Financing of climate adaptation projects that encompasses agriculture has lagged that of climate mitigation projects, by a wide margin. This needs to change
Sivananth Ramachandran and Sandeep Bhattacharya
Climate Change is one the most important issues of our time. According to a 2021 report of the Intergovernmental Panel for Climate Change (IPCC), global warming is likely to exceed 1.5°C during the 21st century in most of the scenarios, and to exceed 2°C in some of the scenarios. Even at 1.5°C, our planet may experience frequent, and heavy precipitation, and flooding (some like heat in North America or sudden precipitation in Kerala have already manifested) among other vagaries.
Climate Change negatively affects agriculture, and agriculture contributes significantly to Climate Change. If no adaptation is followed, Climate Change is expected to reduce wheat yields by 6-23 percent in 2050, and rice yields by up to 6 percent, according to a 2018 Report of National Action Plan on Climate Change, a government policy document.
Agriculture, forestry, and land use accounted for 21 percent of the global greenhouse gas emissions in 2018. Deforestation, methane emissions from rice cultivation and livestock, and usage of chemical inputs, are among the chief culprits.
Despite its significance, financing of climate adaptation projects that encompasses agriculture has lagged that of climate mitigation projects, by a wide margin. In 2019, 64 percent of $80 bn climate finance mobilised by rich countries for developing countries was allocated to climate mitigation projects, and just 25 percent to adaptation projects; and the remainder to crosscutting activities, according to OECD.
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Although governments and development financial institutions will continue to play a major role, catalysing private capital will be key to meeting the scale of the challenge. In recent years, three private financing models have emerged for sustainable agriculture projects — blended finance instruments; green, social, and sustainable bonds (GSS); and, venture capital financing for AgTech companies. Let’s consider each in turn.
The term financial engineering has a negative connotation, but deployed effectively, as in the case of blended finance, it is a powerful way of raising resources to achieve a developmental objective. Blending public sources works best when the perceived risks are higher than actual risks, and when the development impacts are gained over longer time horizons, like in afforestation projects. In India, one of the most well-established blended finance mechanisms are the viability gap funding run by the government.
Green bonds are like traditional bonds, but their use of proceeds is earmarked for environmentally-friendly projects. In India, given the dominance of smallholder farmers, and periodic instances of farm distress, the social development aspects are equally important. In this context, social bonds can be powerful instruments, especially when interest rates can be linked to development targets. In August 2020, Symbiotics, a boutique investment firm, arranged a social bond for Samunnati, an Indian NBFC, raising Rs 506.2 million. Samunnati will use the funds to provide loans to Farmer Producer Organisations (FPOs), and farmers for climate-resilient agriculture projects.
In recent years, the presence of AgTechs, a segment of companies using technology in agriculture leading to increased productivity, and efficiency, has increased. Villigro, an incubator of social enterprises including in agriculture, supports agriculture projects with a substantial impact component, grants, and technical assistance of donors. Such support can improve project viability, and comfort for mainstream investors, and mobilise additional private capital.
However, several challenges remain. First, it is difficult to deploy a large amount of capital, given the prevalence of smallholder farms. Second, scaling up takes time and efforts, which many mainstream financial institutions are unwilling to pursue without adequate financial incentive. Third, although it might be possible to scale up using technology, it is yet to be proven on a large scale.
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Policymakers and other stakeholders can help. Given the myriad practices surrounding organic farming, developing a taxonomy of sustainable agriculture activities can help mobilise private capital, and supportive regulations. Banks should collaborate with AgTechs to leverage their data and technology to create a virtuous cycle of better credit evaluation, lower cost of loans, more financing, and additional demand from farmers for AgTech services. The states should sponsor additional research, especially long-horizon studies, on the benefits of sustainable agriculture practices, to enable greater adoption.
Climate Change is one of the biggest challenges of our times, and the growth in Environmental, Social and Governance (ESG) investing attests to the growing recognition by investors to the possibility that capital can make a difference. In agriculture, a large gap exists between the intention of investors and the actions that are needed to make a difference. It is important to redouble efforts in a sector that has the potential to contribute meaningfully in terms of environmental, and social developmental outcomes.
NOTE – This article was originally published in moneycontrol and can be viewed here
