How to incentivize food systems to meet the realities of the 21st century

Food systems are currently not fit for purpose. They do not meet the food and nutrition security needs of a growing global population and create significant environmental and health costs. As such, a comprehensive transformation is required in the way our food is produced - including the practices of more than 500 million smallholder farmers - and the consumption patterns of 7.7 billion people.

To enable such a transformation while meeting the UN's Sustainable Development Goals (SDG), several transitions are required: to healthier and nutritious diets; to sustainable agricultural practices that protect and restore nature; to more inclusive livelihoods; and to greater efficiency in the production, distribution and consumption of food.

To achieve this will require the right set of incentives for food system actors – incentives that can overcome all of the hurdles preventing stakeholders from making a change, as well as incentives that address the costs of behavioural change, mitigate the costs of transition and, potentially, fund ongoing economic costs. These incentives must fill knowledge and awareness gaps and be powerful enough to change the mindsets of billions of individuals.

Therefore, the key to transforming food systems lies in reimagining incentives. Many of the current incentive mechanisms were put in place decades ago, when development imperatives such as food security and self-sufficiency took centre stage. As the world has moved towards a more holistic and integrated understanding of food systems, one that meets aspirations for healthy people and a sustainable planet, there is a need to repurpose existing incentives and create new ones where required.

With this purpose in mind, the Food Systems Initiative of the World Economic Forum, in collaboration with McKinsey & Company, has launched a report today entitled Incentivizing Food Systems Transformation. The report details four pathways for creating the incentives needed to transform food systems:

1) Repurposing public investment and policies: Policies and regulatory frameworks can be reformed to provide positive incentives for those in the food system to produce and consume food that is healthy for people and the planet.

2) Business model innovation: Companies can redesign business models to prioritize environmental, social and financial outcomes.

3) Institutional investment: Investors can set higher standards with respect to how companies target environmental and social outcomes alongside financial returns.

4) Consumer behavioural change: Consumers can shift their demand to environmentally and socially responsible and nutritious products.

Each of these pathways provides a unique opportunity to drive change. For example, governments spend $570 billion annually on public support for agricultural producers; these subsidies are focused on achieving historical development imperatives, such as eliminating hunger and reducing poverty, rather than at incentivizing the behaviours that will achieve today’s broader vision for food systems. One example is poorly structured fertilizer subsidies that can lead to over-usage, causing water pollution from fertilizer run-offs and additional emissions of greenhouse gases (GHG). By realigning incentives in the policy and regulatory environment and by using public-sector investments, governments can change the economics that drive companies, investors and smallholder farmers.

We are already seeing progress on each of these pathways, albeit on a small scale. Developing a broad-based agenda for change will not be straightforward and will need deliberate action.

First, the report highlights key barriers along each of these pathways that prevent participants in food systems from pursuing change. It proposes a menu of solutions that can address these challenges, as well as the role different stakeholders can play in incentivizing shifts.

For example, in the past two years we have seen a 34% increase in global assets that consider environmental, social and governance (ESG) in portfolio election and management. As climate and health-related risks become increasingly important, we expect to see even higher growth that could unlock significant institutional capital for the agri-food sector. However, to unlock this financing, we must address challenges related to unfavourable risk-return profiles for investments, lack of intermediation vehicles, limited information and market data, and constraints in the enabling environment. The report highlights actions that stakeholders can undertake to unlock these barriers.

Second, while recent progress has been made in all four pathways, it’s important to note that all four pathways are inter-connected, and that progress along all four is needed to support incentives for food system participants and to stimulate change more broadly. For example, unlocking consumer behavioural change at scale requires business model innovations to make healthy food affordable for consumers, public investments to educate consumers on the need for change, and taxation and pricing policies to encourage behavioural shifts.

Third, realigning incentives will involve calculated trade-offs between the numerous and diverse - yet interconnected - outcomes within the system. For example, the higher costs of producing environmentally and socially responsible foods will make them more expensive to consumers. Funding these transition costs and any resulting risks, including through appropriate safety nets, is important for protecting and compensating vulnerable stakeholders in the food system.

Lastly, there is no one-size-fits-all approach for incentivizing food systems transformation. Each country and region can choose a bespoke method that will involve setting transition goals, then choosing incentive pathways and actions aligned with them.

All stakeholders, including the private sector, governments, civil society, development agencies and research/thought leaders have a role to play in making progress along the four required pathways to incentivize the behavioural change required of both producers and consumers of food. Progress requires individual, coordinated and collective action at country, regional and global levels. Multistakeholder collaborations and platforms that enable systemic transformation will be key to developing scalable approaches and models.

To elaborate on these incentive mechanisms in more detail, the report illustrates how the four incentive pathways can be used to incentivize adoption of beneficial agriculture practices by farmers – practices impactful enough to reduce agricultural GHG emissions by around 30% of projected global agricultural emissions in 2050, which is equivalent to more than five times the annual emissions from aircraft.

The report highlights 25 of the most impactful GHG-efficient production practices and six carbon-sequestration methods that can be adopted by farmers. For the former, if implemented at scale, several existing practices could reduce emissions from animal, rice and crop production by about 20-25% of annual agricultural production emissions. The report estimates that if all the available GHG-efficient production practices were implemented at full scale, the global food system could see cost savings of more than $50 billion annually.

However, the adoption of many of these GHG-efficient practices will require a significant shift in the behaviour of growers and other ecosystem actors. To reach the right level of intervention and impact, the incentive mechanisms need to be supported by building skills and increasing funding.

With only 10 years left to achieve the SDGs, world leaders have been calling for a decade of action to meet the 2030 Sustainable Development Agenda. The recently announced UN Food Systems Summit in 2021 provides an important catalyst for mobilizing collective action to transform food systems and meeting the SDGs. This report provides a roadmap with five action areas that the global community can use to incentivize transformation.

As the world prepares for the decade of action as well as the important milestone of the UN Food Systems Summit in 2021, it is our hope that stakeholders can develop a collective leadership action agenda, beginning with a significant effort towards realigning incentives - so that our food systems are fit for the realities of the 21st century.