How to mobilise climate-smart agriculture finance

Agriculture is a significant contributor to climate change, responsible for approximately 20% of global greenhouse gas (GHG) emissions and about 45% of total high-temperature absorbing methane emissions. The Food and Agriculture Organisation (FAO) states that for the past two decades, the contribution of agriculture to the world’s GDP has been stable at 4% while farm-gate GHG went up by 13%.

Conversely, climate-induced events such as increased temperatures, changes in precipitation patterns, and extreme weather events, adversely impact global agriculture. Without global action, The World Bank predicts that about 43 million people in Africa alone may fall below the poverty line by 2030. International Food Policy Research Institute (IFPRI) has warned that climate change may push 90 million Indians towards hunger by 2030 due to a decline in agricultural production and disruption in the food supply chain.

Climate-smart agriculture can combat GHG emissions by reducing emission intensity, while improving farm productivity and increasing the incomes of small and marginal farmers. Climate-smart agriculture practices, such as zero-emissions on-farm machinery and equipment, variable rate fertilization, dry direct seeding, low- or no-tillage, and animal feed mix optimization, can reduce emissions while maintaining food production levels.

However, it requires action from the more than 856 million people employed in agriculture. Reducing emissions is challenging, due to the risk of accepting lower yields in the short-term, even for long-term gains. Furthermore, new farm practices and technologies must reach small-scale farms, which produce 30-34% of the food supply and account for about 75% of farms. Additionally, the small-scale and fragmented composition of the farming sector in most developing countries compounds the difficulty in demonstrating the aggregated potential of the sector to achieve positive climate outcomes at scale. Policy-makers don’t focus on agriculture emissions, with only 38% of agriculture emissions covered in nationally determined contributions (NDC) under the Paris Agreement.

Traditional constraints on financing climate-smart initiatives in agriculture stem from perceptions of low profitability of agriculture, high perceived and actual risks, and high transaction costs due to ineffective linkages between financers and smallholder farmers. Hence, financers often erect several barriers to limit their portfolio’s exposure to agriculture by charging high-interest rates and elevating the qualifying criteria for lending. This market-distorting stance limits the capacity and skills to identify the financial needs of agriculture to implement adaptation and mitigation projects. It limits investments and the proliferation of climate-smart initiatives.

Significant upfront investments are required to execute agriculture’s transformation towards achieving the triple goals of combating climate change by reducing emission intensity, improving farm productivity, and increasing the incomes of small and marginal farmers. Financing is needed across the value chain of agriculture. To reduce GHG emissions, significant financing is required to adopt low-carbon emitting farm machinery and equipment, lower GHG intensive animal farming practices (enteric fermentation, manure storage, animal management), and follow System of Rice Intensification (SRI). On the other hand, significant financing is required to develop drought resilient seeds, adopt water-harvesting systems, change agriculture practices, and offer access to extension services and information on climate-resilient agriculture practices. Most of the activities, particularly for small farmers, need public financing support.

Deploying public finance (sourced from governments, multilateral agencies, climate funds, etc) is essential to nudge farmers to adopt climate-resilient practices. However, it can unlock resources from the private sector for farming practices that are profitable. For example, following SRI is profitable after one or two years. Solutions deployed by financers under such architecture must be infused with flexibilities in repayment conditions to match the cash flows of the local farming communities and agri-entrepreneurs. An effective blend of instruments like grants, project-based soft loans, debt, guarantees, insurances, etc., can emanate from cross-functional collaboration. This support can be tempered with a structured, objective, and transparent due diligence process. Such an approach can manage risks and deliver real impact while earning requisite returns.

To achieve climate-smart outcomes, entry points for directing climate finance toward smallholder farmers should be created. An enabling ecosystem can be set up to facilitate this through appropriate policy and regulatory frameworks. Some characteristics of this ecosystem include establishing a system of property rights for quick access to financial services, eco-smart local economy based credit rating systems, robust contract enforcement with consumer protection laws, farmer advisory services, and extension services, including post-harvest processing solutions and market linkages to manage risks and deliver value addition at the farm gate.

The development of digitally smart “farm-to-fork” food value ecosystems has the potential to unlock several climate-smart solutions for the future. Governments, private corporates, civil society, academia, startups, and smallholder farmer producer organizations (FPOs) should work in consortiums. By leveraging their collective internal strengths, such models can create a win-win for all stakeholders, while delivering climate goals and creating local livelihood opportunities.

The attributes of Agriculture Value Chain Financing (VCF) can be leveraged to provide holistic financial liquidity for such projects. The VCF model’s efficiency can be turbocharged using digital technologies like unique identification numbers, mobile-based apps, and branchless banking. It can seamlessly allow the intermingling of high-tech, scalable, personalised, collaborative precision agriculture offerings to achieve climate-smart goals. It can also be coupled with skill building and technical assistance to improve agricultural yields and reduce wastage. Such solutions can potentially bring smallholders an entire marketplace of goods and services at the click of a button in native languages.

Climate-smart agriculture financing can put into motion collaborative projects that create an impact by deploying pathbreaking innovation through rapid action. As the momentum picks up, every successful project will have a multiplier effect toward achieving a climate-resilient food ecosystem for our collective and integrated future.