks]
    B --> C[Formulate ESE Score: Integrate ESE into personal credit ratings]
    C --> D[Model Framework: Joint liability models with mean-variance utility]
    D --> E[Simulation: Test optimal group sizes & ESE scores across climate scenarios]
    E --> F[Outcomes: Defined optimal group dynamics & improved risk-adjusted agricultural lending]

Cited References (78)

  1. ESG integration and the investment management process: Fundamental investing reinvented (2016)
  2. The carbon footprint of agricultural crop cultivation in India (2018)
  3. Aggregate confusion: The divergence of ESG ratings (2022)
  4. Credit scoring for agricultural loans: a review with applications (1991)
  5. Can agricultural credit scoring for microfinance institutions be implemented and improved by weather data? (2018)
  6. Machine learning (ML) technologies for digital credit scoring in rural finance: A literature review (2021)
  7. Credit scoring for farm loan pricing (1984)
  8. An analysis of credit scoring for agricultural loans in Thailand (2005)
and 70 more
  1. The use of credit scoring in microfinance institutions and their outreach (2014)
  2. How has microcredit supported agriculture? Evidence using panel data from Bangladesh (2016)
  3. Can credit scoring help attract profit-minded investors to microcredit? (2009)
  4. Credit scoring for microfinance: is it worth it? (2012)
  5. Quantitative assessment of agricultural sustainability reveals divergent priorities among nations (2021)
  6. Determinants of smallholder farmers’ participation in microfinance markets in Huye district, southern province, Rwanda (2021)
  7. Achieving the national development agenda and the Sustainable Development Goals (SDGs) through investment in ecological infrastructure: A case study of South Africa (2017)
  8. The future challenges of food and agriculture: An integrated analysis of trends and solutions (2019)
  9. Satisfaction and comparison income (1996)
  10. Assessing the Effectiveness of the Actuaries Climate Index for Estimating the Impact of Extreme Weather on Crop Yield and Insurance Applications (2022)
  11. Fighting poverty with microcredit: experience in Bangladesh. (1998)
  12. Responsible investors: Who they are, what they want (2013)
  13. Selecting socially responsible portfolios: A fuzzy multicriteria approach (2019)
  14. The influence of firm size on the ESG score: Corporate sustainability ratings under review (2020)
  15. Do sovereign wealth funds value ESG engagement? Evidence from target firm’s CSR performance (2022)
  16. Quantification of ESG regulations: a cross-country benchmarking analysis (2022)
  17. Exploring the relationship of ESG score and firm value using cross-lagged panel analyses: Case of the Indian energy sector (2022)
  18. Does sustainability activities performance matter during financial crises? Investigating the case of COVID-19 (2021)
  19. ESG and financial performance: aggregated evidence from more than 2000 empirical studies (2015)
  20. Are we adapting to climate change? (2011)
  21. Responsible investing: The ESG-efficient frontier (2021)
  22. Banker to the poor: Micro-lending and the battle against world poverty (2007)
  23. The economics of microfinance (2010)
  24. Rural financial markets in developing countries (2007)
  25. Climate change risk and agriculture-related stocks (2019)
  26. Portfolio Selection (1952)
  27. From the stockholder to the stakeholder: How sustainability can drive financial outperformance (2015)
  28. The impact of corporate sustainability on organizational processes and performance (2014)
  29. Reinforcement learning: An introduction (2018)
  30. Introduction to machine learning (2020)
  31. Agriculture production as a major driver of the Earth system exceeding planetary boundaries (2017)
  32. Intergovernmental panel on climate change (2007)
  33. Food and Agriculture: the future of sustainability (2012)
  34. Policy efficiency in the field of food sustainability. The adjusted food agriculture and nutrition index (2018)
  35. G20 MACS white paper: Metrics of sustainable agricultural productivity (2016)
  36. Toward a sustainable metric and indicators for the goal of sustainability in agricultural and food production (2021)
  37. The future of agriculture: Agricultural knowledge for economically, socially and environmentally sustainable development (2008)
  38. Global food self-sufficiency in the 21st century under sustainable intensification of agriculture (2020)
  39. FinRL-Podracer: High performance and scalable deep reinforcement learning for quantitative finance (2021)
  40. The impact of sustainability practices on corporate financial performance: Literature trends and future research potential (2018)
  41. Do rural banks matter? Evidence from the Indian social banking experiment (2005)
  42. Group versus individual liability: A field experiment in the Philippines (2006)
  43. Observing unobservables: Identifying information asymmetries with a consumer credit field experiment (2009)
  44. Integrating ESG in portfolio construction (2019)
  45. ESG rating disagreement and stock returns (2021)
  46. Does Fintech Development Enhance Corporate ESG Performance? Evidence from an Emerging Market (2022)
  47. The economics of lending with joint liability: theory and practice (1999)
  48. Joint liability versus individual liability in credit contracts (2011)
  49. Back to Bentham? Explorations of experienced utility (1997)
  50. Key challenges for the establishment of the monitoring, reporting and verification (MRV) system in China’s national carbon emissions trading market (2018)
  51. The Effect of ESG Screening on Investment Return, Risk and Diversification (2021)
  52. What a difference an ESG ratings provider makes (2020)
  53. The effect of financial materiality on ESG performance assessment (2021)
  54. Reinforcement learning: A survey (1996)
  55. Continuous-time mean–variance portfolio selection: A reinforcement learning framework (2020)
  56. FinRL: A deep reinforcement learning library for automated stock trading in quantitative finance (2020) — link
  57. Balancing Profit, Risk, and Sustainability for Portfolio Management (2022)
  58. Deep learning for decision making and the optimization of socially responsible investments and portfolio (2019)
  59. Aggregate confusion: The divergence of ESG ratings (2019)
  60. Sustainable investing with ESG rating uncertainty (2022)
  61. A deep reinforcement learning framework for the financial portfolio management problem (2017) — link
  62. ESG and financial performance: aggregated evidence from more than 2000 empirical studies (2015)
  63. ESG and financial performance (2021)
  64. Differentiating ambiguity and ambiguity attitude (2004)
  65. Common risk factors in the returns on stocks and bonds (1993)
  66. Capital asset prices: A theory of market equilibrium under conditions of risk (1964)
  67. Alpha as ambiguity: Robust mean-variance portfolio analysis (2013)
  68. Sustainable investing in equilibrium (2021)
  69. Joint liability and adaptation to climate change: evidence from Burkinabe cooperatives (2021)
  70. Optimal group size in joint liability contracts (2017)

0 of 78 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.