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Financiers can close the regenerative agriculture funding gap — and unlock $4.5tn in the process

June 20, 2024

Closing the current financing gap in regenerative agriculture would unlock $4.5 trillion in new investment opportunities per year and $5.7 trillion of costs per year saved in damages to people and the planet, according to a new report. (This amounts to roughly 13x and 16x, respectively the investment cost.)    

How that financing gap gets closed depends on using the right financial instruments or sometimes a combination of multiple ones. The new report from investment firm Pollination and Transformational Investing in Food Systems (TIFS), a climate change investment and advisory firm, lays out what those are.

“From a financier’s perspective, regenerative agriculture provides a way to maintain the commercial opportunity in agriculture via adaptation to changing climate conditions,” notes the report, which was produced with support from The Rockefeller Foundation.

“By investing in regenerative agriculture now, financiers can proactively adapt food and agricultural value chain investments to changing climate conditions and take advantage of potential opportunities in transition investing.”

“The global financial sector has a tremendous opportunity to serve innovative farmers and companies with financial products that build regenerative agricultural systems,” noted TIFS director Rex Raimond, adding that the new report organizes the opportunities in the sector that are generating net-positive financial and non-financial returns.

“Financial actors now have at their fingertips many viable pathways to utilize for regenerative agricultural investments,” he said.

Cover crops growing among winter wheat stubble. Image credit: iStock

Regen ag’s financing gap not a problem of capital

“The bankability gap in regenerative agriculture financing is the primary challenge preventing increased capital deployment,” notes the report.

Multiple studies estimate the global annual need for transition costs to be between $200 billion and $450 billion “for at least the next decade.” Funding flows right now are roughly one-tenth of estimated annual need.

This “systemic financing problem” for regenerative agriculture can be boiled down to the simple fact that money isn’t getting to farmers and producers able to implement changes “to effect food system transformation at the speed and scale needed to combat climate change.”

The problem is not for lack of capital, however. As the report notes, “formal agricultural credit globally exceeds estimated needs for transition costs.” (The report acknowledges there remain areas, typically emerging markets with small holder farmers, that still lack adequate access to formal credit.)

Globally, formal agricultural credit is USD $1.1 trillion, and aggregate capital flowing to agriculture has experienced double digit growth in the past decade.

Rather, “the primary barrier to increasing capital deployment for regenerative agriculture is missing confidence that the financing will fit financiers’ current risk and reward standards.”

Image credit: iStock

Financing instruments with real potential for regen ag

Based on interviews with a variety of organizations, the report categorizes models for regenerative agriculture financing as either “Early Model with Growing Traction” or “Nascent Model with Potential.”

Where a financing instrument falls within those two structures is based on several factors, including its scalability, applicability across regions, financial risk-profile, and where it falls on the market maturity curve.

These are new loan products or established ones that have been revised to support regenerative agriculture and land use. Examples of regenerative operating loans include grace periods on repayment of loans, longer loan tenor (up to 10 years) and discounted upfront fees for operating loans.

“In general, mainstream operating loan offerings are characterized by narrow use-of-proceeds, short tenors, and rarely incorporate sustainability-related adjustments in the cost of financing,” notes the report. “Mass adoption of regenerative practices begins with building a strong ecosystem of operating loan products that align financial terms with incentives for practice adoption.”

Climate risk-adjusted insurance

Farmers and producers rely on insurance to mitigate income volatility, so aligning insurance with risk assessments that include regenerative practices is an effective financing lever, according to the report. This might include building concessional terms into insurance policies that can go beyond the short policy periods associated with conventional crop insurance policies.

“A clear line can be drawn between regenerative production and long-run mitigation of agricultural risks,” the report notes. “Consequently, innovative insurers are beginning to take steps to incorporate climate and nature-related risks for agricultural production into premium pricing and adding period extensions for ESG and sustainability- aligned counterparties.”

Report authors highlighted that an un-named insurer (“the biggest insurer in a large emerging market”) has already outlined plans to add climate and ESG risk-adjusted premiums for farmers, having already done a similar thing for the construction industry.

Blended finance

Blended finance for regenerative agriculture “involves strategically combining concessional funds – typically offered on cheaper and more flexible terms than those available through the market – with private capital to finance regenerative projects,” according to the report.

The concessional funds, which usually come via development finance institutions, state-owned banks, philanthropists and impact investors, serve to de-risk investments in regenerative agriculture by “providing a cushion against potential losses.” This makes projects more appealing to private investors.

One such example is the $47 million The Responsible Commodities Facility fund, which offers finance for deforestation-free soy production. The fund blends concessional impact capital and private capital to provide low-interest rate financing for farmers, supported by technical assistance.

Another type of blended financing is found in farmland investment, wherein “generation of on-farm renewable energy, monetization of carbon credits, premiumization of sustainably-produced agricultural products, and integration of nature-based solutions projects all present further opportunities for farmland investments to add sustainability-aligned revenue streams.”

The value of US farmland held by investment funds has doubled from 2021 to more than $16 billion in 2023. As noted in the report, “Regenerative agriculture provides a strong value proposition to unlock both the core commercial value of farmland and the additional potential value derived from sustainability initiatives.”

Image credit: iStock

Nascent models with potential

Newer financing models are also emerging in regenerative agriculture. These include:

  • Private equity and vertical integration approaches, which bring together input procurement, regenerative production, carbon credits, and many other parts of the entire ag value chain. In short these provide “midstream and downstream incentives, capacity, and scale to promote regenerative production upstream.”
  • Regenerative project finance, which lets large-scale regenerative agriculture products receive capital at the beginning of the project lifecycle “based on long-term commercial viability.” Debt and equity are repaid with cash flow generated by the project’s commodity or environmental market (e.g., carbon credits) revenues.

Report authors emphasize that regenerative agriculture is still just “a promising, dynamic, and burgeoning field,” and that all financing for it is a nascent area. “The degree of nascency cannot be overstated.”

It highlights a number of investors already making strides in this area, including 12Tree, Agri3, Agriculture Capital, Impact Ag Partners, and SLM Partners.

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