Is Agriculture the Missed Opportunity in Climate Investment?

In this year of increased focus on climate action leading up to COP 26 UN Climate Conference in Glasgow, investors may be overlooking a sector ready to be harvested for its unique ability to fight the climate crisis - agriculture. In fact, some $972 billion flowing annually into the agriculture value chain could be channeled into transformative investment that would accelerate the adoption of climate-smart agriculture, according to a new report.

An untapped market

The report, from the U.S. Farmers and Ranchers in Action in partnership with The Mixing Bowl, the Croatan Institute and the World Business Council for Sustainable Development, looked at untapped environmental, social and governance (ESG) opportunities for investors in the global ag sector.

Agriculture is typically not a part of the $2 trillion invested and re-invested annually in ESG portfolios, the report showed; for example, in the third quarter of 2020 alone, there were $10 billion in corporate support for green bond issuance, but agriculture was not included. The reality, however, is that innovative financial mechanisms like green bonds and community finance could help farmers and ranchers tap into that capital.

There’s good reason to bridge the gap between the ag and finance sectors to help reach the climate goal set by the Biden administration last week to slash greenhouse gas emissions by 52 percent by 2030.

Climate-smart practices could cut GHG emissions from agriculture by half

By 2025, widespread adoption of climate-smart practices could reduce U.S. agriculture’s contribution to total U.S. GHG emissions by more than half, from almost 10 percent to 3.8 percent, the report found. It noted that these practices - which span nutrient application, manure management, and cultivation and grazing - are “sufficiently mature, both scientifically and in practice, to materially increase carbon storage if widely deployed in the U.S. and globally.”

What is missing is investment now and throughout the next decade to deliver on the potential of soils to be a key carbon sequestration solution and support resiliency for farmers and ranchers, according to Erin Fitzgerald, the CEO of USFRA.

“Just as the renewable energy sector benefited from renewable energy credits and tradeable credits, and innovative fintech strategies, the ag sector could benefit from the same approach. And investors benefit from a more diversified ESG portfolio,” Fitzgerald told TriplePundit.

Tackling the barriers to the digitization of agriculture

Technology is also going to play a critical role in scaling up climate-smart agriculture, according to Rob Trice, the founder of The Mixing Bowl, a forum that promotes the adoption of IT innovation in the food and ag industries. As noted in the report, “The digitization of agriculture may be the single biggest opportunity to meet farmers’ challenges and scale climate-smart soil practice adoption.”

There are barriers to taking advantage of that opportunity. They include the up-front costs to farmers to adopt climate-smart ag practices, as well as the price of carbon sequestration, and new technologies that can measure soil health.  

“The question is, how can we make the cost-benefit of using these technologies workable for everybody, particularly the farmers and ranchers? A lot of the technologies have been less than mature. And so we need that investment to kind of get these things over the hump,” Trice told 3p.

Thinking creatively about new finance mechanisms

David LeZaks, a senior fellow and environmental scientist at the non-profit research organization Croatan Institute, explained during an interview with 3p “that additional capital that is appropriately structured can act as a catalyst as we go through these transformative shifts, While there is definitely a buzz around venture capital, the majority of capital flows to farmers via bond finance. Whether it be an individual using a crowd-funding platform or an institutional investor investing in the stewardship of real assets, there are ways to not only adapt the mechanisms that are used to flow capital to a more climate-smart agriculture, but also to attract more capital to the sector.”

Tim Crosby, Principal of the Thread Fund, which focuses on investing multiple forms of capital to generate social and environmental returns, and a member of the Transformative Investment in Climate-Smart Agriculture Working Group, said a large barrier is that federal payments, subsidies and incentives are so prevalent that they influence risk and stability of markets.

“About a third of a farmer’s income over the last three years has been from federal payments, to keep doing what we have been doing for decades. Add to that the use of food and agriculture in trade wars and you have two federal issues that create uncertainty of returns for any investor. And when you are addressing innovation in this arena, you will have a hard time raising capital,” he said.

Crosby added: “Because regenerative and climate-smart ag can be long-term plays, they do not match up with traditional ten-year funds… Additionally, food is taken for granted. This mirrors confusion among investors who do not really understand what they are investing in when they invest in production solutions that consider climate, water and farmer livelihood. Add it all up and aligned investments in these needed production models are therefore seen as high risk even though the highest risk investments we can make today are investing in business as usual.”  

The time is ripe for a transformative investment in agriculture

Despite the challenges, Gray Harris, senior vice president of Coastal Enterprises, Inc. and a member of the Transformative Investment in Climate-Smart Agriculture Working Group, believes the time is right to leverage transformative investment for climate-smart agriculture.

“We are seeing a powerful convergence of economic forces that signal changes in our society,” Harris explained. She cited growing consumer demand for locally grown, healthy, fresh foods; the COVID-19 pandemic demonstrating that current food systems need to be more resilient, as 3p has reported, and the Biden’s administration moves to put the climate crisis and climate-smart agriculture at the center of the U.S. Department of Agriculture’s forward-going strategy.

“For a long time, many of us have regarded agriculture as one of the most innovative solutions to the climate crisis, with the potential to both sequester carbon and create new and diverse income streams for farmers.  It will require a lot of financial capital investment to make this change happen, and it will require defining, or re-defining, what ‘transformative’ investment really is,” Harris said. “In our opinion, it will not look like traditional forms of investment capital that currently exist; in fact, the time is ripe for innovation in the investment tools and facilities that will meet the needs of farmers and foresters and investors alike.” 

Image credit: Joel Holland/Unsplash