Low carbon and resilient food systems require greater public-private collaboration, urges CGIAR

25 Nov 2019 --- A significant amount of climate-smart investments to transform food systems are not yet at scale. This is according to a new report by global agriculture research partnership CGIAR. Against this backdrop, the organization and its partners highlight a diverse set of policy options, innovative financial solutions and strategies for how government, food and agriculture companies, public and private donors and investors can support the transformation to low-carbon and resilient food systems.

As climate change affects food systems, CGIAR highlights that governments, food and agriculture companies as well as public and private investors need to better identify and address the numerous climate-related risks they face. “This can also be an infection point to take advantage of new investment opportunities that the transformation to low-carbon and resilient food systems presents,” the authors of the report concur.

In depth, the paper explores innovative strategies to address the core market failures today, primarily:

1. Lack of deep pipeline of bankable projects: One of the biggest challenges to private sector investment in food systems is not the lack of pledged or committed capital seeking investments with measurable environmental benefits and financial returns, but rather identifying bankable projects with attractive risk-adjusted returns, outlines the CGIAR report.

In 2015, Forest Trends’ Ecosystem Marketplace estimated that over 30 percent of capital committed for sustainable food and fiber production, habitat protection or clean water remained undeployed (of the 128 banks, corporates, fund managers, family offices and non-governmental organizations surveyed). Lack of deals was cited as the biggest obstacle to investment; despite this, encouragingly almost all planned to raise or reallocate more capital to the sector.

2. High investment risk and lack of primary data/information asymmetries: Unproven or early-stage business models with long development lead times and technical assistance requirements and uncertain financial/environmental upside – particularly within the smallholder farmer context in developing countries – reduce investor appetite for opportunities outside of business-as-usual agriculture and forestry investments. 

Additionally, a fundamental lack of accurate and accessible primary data both at the farm level and throughout the supply chain makes it difficult for corporate and financial investors to assess investment risks (both real and perceived) and execute risk-mitigation strategies, further discouraging capital deployment.

3. Lack of intermediation to efficiently connect different pools of capital to investments: Currently, high transaction costs and small ticket sizes pose significant barriers to the overall scale and growth of investments, as more commercially-oriented investors (and in particular institutional investors) prefer sizeable investment-grade assets with exit/liquidity features. 

While the underlying drivers are common to previous market failures (lack of data, early stage and/or disaggregated deals), they are also reflected in an ineffective and inefficient intermediation market. Aany transactions involve complex and/or bespoke terms and features and smaller deals are difficult to aggregate, securitize and match to the risk-return and liquidity features of large-scale investors.

Shifting the needle of sustainable food systems
In the immediate short-term, food and agricultural corporates can already easily “raise the bar” for sustainability on existing business-as-usual investments and continue mainstreaming environmental, social and governance (‘ESG’) commitments to green supply chains, asserts CGIAR.

The prevailing sentiment from the World Economic Forum in Davos, Switzerland in January shows a mainstream shift in the business and investor communities towards thinking about climate change and its implications.

Bridging the gap between high-level interest and concrete investment opportunities – and more importantly action on the ground – is, however, no easy task, CGIAR highlights. Furthermore, many of these ESG commitments entail minimal measurement and reporting requirements. 

“While this strategy will not shift the needle by itself, it is nonetheless an important first step in embedding a sustainability dimension into decision-making,” highlight the report’s authors.

The report outlines that scaling up green financing linked to climate outcomes can also be a first step to attracting new and diversified mainstream institutional investors into climate finance, as well as an additional financial incentive for greater corporate action towards sustainability in the short-term.

Alongside government policies and regulations, blended finance – the strategic use of public and philanthropic capital – is outlined as playing an essential role to develop a deeper pipeline of bankable projects and catalyze private investments into new markets and business models.

“To truly shift the needle, government support is needed to fundamentally embed the external costs of unsustainable food systems into business-as-usual decision-making, create market incentives for new sustainable opportunities, and support market-building interventions,” stresses the report.

Moreover, digital solutions are pegged as having the potential to both support pipeline development, as well as represent new standalone investment opportunities. But digital disruption at scale will need coordinated action between government, public and private capital providers and other ecosystem stakeholders.

This report was implemented as part of the CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS), which is carried out with support from the CGIAR Trust Fund and through bilateral funding agreements. 

By Benjamin Ferrer