Investing in Climate-Smart Agriculture (CSA) finance allows financial institutions to become partners, not just providers, in fostering a resilient agricultural sector.
As climate change accelerates, rising temperatures, erratic rainfall, and extreme weather events are increasingly threatening global food security, with smallholder farmers bearing the brunt. The urgency to transition the agri-food sector toward low-carbon, resilient systems is no longer a choice but a necessity. However, this transformation hinges on immediate and substantial investment in climate-smart agriculture (CSA) technologies and practices.
RELEVANT SUSTAINABLE GOALS
Climate-Smart Agriculture: A Win-Win Solution
Climate-smart agriculture (CSA) integrates sustainable practices that enhance crop yields, boost resilience, and mitigate climate impacts across the agricultural value chain. Despite the significant need for investment—estimated at $260 billion annually—current climate finance for agriculture falls far short, with only 4.3% of tracked climate finance in 2019/2020 directed to the agriculture, forestry, and land use sectors. Most of this funding comes from public sources, leaving a gap that private financial institutions are well-positioned to fill.
By investing in CSA, financial institutions not only contribute to a greener future but also benefit from more resilient agricultural portfolios. Turning CSA from a niche concept into a mainstream reality can be achieved by developing tailored financial products, understanding climate risks, and building partnerships across the value chain.
Tailoring Financial Products to Farmers’ Needs
One way financial institutions can support CSA is by designing specialized financial products such as CSA loans and weather-index insurance that cater to the unique needs of farmers adopting climate-smart practices. For instance, agroforestry systems and climate-adapted crop varieties require long-term investments. Financial products tailored with appropriate payment terms and grace periods aligned with crop cycles can make these investments more accessible to farmers.
Additionally, incentivizing farmers through variable interest rates linked to climate performance, rebates, discounted insurance premiums, and non-financial services can encourage the adoption of CSA practices. For example, farmers who implement water-saving technologies like drip irrigation could receive lower interest rates compared to those using conventional methods.
Managing Climate Risks in Agriculture
Understanding the physical and transitional risks affecting agriculture portfolios is essential for financial institutions aiming to invest in CSA. Conducting climate scenario analyses and stress tests can help institutions evaluate the resilience of their portfolios, identify financial risks, and adjust lending strategies accordingly. The use of digital solutions, such as satellite and drone imagery combined with machine learning algorithms, can further enhance the ability to assess borrowers’ repayment capacity and portfolio exposure to climate risks.
Empowering Farmers Through Digital Platforms and Partnerships
Investing in digital platforms that connect farmers to markets, weather data, and agronomic advice empowers them to make informed decisions and adopt climate-smart practices. Building capacity through partnerships with local organizations, such as NGOs, research institutions, and government agencies, can provide essential training and technical assistance to farmers on CSA practices and financial management.
Establishing value chain partnerships is another critical strategy. By linking input suppliers, technology providers, processors, and financial institutions, these partnerships can help farmers gain access to the necessary resources to implement CSA solutions. Pre-arranged purchase agreements can further facilitate access to financing, enabling farmers to secure loans against future sales of climate-smart produce.
Mobilizing Private Capital for CSA
Mobilizing private capital through financial institutions offers numerous advantages, including streamlined fund delivery, reduced transaction costs, and broader outreach to diverse farmers. Blending concessional finance with commercial funds, supported by risk-sharing instruments, can further stimulate investment in CSA. The multiplier effect of concessional finance, where each dollar can mobilize four dollars of commercial finance, demonstrates the potential impact of these blended finance approaches.
The International Finance Corporation (IFC) exemplifies this strategy through its investments in global CSA projects. In Kenya, a $100 million loan to Equity Bank supported over 47,000 smallholder tea farmers in adopting CSA solutions such as solar energy, climate-resilient seeds, and sustainable fertilizer use. Similarly, in Brazil, a $100 million loan to Banco ABC Brasil S.A. enabled the expansion of its climate-smart agriculture lending and biofuel production.
Lead image courtesy of Lorenza Cotellessa. all other images courtesy of Beagle Button.
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