Climate finance meets low-carbon agtech
By Jonathan Phillips, Victoria Plutshack, Rob Fetter
Headlining the local weather finance discussions subsequent week at COP26 could be the shortfall in superior economies’ $100 billion annual pledge to assist low- and middle-income international locations (LMICs) adapt and additional mitigate local weather change. However with precise financing wants shortly approaching the trillions, the extra vital dialogue could also be reforming how public local weather finance is deployed. Change is required to mobilize personal capital, fill crucial gaps, and drive resilient, low-carbon growth. Agriculture worth chains are a superb place to start out the dialog.
Photo voltaic and different renewables are enabling distributed, low-cost chilly storage, irrigation, and processing capabilities that might be transformative for rural communities in Africa and South Asia. Scaling these modern small and medium enterprises (SMEs) might present a bunch of companies to assist farm households and communities adapt to local weather change, together with elevated revenue from greater yields and higher-quality produce, decreased danger of crop failure, decreased post-harvest loss, and different resilience features.
These are actual advantages that enhance meals safety and dietary range and assist rural communities survive shocks which are changing into extra frequent and intense with local weather change. But of the roughly $600 billion in tracked climate-related financing globally simply 0.2 % goes to small-scale agriculture worth chains and financing establishments serving them.
And whereas meals techniques generate one-third of the 52 gigatons in complete greenhouse gasoline emissions globally, it’s not the place local weather mitigation investments are flowing. The worth of carbon markets hit almost $280 billion final 12 months, however virtually not one of the SMEs sending diesel mills to the scrap heap are doing it with the assistance of carbon financing. As Determine 1 illustrates, agriculture-related emissions tasks account for 1 % of all carbon credit issued.
Determine 1. The agriculture sector accounts for simply 1% of the worldwide carbon market
Supply: AgFunderNetwork, from Berkeley Carbon Buying and selling Undertaking knowledge.
That is regardless of appreciable potential for CO2 reductions from enterprises powering rural agriculture sector transformation. Our forthcoming analysis finds:
- An funding of $200 million to supply photo voltaic irrigation pumps to 1.Three million farmers in Kenya would avert emissions of 6.7 million tons of CO2 yearly.
- Investing $10 million into photo voltaic conduction dryers in India would cut back CO2 emissions by 1.6 million tons per 12 months.
- Changing one-quarter of the 8.Eight million diesel irrigation pumps in India with photo voltaic pumps would cut back CO2 emissions by 11.5 million tons per 12 months.
As Determine 2 places in context, the worldwide fleet of Tesla automobiles and photo voltaic panels displaced a complete of 5.Zero million metric tons of CO2e in 2020.
Determine 2. Chosen low-carbon agtech mitigation potentials, by market
Supply: Catalyzing local weather finance for low-carbon ag-tech, James E. Rogers Power Entry Undertaking, Duke College.
These should not garden-variety carbon reductions. Like Tesla, they symbolize the entrance finish of a low-carbon sectoral transformation that might reverberate years into the longer term. The house is ripe for donors and ESG departments aiming for catalytic impression with their mitigation investments.
The issues—and a few options
So why are these corporations unable to draw local weather finance to speed up scale-up and what’s wanted to mobilize agtech funding in LMICs?
1. Pay corporations for local weather advantages.
Only a few corporations take pleasure in monetary advantages from the mitigation and adaptation features they’re offering. Accounting and verifying carbon reductions have excessive transaction prices on the small scale. Measuring adaptation enhancements which are extremely location particular or contain very long time frames are difficult. However within the Knowledge Age, these are alternatives, not roadblocks. Progressive funds and outcome-oriented financing amenities are rising that construct credible metrics to confirm adaptation impacts and mix public, philanthropic, and personal capital to align danger.
2. Join SMEs to the local weather coverage ecosystem, mobilize personal funding, and give attention to gender.
Billions of {dollars} for adaptation move to LMICs by way of the Inexperienced Local weather Fund, International Surroundings Facility, and different UNFCCC financing entities primarily based on adaptation plans that international locations are required to develop. With 80 % of the meals and 40 % of jobs tied to small-scale agriculture throughout sub-Saharan Africa and South Asia, the sector is central to those plans. Nonetheless, not one of the SMEs we spoke with have been engaged in adaptation planning processes or conscious of the content material of nation plans the place they function. It is because there may be little to no position for SMEs in most plans, a troubling hole that UNFCCC funders are realizing.
Focusing on assist for SMEs beneath local weather plans might additionally encourage personal funding, one other space the place local weather finance is badly underperforming. Of the $30 billion in annual adaptation funding, simply 1.6 % is from personal sources. Somewhat than financing tasks immediately, public funders should pivot onerous to delivering monetary merchandise that de-risk personal funding—be it by way of mixing, credit score enhancement, forex protection, demonstrating unproven fashions, or different measures.
Investing with a gender lens would possibly assist too. Feminine-owned SMEs account for roughly a 3rd of formal SMEs in rising markets, and our pattern inside agtech was effectively under that. Girls produce an estimated 70 % of the meals in Africa, however women-owned SMEs are typically way more capital constrained than their male counterparts. Outdated legal guidelines and cultural customs usually maintain feminine land possession—and mortgage collateral—low. To completely leverage the potential of agtech, some buyers are transferring to non-asset-based lending and different types of safety like future money flows, buy order contracts, or accounts receivables.
3. Empower smallholders and deal with affordability.
Shoppers of low-carbon agtech are extraordinarily value delicate. For SunCulture, a 25 % discount within the value of its photo voltaic irrigation pump will increase the addressable market by 100 %. Demand-side subsidies or results-based financing—basically paying an operator for a selected final result—will be instrumental in bringing scale to a sector and incentivizing enlargement into new markets.
We additionally found that SMEs throughout agriculture worth chains face roadblocks, but additionally supply options. Their merchandise routinely supply prospects paybacks of 6-24 months, however that makes little distinction to prospects dealing with borrowing prices of 30-45 % yearly. Of SMEs interviewed, almost 60 % both grew to become client finance organizations immediately or invested in third-party relationships to unravel for an absence of client credit score entry. Enhancing entry to credit score—by way of banks, microfinance establishments, coops, and different nonbank monetary establishments—immediately advantages farmers and permits SMEs to give attention to core competencies
Small agriculture enterprises are addressing the vitality entry and reliability issues en path to bettering the productiveness and resilience of rural communities. It’s a snapshot of what low-carbon growth might appear like. The duty earlier than local weather buyers is to determine these transformative fashions, display their advantages and de-risk them, and convey alongside the personal sector to ship scale.
