How to finance the transition to climate-smart agriculture

As we continue to work to better the environment, it is no secret that increasing the health of agricultural soils has benefits, including greater biodiversity, improved water conservation and quality, climate change mitigation, and better crop resilience. These outcomes are achieved by a paradigm shift in farming practices: regenerative agriculture.

However, the transition to regenerative agriculture systems by farmers is often hindered by a common yet critical aspect of many systems changes: financing. While environmental motivations may be present, ultimately, this transition represents a business decision for every farmer. Shifting from long-standing, conventional practices, to regenerative agriculture requires an increased investment of time, labour, and money.

According to the recent report 100 Million Farmers: Breakthrough Models for Financing a Sustainability Transition from the World Economic Forum and Bain & Company, this hurdle is typically short-term economic risk for farmers. In the first few years after adoption, farmers can face higher costs from technology and input changes as well as temporary yield losses. Over time, as the health of the soil improves farmers often see increased crop resiliency and, in some systems, increased yields. This is due to enhanced levels of soil organic carbon, biodiversity, water content in soils, water quality, and soil fertility.

Many farmers cannot bear the initial costs and near-term risks without support. The ensuing question then becomes: how do we assist them?

Dave McKay, President and Chief Executive Officer, Royal Bank of Canada, explains, “Farmers have embraced climate-smart agricultural practices and food production for decades, but now it’s time for business leaders and policy-makers to fully support them. This entails backing coordinated initiatives that aid the agri-food sector in reducing emissions and finding additional ways to financially reward farmers for preservation efforts, not solely production.”

The aforementioned report is one example of a critical piece of thought leadership that emerged from the 2024 World Economic Forum Annual Meeting in Davos. This report – a collaborative effort involving financial institutions, agri-food value chain companies, and farming organizations – presents a model of financing and collaboration to support farmers that benefits all the actors that participate in it: farmers, financial institutions, agri-food companies, and others.

As farmers start to work through the management challenges of the regenerative transition, they need adequate safety nets to feel secure enough to take their first steps. To address the initial cost hurdle, farmers require financial support, including upfront payments or guarantees and lending or insurance on more favourable terms that shift the risk away from the farmer during the first few years after adoption. Financial support should be part of a broader “farmer services stack” that also includes technical assistance and measurement, reporting, and verification (MRV) services. Support for farmers must be flexible, not one-size-fits-all.

The majority of funding should come from monetizing ecosystem services that result from regenerative agriculture. To facilitate the sale of credits or claims, an anchoring organization would act as a “coordinating mechanism”, facilitating the exchange of ecosystem outcomes from farmers and demand for outcomes from the buyers that value them. To get new transitions off the ground and ensure that farmers can receive support at the beginning when they need it most, additional investment from public and private capital providers is required. This “financing stack” should include catalytic, concessional and long-term commercial investors, who would earn a return over time from ecosystem services monetization.

Successful implementation of this model requires collaboration among various stakeholders, including financial service providers, policy-makers, participants in the crop value chain, technical assistance providers, and regulators. The coordinating mechanism, mentioned above, enables collaboration among this broad group.

In addition to the facilitation of ecosystem services monetization between farmer and buyer, this organization integrates the farmer services stack, restructures cash flows for farmers to de-risk their transitions, assembles the financing stack, and manages risk for farmers and partners. This key role requires advanced financial capabilities. In innovative existing initiatives that demonstrate some elements of the breakthrough model, several kinds of actors have played the role of coordinating mechanism: grower associations and their affiliates, financial services providers, and agri-tech companies.

In essence, collaboration among influential actors is imperative to develop and deliver both a financial stack and services stack to farmers. By pooling resources, participating organizations, and farmers, the transition’s risk is collectively shared, minimizing its impact on any single entity.

As food systems transformation remains a pressing issue in 2024 with the upcoming COP30 in the major agricultural nation of Brazil, let us shift towards action. Most farmers cannot transition without support, making collaboration models for financing, training, and measurement more crucial than ever. This breakthrough model represents a growing trend in food systems investment, signalling a positive shift towards prioritizing our planet, people, and plants.

This article was written with contributions from Holly Sullivan (Specialist, Regenerative and Climate Adaptive Systems, World Economic Forum).