Unlocking climate finance for agriculture through innovative financing mechanisms

Dhanush Dinesh and Fabian Verhage(CCAFS)

New business and financial models are emerging to unlock climate finance and capitalize on the opportunities for climate action in agriculture.

The World Bank estimates that every year from 2010 to 2050 between USD 70 and 100 billion should be spent on adaptation in developing countries. The cost of adaptation in agriculture specifically has been estimated at a yearly USD 7 billion by the International Food Policy Research Institute. Fortunately, investing in adaptation in agriculture can generate positive returns on investments and co-benefits for sustainable development, so private and public sectors are devising new mechanisms to capitalize on these opportunities.

In a new working paper by the CGIAR Research Program on Climate Change, Agriculture and Food Security and partners, experts highlight climate financing opportunities as part of the best bet innovations for adaptation in agriculture.

Private adaptation finance

Traditionally, discussions around adaptation finance have focused on the public sector, but the private sector offers a huge opportunity to mobilize climate action and finance in agriculture. The private sector is already investing substantially in adaptation, either to safeguard their own production or to capitalize on new business opportunities. An example of this can be found in Brazil, where Rabobank promotes and finances Integrated Crop, Livestock and Forestry (ICLF) farming among its clients. ICLF allows farmers to restore underutilized or degraded arable land, increasing their profitability. Together with UN Environment, Rabobank recently announced a new USD 1 billion facility to scale up such efforts around the world.

Impact investment

Impact investment is another growing field of climate finance. Impact investors fund projects with social and environmental benefits, which makes agriculture an attractive sector for investment, as investments often lead to multiple development benefits. An example of an impact investor is Root Capital, which invests in the growth of small agricultural enterprises in Africa and Latin America. Investments in such companies can stimulate incomes and job creation, empower women and youngsters and preserve the environment. By 2017, Root Capital had deployed over USD 1.1 billion in credit to 659 businesses, who collectively source from over 1.2 million smallholder farmers. Other examples of impact funds that invest in agriculture are Acumen, LGT Venture philanthropy, Vital Capital, Althelia Ecosphere Fund and Moringa Fund.

Blended finance

With blended finance, development finance and philanthropic funds use their capital to incentivize and leverage private sector capital. Traditionally, financial institutions shy away from lending to smallholder farmers and small enterprises in agriculture due to perceived high risks and high transaction costs. By blending climate finance with private agriculture finance, some of these challenges can be addressed. An example on blended finance is the Strengthening Adaptation and Resilience to Climate Change in Kenya (StARCK+) project of United Kingdom’s Department for International Development. The Climate Smart Agriculture Component (CSAC) of StARCK+ provides repayable grants to micro-finance institutions and their agribusiness partners for lending to farmers and agribusiness actors. In this way, the project aims to catalyse private sector innovation and investment for agricultural adaptation.

Mainstreaming climate-resilient practices into financial institutions and investor’s operations

A fourth development through which more climate finance can be unlocked for climate action in agriculture is the mainstreaming of climate resilience in the operations of financial institutions and investors. Enterprises and farmers that are resilient to climate stresses are better capable to pay back loans over time and considered more bankable. The financing world is starting to recognise this, as demonstrated by the establishment of the Climate Action in Financial Institutions Initiative, through which 31 private and public financial institutions support each other to incorporate climate change considerations systematically across their strategies, programs and operations.

Investments from the private sector are needed to scale up climate-smart agricultural practices. The innovative financing mechanisms described above are therefore crucial to realise the potential of agriculture for adaptation and mitigation. A challenge that remains for deployment of these business and financial models is the fear of early-stage projects by investors and development funders. Another challenge is to include the poorest of the poor, as business and financial models tend to benefit smallholders with more resources. On the other hand, however, once proven to work, financial institutions around the world are likely to adopt these new business models and improve the adaptive capacity of farmers and agribusinesses.

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