Role of climate finance in the agriculture sector

Introduction

Climate change will affect agriculture and will be affected by agriculture interrelatedly. With rising water stress globally and greenhouse gas emissions from farming worsening climate impacts, climate change is becoming a defining challenge for agriculture, food, and water. It will hit the developing countries harder because of the rise in the need for agricultural output in relation to their population. COP 21 of the UNFCCC has laid the foundation for global action on climate change mitigation and adaptation strategies. These are linked to SDGs, especially- SDG1: No Poverty, SDG2: Zero Hunger and SDG13: Climate Action. As a result, there is an urgent need for sustainable agriculture practices to support the sustainable management of land, water, and natural resources. Financing from both public and private sources is required for this transition to sustainable agriculture.

Complications

However, given the long-term nature of projects in sustainable agriculture, private investors may be hesitant to finance sustainable agriculture. Further, the perception of low profitability and lower margins among lenders, combined with banks not accounting for climate risks in their credit risk assessments, is a major impediment. Moreover, agriculture projects have long gestational periods and investment horizons, which makes lenders reluctant. In addition, there is no standard framework for evaluating the projects in financial terms. Furthermore, the challenge of small landholdings and capital required by farmers extends to make capital management and disbursal processes complex.

Solution

The financial sector plays a critical role by providing the support necessary to enable farmers to switch to sustainable farming practices. Climate finance as one of the financing tools may be used to mobilize public and private sectors capital to strengthen the links between farmers and lenders like financial institutions. Examples include Villgro, a social enterprise incubator, that uses a blended approach, depending on the needs of the venture by providing equity or grants. The incubator also assesses the venture through management commitment, business feasibility and the innovative solutions. Villgro incubates this with the support of its donors, like the Rockfeller Foundation and the Ford Foundation.

Another solution as adopted by the AGRI3 fund, which is created by UNEP and Rabobank is to support the transition to sustainable agriculture. It aims to mobilize US $1 billion in public and private capital by providing commercial banks with loan guarantees. Climate finance architecture, which facilitate direct financing to farmers, while educating the farmers on the importance of adopting climate-resilient practices, are also coming up. Such an architecture helps ensure that funds are absorbed and deployed effectively, maintaining credibility between farmers and lenders.

For public climate finance to be used effectively, a balance of mitigation and market-linked instruments are needed to rebalance the risk-reward metrics, and leverage and catalyze private finance in agriculture. Market-linked instruments also help mobilize funds for smallholders and SMEs, even though they have more value chain finance. Public-private partnerships for agribusiness development are also being developed through various partnership projects to develop agricultural value chains, research and innovation and market infrastructure.

One of the initiatives by the Food and Agriculture Organization (FAO) of the United Nations is Climate Smart Agriculture (CSA), which helps transform farming into green and climate-resilient practices. It provides financing options and helps implement the practices at the field level. NABARD in India also helps organizations source funds from national and international organizations like the National Adaptation Fund for climate adaptation and mitigation activities. It has implemented various climate change initiatives, like the National Adaptation Fund for Climate Change in various states in India, the Green Climate Fund across India, and Climate Change Fund. All of this serves as demonstrative evidence of how policymakers and regulators are equipped to make necessary reforms to encourage climate finance for agriculture.

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