Headlining the climate finance discussions next week at COP26 may be the shortfall in advanced economies’ $100 billion annual pledge to help low- and middle-income countries (LMICs) adapt and further mitigate climate change. But with actual financing needs quickly approaching the trillions, the more important discussion may be reforming how public climate finance is deployed. Change is needed to mobilize private capital, fill critical gaps, and drive resilient, low-carbon development. Agriculture value chains are a good place to start the conversation.
Solar and other renewables are enabling distributed, low-cost cold storage, irrigation, and processing capabilities that could be transformative for rural communities in Africa and South Asia. Scaling these innovative small and medium enterprises (SMEs) could provide a host of services to help farm households and communities adapt to climate change, including increased income from higher yields and higher-quality produce, reduced risk of crop failure, reduced post-harvest loss, and other resilience gains.
These are real benefits that improve food security and nutritional diversity and help rural communities survive shocks that are becoming more frequent and intense with climate change. Yet of the roughly $600 billion in tracked climate-related financing globally just 0.2 percent goes to small-scale agriculture value chains and financing institutions serving them.
And while food systems generate one-third of the 52 gigatons in total greenhouse gas emissions globally, it’s not where climate mitigation investments are flowing. The value of carbon markets hit nearly $280 billion last year, but almost none of the SMEs sending diesel generators to the scrap heap are doing it with the help of carbon financing. As Figure 1 illustrates, agriculture-related emissions projects account for 1 percent of all carbon credits issued.
Figure 1. The agriculture sector accounts for just 1% of the global carbon market
This is despite considerable potential for CO2 reductions from enterprises powering rural agriculture sector transformation. Our forthcoming research finds:
- An investment of $200 million to provide solar irrigation pumps to 1.3 million farmers in Kenya would avert emissions of 6.7 million tons of CO2 annually.
- Investing $10 million into solar conduction dryers in India would reduce CO2 emissions by 1.6 million tons per year.
- Replacing one-quarter of the 8.8 million diesel irrigation pumps in India with solar pumps would reduce CO2 emissions by 11.5 million tons per year.
As Figure 2 puts in context, the global fleet of Tesla vehicles and solar panels displaced a total of 5.0 million metric tons of CO2e in 2020.
Figure 2. Selected low-carbon agtech mitigation potentials, by market
Source: Catalyzing climate finance for low-carbon ag-tech, James E. Rogers Energy Access Project, Duke University.
These are not garden-variety carbon reductions. Like Tesla, they represent the front end of a low-carbon sectoral transformation that could reverberate years into the future. The space is ripe for donors and ESG departments aiming for catalytic impact with their mitigation investments.
The problems—and some solutions
So why are these companies unable to attract climate finance to accelerate scale-up and what’s needed to mobilize agtech investment in LMICs?
1. Pay companies for climate benefits.
Very few companies enjoy financial benefits from the mitigation and adaptation gains they are providing. Accounting and verifying carbon reductions have high transaction costs at the small scale. Measuring adaptation improvements that are highly location specific or involve long time frames are challenging. But in the Data Age, these are opportunities, not roadblocks. Innovative funds and outcome-oriented financing facilities are emerging that build credible metrics to verify adaptation impacts and blend public, philanthropic, and private capital to align risk.
2. Connect SMEs to the climate policy ecosystem, mobilize private investment, and focus on gender.
Billions of dollars for adaptation flow to LMICs through the Green Climate Fund, Global Environment Facility, and other UNFCCC financing entities based on adaptation plans that countries are required to develop. With 80 percent of the food and 40 percent of jobs tied to small-scale agriculture across sub-Saharan Africa and South Asia, the sector is central to these plans. However, none of the SMEs we spoke with were engaged in adaptation planning processes or aware of the content of country plans where they operate. This is because there is little to no role for SMEs in most plans, a troubling gap that UNFCCC funders are realizing.
Targeting support for SMEs under climate plans could also motivate private investment, another area where climate finance is badly underperforming. Of the $30 billion in annual adaptation investment, just 1.6 percent is from private sources. Rather than financing projects directly, public funders must pivot hard to delivering financial products that de-risk private investment—be it through blending, credit enhancement, currency coverage, demonstrating unproven models, or other measures.
Investing with a gender lens might help too. Female-owned SMEs account for roughly a third of formal SMEs in emerging markets, and our sample within agtech was well below that. Women produce an estimated 70 percent of the food in Africa, but women-owned SMEs tend to be far more capital constrained than their male counterparts. Outdated laws and cultural customs often keep female land ownership—and loan collateral—low. To fully leverage the potential of agtech, some investors are moving to non-asset-based lending and other forms of security like future cash flows, purchase order contracts, or accounts receivables.
3. Empower smallholders and address affordability.
Consumers of low-carbon agtech are extremely price sensitive. For SunCulture, a 25 percent reduction in the price of its solar irrigation pump increases the addressable market by 100 percent. Demand-side subsidies or results-based financing—essentially paying an operator for a specific outcome—can be instrumental in bringing scale to a sector and incentivizing expansion into new markets.
We also discovered that SMEs across agriculture value chains face roadblocks, but also offer solutions. Their products routinely offer customers paybacks of 6-24 months, but that makes little difference to customers facing borrowing costs of 30-45 percent annually. Of SMEs interviewed, nearly 60 percent either became consumer finance organizations directly or invested in third-party relationships to solve for a lack of consumer credit access. Improving access to credit—through banks, microfinance institutions, coops, and other nonbank financial institutions—directly benefits farmers and allows SMEs to focus on core competencies
Small agriculture enterprises are addressing the energy access and reliability problems en route to improving the productivity and resilience of rural communities. It’s a snapshot of what low-carbon development could look like. The task before climate investors is to identify these transformative models, demonstrate their benefits and de-risk them, and bring along the private sector to deliver scale.