Why Making A Sustainable Global Food System Needs Private Sector Intervention

Why Making A Sustainable Global Food System Needs Private Sector Intervention

“the global food system needs to be reshaped to be more productive, more inclusive of poor and marginalized populations, environmentally sustainable and resilient, and able to deliver healthy and nutritious diets to all,” – FAO

With a rapidly growing global population (an estimated 10 billion mouths to feed) and the commensurate rise in food demand, the world’s food system desperately needs to be decarbonised. Data shows that global food systems make up 21-37% of global GHG emissions, with food waste leading to 8-10% of emissions.

The Food and Agriculture Organisation (FAO) notes that “the global food system needs to be reshaped to be more productive, more inclusive of poor and marginalized populations, environmentally sustainable and resilient, and able to deliver healthy and nutritious diets to all,” highlighting that the creation of a sustainable food system is critical to tackle the systemic and complex challenges associated with climate change.

Sustainable food systems ensure universal food security and nutrition in a way that the economic, social and environmental resources of future generations are not compromised. This being said, achieving the transformation of the existing food system into a sustainable one would ensure equal access and availability of life-sustaining food and nutrition, while also reducing GHG emissions and tackling the devastating effects of climate change.

The need for collaboration

The COVID-19 pandemic exposed the highly interlinked nature of the global food system with other key systems such as energy, trade, health and more, reiterating the need for a comprehensive and concerted approach to complex challenges of the global food system and calling for collaborative action from all stakeholders to enact change. A number of initiatives ranging from policy interventions, regulation, advancements in AgriTech, knowledge sharing and technical assistance and even emergency humanitarian relief have been implemented.

However, transformative action (which is what the global food system desperately needs), can only really be achieved by marrying food and finance, and working towards scaling financing for crucial projects related to food. Participation from the private sector and financial institutions can enable the transformative change needed to establish a sustainable global food system.

Current trends

Sustainable finance bonds hit $287 billion in Q1 of 2021 (this was double of what was raised in Q1 of 2020). In the same time, green bonds rose 400% year-on-year to reach $131 billion. Refinitv data also demonstrates that following the COVID-19 crisis, investors are increasingly looking at ESG factors, with the ‘S’ of ESG growing steadily. Social and sustainability bonds are now equalling the dominating green bonds, making up 36% and 14% of Q1 2021 bond supply.

The transformation to low-carbon and sustainable food systems present interesting investment opportunities. The Business and Sustainable Development Commission estimated that there are investment opportunities worth over $2.3 trillion for the private sector, in the implementation of food-related SDGs, in 2016. These could target use of technology, reduction of food waste, enhancing markets and more, needed about $320 billion per year to achieve them.

Challenges

This being said, the CIGAR report on Financing the Transformation of Food Systems Under a Changing Climate also finds that the climate-smart investments needed have not achieved scale due to certain ‘core market failures’, with progress on building climate-smart financial systems being slow.

The ‘core market failures’ the report discusses, include:

  • Lack of bankable projects: identifying bankable projects with an attractive risk to return ratio is one of the most crucial challenge faced by investors, due to the odd investment sizes of interventions in this sector. Smaller ticket-sizes of food products pose barriers especially to investors looking for higher returns, whereas these projects are often too big for micro-finance as well
  • High risk: nascent projects or businesses with long tenors, high technical assistance needs and uncertain financial or environmental benefits hinder investment in this sector
  • Lack of reliable data: a lack of reliable data throughout the supply chain does not allow for effective assessment of investment risks and deters investors, and subsequently also increases risks

Resilient and low-emission agricultural supply chains are not being backed up by investments and climate finance flows quite disproportionately to mitigation interventions, with top sectors being renewable energy, energy efficiency and transport. Adaptation finance, i.e., the key to transforming the food system, makes up only 4% of the total climate finance mobilised in 2016.

Solutions

Incentivising capital flows from the private sector is crucial in achieving sustainable food systems. Interventions can centre around 2 key areas:

Policy and regulation

  • Encourage more systemic and thorough collection of data throughout the food system, supported by better analysis and assessment to inform decisions in policymaking and investments
  • Require businesses and companies working in inter-related sectors such as agriculture, health, environment, transport and infrastructure to report and disclose climate-related data including emissions, waste and use of water
  • Incentivise the adoption of new climate-smart technologies to better processes in the food system, including data collection and monitoring, improving payment gateways to increase access and reduce transaction costs
  • Incentivise the adoption of nature-based solutions for climate adaptation
    Incentivise private sector participation in multistakeholder, PPP models to encourage increased capital flows
  • Integrate the environmental cost of unsustainable food production into business-as-usual decision-making
  • Provide credit enhancements to smaller projects as a way of de-risking investments and encourage greater private sector flows

Alternative financing

  • Blended finance projects which would help develop a pipeline of bankable projects as interventions are de-risked through the multistakeholder structuring and smaller projects gain better access to capital
  • Blended finance can also catalyse private capital “by standardising requirements/aggregation of public capital, realigning returns and leverage expectations, increasing effective application of risk tools, and increasing allocation of public capital for de-risking),”
  • SDG bonds: the NOK 4 billion, 5-year floating bond and the SEK 1 billion 5-year floating bond raised approximately $550 million to raise awareness about tackling food loss and waste. Leveraging similar approaches for capital raising can improve smaller projects’ access to capital markets
  • Greater allocation of climate finance to climate adaptation that specifically deals with making the food system more resilient to climate risks
  • Aggregating and/or securitising smaller interventions as marketable investment products for a larger investor base as this would de-risk these interventions

Bibliography

https://www.weforum.org/agenda/2020/11/sustainable-global-food-system-finance/

https://www.ipcc.ch/srccl/chapter/summary-for-policymakers/

https://www.unep.org/resources/report/unep-food-waste-index-report-2021

http://www.fao.org/3/ca2079en/CA2079EN.pdf

https://cgspace.cgiar.org/bitstream/handle/10568/101132/CCAFS%20KOIS%20Financing%20the%20Transformation%20of%20Food%20Systems%20Under%20a%20Changing%20Climate.pdf?sequence=1&isAllowed=y

https://www.refinitiv.com/perspectives/future-of-investing-trading/sustainable-finance-continues-surge-in-q1/

https://www.refinitiv.com/perspectives/future-of-investing-trading/top-6-esg-investing-trends-in-2021/

https://insights.nordea.com/en/sustainability/sustainable-bond-issuance/

https://www.worldbank.org/en/topic/financialsector/brief/agriculture-finance

https://www.worldbank.org/en/news/press-release/2020/10/15/world-bank-issues-sustainable-development-bonds-in-scandinavian-currencies-and-raises-awareness-for-food-loss-and-waste