Originally published in AgFunderNews here
Co-written by Sourajit Aiyer and Sandeep Bhattacharya, India Projects Manager, Climate Bonds Initiative
The vulnerability of our modern food systems to climate disruption is widely known. In India, increased incidences of drought, cyclones, and varied rains makes the development of climate-resilient agriculture integral to improving farm incomes.
Covid-19 has highlighted the weaknesses our food systems face from disease. Disruptions to the food supply chain, imports, and consumers’ access; reduction in labor impacting processes like harvest, sowing, and logistics; and the rising prices of staples hitting lower-income communities are just a few of those weaknesses.
The expansion of farmland into wildlife habitats leading to increased human-food-wildlife interactions, and intensive livestock husbandry without inoculation checks, have also had an effect. The same can be said of distress migration of rural poor to unhygienic squalor in cities, making them more susceptible to illness; and a disproportionate focus on farm yields rather than nutritive quality, potentially reducing the natural immunity of humans.
This pandemic makes it even more imperative to move to a climate-resilient food system. Several shifts will be essential to ensure the quantity and quality of food required to feed the world’s 7 billion-plus people, many of whom enter poverty as climate and disease shocks hit their livelihoods. These include the creation of low-cost farming systems with less dependence on water and chemicals, as well as leveraging agroecology to synthesize the environment with farming, nudging consumers’ demand towards climate-resistant grains, and making farming more viable for smallholders.
Sustainable agriculture methods like Zero Budget Natural Farming in India’s Andhra Pradesh are helping to rebuild local community structures – critical after such shocks – and lead to improvements in both farming and the environment.
But large-scale, climate-resilient agriculture systems cannot be achieved without funding.
Realigning capital access
A joint Climate Bonds Initiative–World Resources Institute project has been exploring interventions that can scale up investments into resilient agriculture. Traditional agri-credit has had a limited impact on climate resilience as it does not insulate farmers from climate vagaries – nor does it minimize the probability of repayment failure, making lending risky.
A realignment of farm credit can address those risks. Creating volumes that farmers wouldn’t be able to get by themselves, such a realignment could offer scope for capital market linkages to make dedicated ‘green capital’ available.
Dedicated green capital enabled priority access to funding for Indian renewable energy players like ReNew Power and Greenko, and banks like Yes Bank and SBI. Not only have they repeatedly issued green bonds, but SBI’s last issuance in March 2020 came at the height of the Covid-19 crisis. That demonstrates the resilience of this mode of finance.
Can capital market financing scale up climate-resilient agriculture, just like it did for renewable energy? Here are five ways it can.
Water infrastructure projects
One route is in the scaling up of large-scale landscape solutions through state projects that catalyze farming for an entire vulnerable region, via watersheds, drip systems, and so on. Such solutions are critical to achieve climate resilience in nations like India, where farming remains a major livelihood. The state can partially fund this through the diversion of fertilizer subsidies by transitioning to natural farming methods. Moreover, government agencies can finance or refinance those assets from the capital market. By highlighting the role of the government, these projects get visibility — increasing chances of replication — and evince interest from philanthropists. This can reduce the cost of borrowing by attracting more social and environmental-oriented investors. This visibility, along with the movement of philanthropy and CSR in India into water infrastructure, can also catalyze blended finance that can attract further interest from the capital markets.
Offtakers — that is, companies which process raw agri-produce from farmers and turn it into products — can enhance their access to capital by isolating those assets involved in sustainable farming and borrowing against them, just as SBI and Yes Bank did with their renewable energy assets. Apart from scaling up those assets, credit to corporates would benefit from better monitoring mechanisms. A single project could create a ripple-effect for several smallholders in a value chain. Such credit could support farm aggregators as well as retailers. In India, the food and apparel sectors have seen Arvind Mills and 24 Mantra Organic moving into responsibly sourced cotton and organically sourced crops respectively.
Corporates that develop inputs which contribute towards resilience could access capital to scale up their solutions. Again, that would have a cascading benefit along the value chain. UPL, a leading Indian agrochemical company, developed Zeba – a superabsorbent soil additive that acts as a sponge and reduces dependence on irrigation or rains. Even corporates who reduce food spoilage through cold storage solutions, or those who process inputs from crop residue, can form part of such resilience-enhancing solutions.
Those institutions lending to sustainable farming projects can access the capital markets for refinance through ESG-dedicated funds, which are growing in popularity in India. That may be in the form of funding for a specific project, for investing in a bond, or through secondary markets which would enhance liquidity. This route may become inevitable as banks turn to less-risky assets in the post-pandemic scenario, which could curtail direct agri-credit to farmers and farmer producer organizations. In India, investment in funds like Omnivore or Grameen Impact, that in turn target smallholders, demonstrates this.
Lastly, insurance companies that underwrite risks in the value chain can offload some of their risk to the capital markets – although the market for such securities is still underdeveloped in India.
New policy initiatives
Realigning farm credit according to the ways described above can direct increased finance towards climate-resilient agriculture, while addressing the implied risks of direct lending to smallholders and creating a ripple-effect for farmers a given value chain.
At the same time, three policies announced by India in the wake of the Covid-19 crisis offer a tailwind when it comes to encouraging climate-resilient agriculture. The amendment of the Essential Commodities Act — legislation created decades ago when India faced chronic food scarcity — by removing several crops from its purview would ensure supply chain continuity and steady buyers for produce.
Second, the deregulation of mandis (farmers’ markets) through the removal of inter-state trade barriers, along with e-trading of produce, should give farmers the option to choose the market they want to sell their produce to and sell directly to aggregators by bypassing extortive middlemen. This would help them build better market linkages and improve their realization of value from farming.
Third, a ₹1 trillion ($13.2 billion) agri-fund for the development of post-harvest, food processing, and scientific storage infrastructure in closer proximity to farm gates should enable smallholders to get more value out of the system and reduce losses.