To meet climate goals, mainstream climate change mitigation in agricultural finance

Blended finance improves returns on investment in climate change mitigation in agriculture, allowing farmers and investors to benefit from increases in sustainability. Photo: CCAFS (Bangladesh)
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Emerging financial instruments and growing public sector support for mitigation in agriculture are making lending and investment for low emissions development more attractive, setting the stage for large-scale public-private sector collaboration.

Only 0.5% of public climate change mitigation finance flowed to the agriculture and land use sector in 2015, according to a new report by Climate Policy Initiative (CPI). Given that the sector produces almost a quarter of greenhouse gas emissions globally, lack of action in agriculture threatens to prevent achievement of mitigation goals. Agriculture is one of the largest sources of emissions – and represents one of the largest sources for mitigation – in developing countries. Climate finance is urgently needed to meet climate change commitments in their Nationally Determined Contributions (NDCs).

NDCs form the foundation of the Paris Agreement, but they cover only approximately one-third of the emissions reductions needed to be on a least- cost pathway for the goal of staying well below 2°C.

Developing countries, in particular, require climate finance in agriculture to meet NDCs, and we need significant action by the private sector to increase ambition,” Lini Wollenberg, Low Emissions Development research leader for CCAFS, explained.

But there are signs of progress. At a COP23 side event, sponsored by CCAFS, CPI and the Climate-Smart Lending Platform, nine experts described innovative mechanisms for decreasing the risks and costs associated with agricultural investment, including evidence for business cases for climate action in agriculture, and widespread education and technical assistance for agriculture managers and financiers. These mechanisms make it possible to fund a range of producers, including smallholder farmers.

Innovative mechanisms

Angela Falconer, Associate Director of CPI, spoke about the huge opportunity for investment in the sector. CPI quoted figures from a paper by AlphaBeta, commissioned by the Business and Sustainable Development Commission, estimating that USD 320 billion per year in investment is needed in food and agriculture to unlock business opportunities worth USD 2.3 trillion annually for the private sector by 2030 in the implementation of the Sustainable Development Goals (SGDs). The question, she said, is: How are we going to seize this opportunity?

One way is to identify, develop and launch new sustainable finance instruments and mechanisms, which the Global Innovation Lab, a public and private initiative, is doing. In the last year, Lab instruments have mobilized almost USD 1 billion in climate finance.

A key feature of climate action in agriculture is that many climate-smart agriculture management actions increase farmers’ productivity – and thus profits – while also decreasing emission intensity and thus providing mitigation.

Banks increasingly understand that by adopting climate-smart management practices, farmers decrease production risks and increase incomes. A more productive farmer is a smaller risk for banks,” Mark Ellis-Jones, CEO of F3Life, said.

Ellis-Jones explained how the Climate Smart Lending Platform brings multiple actors together.

  • Investors: to provide the debt and grants necessary to scale climate-smart lending pilots
  • Tool developers: to provide the tools and systems necessary to roll-out climate-smart lending practices at scale
  • Technical assistance providers: to help farmers adopt climate-smart agricultural practices and lenders on-board climate-smart lending systems
  • Local lenders: to manage the last-mile relationships with smallholder farmers

A Green List of no-regret technologies in agriculture would help guide investors who are seeing to increase financing for bankable innovations in smallholder agriculture, Ellis-Jones said.  And establishing financial rules of disclosure by banks and other investors would support mainstreaming of climate in finance.

Finance in Motion, in partnership with KfW and Conservation International, is supporting innovations to increase sustainable livestock production. In Nicaragua, the eco.business Fund provides long-term financing to support the expansion of the agriculture credit portfolio, focusing on medium to large cattle ranchers that require financing to implement sustainable practices to transform the cattle sector. Gabriela Weber de Morais, Environmental and Social Compliance Associate at Finance in Motion, described the three main components to establishing and implementing their financing mechanism – establishing compliance, characterizing producers, and monitoring.

National leadership

Rwanda’s Green Fund (FONERWA) provides technical and financial support to public and private projects that align with Rwanda’s commitment to a green economy and with the country’s NDC, including support for sustainable intensification of small-scale farming; sustainable forestry, agroforestry and biomass energy; and increasing agricultural diversity for local and export markets.

Smallholder farmers are benefitting from public sector resources, but this is not yet resulting in the kind of transformation we are looking for. We've been able to mobilize public sector funds, but it's not enough. We need the private sector to become a key player to bring in the kind of transformation we want to see,” Alex Mulisa, Coordinator of FONERWA, said.

In the recent report on flows in climate finance, CPI found that 80% of funding is domestic, which means raised and spent in same country.  

This underlines the importance of domestic enabling policy environments and ecosystems for enabling private investments,” Falconer said.

Leveraging private sector action to reach scale

With public funding, the NAMA Facility aims to shift a sector in a country toward a sustainable, irreversible low carbon pathway. The NAMA Facility tries to achieve this transformation through using its USD 260 million to attract 7 times more private and public funding and by using multiple financial mechanisms.

One practical way to bring private sector and commercial banks to climate action in agriculture is to buy down some of their costs. We need to provide technical assistance to commercial banks to understand the opportunities,” Ash Sharma, Senior Adviser to the NAMA Facility, said. “Roles of public financing can be de-risking investments, funding project pipelines, and testing innovative financing instruments.”

Lizzie Teague of Root Capital emphasized the importance of blended finance for climate action. Blended finance comes from public, philanthropic, and private sector funds and is an important step to scaling up, according to the experts. Citing the Global Impact Investing Network, Teague explained that mitigation finance in the agriculture sector is attracting increasing interest in impact investment circles.

Mitigation finance in the agricultural sector often requires a blended finance approach, which includes mixing commercial capital with targeted public funding or subsidy to cover higher costs or risks to investors and technical assistance to investees,” Teague said.

Opportunities for blended finance and working with impact investors are making investment in climate change mitigation in agriculture more attractive for private sector investors.

We need to maximize the value of public sector investments for attracting private investment for climate action,” Juan Chang, Senior Forest and Land Use Specialist at Green Climate Fund, said.

The private sector drove massive scale-up of low emissions development in the energy and transportation sectors. Is agriculture next?

Representatives from two private sector organizations that attended the event – World Business Council for Sustainable Development (WBCSD) and the Fertilizer Canada, an association for fertilizer companies in Canada  – indicated their interest in improving mitigation in outcomes.

Many multi-national companies have also made mitigation commitments in production. Leveraging investments across the public and private sectors will increase ambition and contribute to transformation to low emissions agriculture.

Enhanced monitoring and reporting of non-state actions and the resulting emission reductions be will be essential to making pledged actions transparent and credible,” Lini Wollenberg said.

This issue was raised in a COP23 decision - called the Koronivia Joint Work on Agriculture - to move forward in agriculture within the UNFCCC framework. 

More information

View the presentations:

  1. Climate finance context, agricultural investments, and innovative financing instruments. Angela Falconer, Associate Director, Climate Policy Initiative
  2. Making climate finance work for low-emissions livestock development in Nicaragua, Gabriela Weber de Morais, Environmental and Social Compliance Associate, Finance in Motion
  3. Rwanda's Green Fund (FONERWA): an engine for 50 years of green growth, Alex Mulisa, Coordinator, Rwanda’s Green Fund (FONERWA)
  4. Finance and lessons learned at the NAMA Facility, Ash Sharma, Senior Adviser to the NAMA Facility

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