Josefina Achaval-Torre, CoSAI Secretariat
Can financial incentives change the agricultural landscape to enable more sustainable and equitable food systems? What are the financial incentives that have worked thus far, and have the potential to be scaled up in the Global South? Through significant innovation, new examples are emerging that enable the transformation of agricultural systems to contribute to reducing the risk exposure of lenders. However, there is still limited evidence on instruments that work with farmers to support adoption of improved practices and concurrently support positive environmental and social outcomes in sustainable agriculture intensification (SAI).
THE GROWTH OF FINANCIAL INCENTIVES
A preliminary investigation by CoSAI highlighted a range of financial incentives that have been used to support the shift toward sustainability and address the negative impacts of agriculture on the environmental, human and social aspects.
Some of these approaches, such as carbon payments, are recent developments responding to the challenge of climate change. For example, HSBC has announced that it will raise a $1 billion natural capital investment fund. Lombard Odier has launched a $400 million circular bioeconomy fund that seeks to harness the power of nature. Walmart, meanwhile, has committed to transforming the world’s supply chains into truly regenerative systems, while protecting, managing or restoring at least 50 million acres of land and one million square miles of ocean by 2030.
Other mechanisms have been around for several decades, such as direct public payments which focus largely on addressing environmental challenges associated with inappropriate land management. The most widely adopted incentive instrument is payment for environmental services (PES), as this is one of the longest conditional financial incentive schemes in operation. Numerous successful PES initiatives have been implemented at different scales in Latin America, the United States, Africa, Southeast Asia, Europe and China, predominantly funded through the public purse. There are currently over 550 PES programs globally, steadily increasing in number, with total annual expenditures that could soon reach over $40 billion.
While much of PES is devoted to preserving forest resources, there are cases that have a direct agricultural land management focus. These include the restoration of grazing land, agroforestry initiatives, urban ecosystems, promoting climate smart agriculture, and others that have a clear environmental outcome. However, there are few that specifically address both environmental and social outcomes. For example, the Grain-to-Green Program in China converted 33.5 million hectares of cropland to forest at a cost of about $72.5 billion, using a permanent land retirement scheme that has reduced soil erosion and increased carbon sequestration at landscape scales. However, it was found that the net effects on household income were overall negative, even after program payments were considered. This highlights the importance of designing programs that factor in both social and environmental outcomes, supported by appropriate policy frameworks.
INNOVATIVE APPROACHES - FOR PEOPLE AND NATURE?
CoSAI’s review found that there are a number of interesting and innovative initiatives underway, including carbon payments, incentives and new methodologies for smallholder farmers [1-5], payment for biodiversity [6-8], climate-smart agriculture [9-11], land restoration through agricultural production [12-14], and access to finance [15,16] linked to environmental, social and governance issues. The full list of examples of the different initiatives considered in the preliminary investigation can be downloaded here.
While there are few details available on these initiatives, most of them appear to lack social analysis – for example, “smallholders” are often treated as a homogeneous group. There are a few cases that have a direct agricultural land management focus with environmental goals (such as restoration of grazing land, agroforestry initiatives, urban ecosystems and promoting climate-smart agriculture). Despite good results achieved by some of the financial incentives, there is also evidence that some of these initiatives have had: a) mixed effects on the environment, with most of them focused on agroforestry, water and land restoration; and b) generally negative social effects, where the most impacted are farmers, particularly small-scale producers.
Much of the financing that supports incentive-based schemes at scale comes from the public sector. However, there are several constraints in raising public (and private) capital to support financial incentive mechanisms. Still, innovative initiatives are being instigated by both the public and private sector separately, as well as funding techniques such as “blended finance” (a mixture of both). There is not yet enough evidence to make informed assessments of the benefits and trade-offs being made between environmental and social outcomes in these innovative initiatives. The adoption of practices and approaches that have public and social goods are often more difficult to achieve and less attractive due to a perceived limited immediate benefit (e.g. economic). In general, these practices require incentivization.
TARGETING FARMERS TO MEET ENVIRONMENTAL AND SOCIAL OBJECTIVES
To transform the global food system, we need to invest in innovating (and evaluating) financial instruments that can specifically benefit farmers, improve agricultural land use, and meet environmental and social objectives at scale. It is generally agreed that financial incentives, for both farmers and others, are the most effective instruments to facilitate change. As part of this process, it is necessary to bring together a diversity of actors to provide insights into addressing these challenges.
Further studies should focus on direct financial instruments aimed at incentivizing farmers and other direct food system actors to protect and restore nature and mitigate climate change in the Global South. These may include taxes, subsidies, PES, soft loans, conditional social transfers, or carbon and agriculture-based certification, together with linked policies and regulations.
CoSAI is moving forward with a fuller study that will offer recommendations for designing, implementing, and evaluating innovations in financial instruments that address the social and environmental objectives of SAI. CoSAI will participate in the upcoming IUCN World Conservation Congress, facilitating a session focused on Agricultural finance as a force for conservation: innovations for and from the Global South. Following up on the global dialogue, CoSAI will host a series of regional dialogues bringing together experts from all sectors in the Global South who have participated in innovation in financial mechanisms to support an inclusive sustainability transition in agriculture.
With thanks to Juan Forero and Andrew Noble for their contributions.
The views expressed in this blog are those of an individual consultant and are not necessarily supported by CoSAI.
1 Mirova: Where investing meets sustainability. Mirova.
2 Bayer takes steps to make carbon sequestration a farmer’s newest crop opportunity. Bayer, 21 July 2020.
3 CO2OL Tropical Mix. ForestFinest Consulting.
4Building sustainable cocoa agroforestry systems in Colombia. Initiative 20x20.
5Climate + Development Finance: Increasing investment to bankable projects. The Gold Standard.
7Building sustainable cocoa agroforestry systems in Colombia. Initiative 20x20.
8Responsible Commodities Facility. The Global Innovation Lab for Climate Finance, 2018.
9Monetizing Water Savings. The Global Innovation Lab for Climate Finance, 2020.
11The West African Initiative for Climate Smart Agriculture. The Global Innovation Lab for Climate Finance, 2019.
12Tropical Landscapes Finance Facility. TLFF Indonesia.
13Rural Prosperity Bond. The Global Innovation Lab for Climate Finance, 2020.
14Sustainability-linked loans: Banking on a sustainable food system [video]. Financial Times, 30 September 2020.
15Food Securities Fund starts operations, makes first investment. Clarmondial, 9 March 2021.
16Selvashrimp. Blueyou Ltd.