Risk sharing between sectors at the heart of the solution in the lead up to the UN Food Systems Summit

It has been an eventful week for the financing of game-changing solutions in food systems:

• President Biden convened world leaders for a climate change summit, where the President made a bold commitment to reduce U.S. emissions by at least 50% by 2030. This was complimented by the announcement of a new climate finance plan.
• The launch of the Glasgow Financial Alliance for Net Zero (GFANZ) saw banks and financial institutions with more than USD 70 trillion in assets pledge to align investments with the goal of achieving net zero emissions.
• The European Commission’s published it rules for implementing a sustainable finance taxonomy and put the target of 55% reduction by 2030 into law.
• On Earth Day 2021, debate and action was action focused on this year’s chosen theme of ’Restore our Earth’.

The growing chorus of commitments to sustainable finance is not just admirable, its essential. While we have seen similar calls in the past - especially in the food and agriculture sector - action has been constraint by:

1. The lack of a deep pipeline of so-called ‘bankable’ projects with attractive risk-adjusted returns;
2. The (perception of) high risk related to financing alternative agricultural commodity production systems that focus on positive nature, climate and rural livelihood impacts, which is compounded by the lack of data; and
3. The lack of sufficient ‘matchmaking’ mechanisms that bring together investors with the projects that can help launch or accelerate.

Unless these failures are addressed, we won’t realize the full potential of sustainable finance. It needs to be mobilized, getting it to the hands of small- and medium-scale farmers, the custodians of nature on the frontline of climate change.

So it was exciting for UNEP to co-convene a UN Food Systems Summit Dialogue with Rabobank, the CGIAR Program on Climate Change, Agriculture and Food Security (CCAFS) and the Ministry of Foreign Affairs of the Netherlands. It brought together stakeholders from across the financial system to address market failures I highlighted.

By addressing these failures collectively, we can outline a clearer roadmap for implementation for the UN Food Systems Summit and the UN COP26 climate summit in Glasgow this November.

My takeaway from the Dialogue is the need for action on four priorities, on which the UN food and climate summits must deliver:

1. Catalyse systemic change that address market failures: Transitioning to sustainable food systems requires systemic changes, like embedding the ‘true price’ of water, carbon, soil and other ecosystem services into the price of food and non-food products that we consume on a daily basis. This requires governments to regulate the way natural capital is integrated in GDP as well as by providing the necessary economic incentives by adjusting trade-tariffs for sustainably produced agricultural commodities or repurposing the USD 700 billion spent on agricultural subsidies every year to be in line with sustainable food systems. Businesses can integrate the value of naturel capital in their Profit & Loss (P&L) statements and financiers can get involved in the forthcoming Taskforce on Nature-related Financial Disclosure.
2. Need for ambitious and time-bound commitments from corporates and finance institutions in combination with increased access for concessional capital from governments: Commitments by both private financiers as well as public institutions will be necessary to move towards a sustainable food system, but this needs to be combined with a clear and time-bound table to implement it. The announcement of a new ‘Net Zero Banking Alliance’, a ‘Net Zero Asset Managers Initiative and ‘Net Zero Asset Owner Alliance’ is an important signal. To make these commitments actionable three critical elements are needed: 1) we need short-term milestones or targets to ensure that commitments for the future also mean action in the near term; 2) Action on climate change, nature and land degradation need to come together in alignment of purpose; c) Governments and philanthropists need to scale up the availability of concessional capital as a critical enabler to ‘crowd-in’ private finance.
3. Farmers, SMEs and larger producers need to be provided with clear incentives: We need to realise that the transition to sustainable food systems cannot be a top-down approach, but requires bottom-up interest and demand from farmers as well as small- and medium-sized enterprises. There must also be incentives for larger producers and processors to create necessary buy-in. This can be done through various blended finance schemes, trade incentives, technology transfers for climate-smart agriculture and technical assistance.
4. Standardize metrics, definitions and criteria: There is at present too much uncertainty for development finance Institutions, commercial banks, investors, which results in delayed decision or outright inaction. The standardization of metrics, definitions and criteria can be a key building block in moving towards an ‘asset class’ for financing net zero and nature positive food production, processing, trade and consumption.

 

On Earth Day, I’m glad to say I believe that action on these priorities is within our grasp. But leadership is needed to steer global momentum into concrete measures. As Rabobank Chairman Wiebe Draijer said: "A trickle grows into a stream, then a river and ultimately an ocean.”

Every major actor - from banks and investors on the one hand, to agribusinesses and consumer goods companies as well as governments - will have to leave their "safe corner" if we are to transition to more sustainable food system. Sharing the financial, market and reputational risk will be at the heart of the solution. This requires leadership from these major actors. From governments who need to be willing to adjust trade tariffs and fiscal policies away from business-as-usual, to the need for sharing the financial risk involved in novel (blended finance) transactions involving agribusinesses, banks, investors and governments.

If this is put in a motion we can make concrete steps to restore the 2 billion ha of degraded land and improve the lives of the half a billion smallholder farmers around the world. The diversity of participants and the rich discussion was why our UN Food Systems Dialogue was so inspiring, bringing together corporations, investors, governments, scientists and farmers to explore ways forward.

We now need to progress from dialogue to action. That we must act now to secure a sustainable future, before it’s too late.

 

About the Author

Ivo Mulder, Head, Climate Finance Unit, UNEP