Agriculture in the modern era faces multiple challenges – increased demand for food, levelling off of crop yields, and dwindling natural resources. Not to mention the impact of climate change and extreme weather events. A warming planet could decrease crop yields by 25%. All in all, something needs to be done to avert complete disaster.

Thankfully, the solutions aren't far-fetched. However, transforming the agriculture sector and building resilience will be impossible without increasing the money available for investments. Access to finance has been a long-standing obstacle for agriculture due to perceptions of high risks and low profitability.

Green finance

If we take global climate finance broadly, capital flows crossed about $2 trillion in 2023. While that's plenty of money, it's well short of the $8 trillion a year needed to achieve net-zero emissions. Transforming the global food system will require at least $300 billion in additional capital through 2030.

Green finance spans a comprehensive landscape of financial services and investment opportunities for projects, activities, and companies involved in agricultural sustainability. It's one of several tools needed to address environmental challenges and promote sustainable development.

Let's tackle why finance for sustainable agriculture is important. Simply put, it's a pathway to economic development and inclusive growth. According to The Economist, the right policies and investments can unlock an extra $2 trillion in rural growth by 2030.

Much of this growth can help smallholder farmers in developing countries. It's where agriculture is likely to be the main source of people's livelihoods.

Adequate capital is required for agriculture to adapt. This isn't breaking news since access to funds has been challenging for the sector for decades, especially in developing countries. Smallholder farmers and agribusinesses, particularly women, suffer the most.

Implementation

Farmers worldwide are increasingly aware of climate-smart agricultural practices and food production. In some ways, they have been for decades. It's high time business leaders and policymakers supported them.

As farmers begin to work through transitioning to sustainable agriculture, they need some safety nets. There's an initial cost hurdle where they need support like upfront payments, financial guarantees, lending, or insurance on favourable terms to shift the risk away from them in the initial years. Here's how it can be done:

• Retooling public support: There's no economic rationale in providing billions of dollars to agrifood systems that generate trillions in hidden costs. The UAE's Declaration of Sustainable Agriculture, Resilient Food Systems and Climate Action is one approach where money is pushed toward activities that increase incomes.

• Private sector investments: The private sector has a role to play. Private sector financing and spending on agriculture and food will go a long way in helping transform the agrifood ecosystem.

• Scale up climate financing: According to some estimates, global agrifood systems receive only 4% of the $660 billion of total global project-level climate financing per year. That's not enough if we expect the world's farmers to do more for the climate without being adequately compensated.

• Adjust damage financing: Data from post-disaster assessments between 2007 and 2022 indicate agricultural losses accounted for 23% of the total impact across all sectors. Farmers on the front lines have had their bottom lines affected. Agriculture should be front and centre when discussing any loss or damage fund.

Challenges

Development agencies and the public and private sectors have made many interventions to overcome the agricultural financing gap. The results have been mixed. That's because there are still challenges in closing the financing gap. Here are among the most prominent:

• Inadequate policies: Due to ineffective policies and regulations, lending becomes difficult, and additional barriers crop up in the flow of liquidity.

• Managing risks: Agriculture is complex. It's even more complex when assessing and managing risks. For example, in developing countries, farmers and financiers can't fully understand the impact of risks related to the seasonality of agricultural cash flows.

• High transaction costs: It's a substantial barrier to lending to farmers. Low population densities in rural areas mean reaching farmers becomes difficult and they're not integrated into the finance value chain. The cost of bringing them in is more expensive.

No turning back

All developmental finance today is shaped by climate change. This includes agriculture which is uniquely linked to our planet's health. Apart from private sources, the increased use of public climate finance can unlock additional finance.

When finance is used effectively by balancing risk mitigation and market-related instruments, it's a good thing. Green finance can be tailored to meet the risks of all types of investors. If it's to be effective in closing funding gaps, then barriers to lending need to fall. At Smart Grow Farms, we approach sustainable agriculture from a holistic point of view and are keenly aware of the role that capital plays in agricultural transformation.