Below is my speech from the plenary on “Financing Climate Smart Agriculture”, given at the Global Innovations in Agriculture in Abu Dhabi (March 2015).
I’m excited to be here and to share my thoughts about financing climate smart agriculture. In particular I’m keen to have an opportunity to discuss specifics: specific contexts and specific deals, so that this very broad term that means so many different things to so many different people doesn’t become a meaningless buzzword.
Scientific information exists on some of the interventions that are required. But it’s clear that we both need to speed up the science and, where there is some scientific basis, speed up deployment of interventions – and hence we talk about finance.
But, finance is also a very broad term: financing whom, to do what, how, and on what basis? Its important not to put the financing cart before the horse: investment is about understanding risk and finding the best way to address it. Value is created by solving a problem, first comes the business, then you make a diagnosis and prescribe the most appropriate financial structure to address it.
There are many, many, ways to finance activities: from private equity investment in companies managing land, to short term input finance, to company and government debt (bonds), microfinance, venture capital… the list goes on. These all involve different types of investees and suit different types of investors. When we talk about financing and engaging investors, we need to be aware of the mandates and constraints of different players in the financing ecosystem.
Finance is generally provided to recipients based on their ability to generate returns and manage risks. Climate change itself is likely to have direct impacts: it will increase volatility. This will most markedly be felt on those with a lower ability to absorb shocks (in other words, poor people) and in countries where the cost of capital is already high (least developed countries). If we consider the “risk” element then what to finance includes technologies, infrastructure, working capital, training, seeds, crop management products and data. But, again, these need to be considered in their context.
As one of my favorite singers says: “money is a means to create wealth, not wealth itself” (Akala) – we urgently need to strengthen the link between money, financial and environmental wealth. Finance is about moving money, and to move money towards “Climate Smart Agriculture”, we need to (A) change legal frameworks, and (B) provide investors with suitable, comparable investment opportunities.
Having first trained as a (tropical environmental & soil) scientist and moving on to work in finance, I would say that cross-sector communication is an issue. Even within the financial services community there are differences – a trader has a different knowledge base from a private equity professional. But most financiers will not be interested until they see direct commercial opportunities – this might be from seeing others succeed. And, also be aware that non-scientists might be uncomfortable with the science, in particular lack of full certainty. Here I want to give a quote from my favorite comedian Dara O’Brien: “science knows it doesn’t know everything, otherwise it’d stop”…
I also want to emphasize the need for working with operational companies: most companies in this space “get it”, and are investing for example through Research & Development (R&D). But many are under pressure from their investors to generate consistent quarterly performance. And this is when we must look at ourselves, because often times the ultimate investors are us – the general public, through our pension and insurance funds! Big food and beverage companies are also pressured by consumers (again us) to keep prices low. So while they might have expertise and capacity, and on a may have access to cheap financing, in practice it may be difficult for them to make the required investments, at the scale required (here I want to give a nod to Mars & Danone who recently launched an equity fund to invest in small holders).
In general I believe that there is significant unmet investor demand. For example demand for labeled green bonds is in the hundred of billions of dollars per year – not just in the US and Europe but also here in the Middle East and in Asia. Also, a recent survey from family offices indicated a strong interest in increasing their exposure to “impact investing” but found that generally, good quality deal flow is lacking. This is also what we hear from the investors that we speak with.
So who is Clarmondial in all this? Clarmondial was created to proactively bridge this gap. We focus on sustainable supply chains, related to agriculture. We are putting our money, time and energy where our mouth is and have spent the last couple of years working with different parts of the investment ecosystem, from start ups to scale up and spin-offs. Clients and partners have come to us through referrals and word of mouth. We are now structuring products and providing investment banking services. We have established and will soon launch the Clarmondial Foundation, which will be focused on proactively developing and bringing to market impactful, fit for purpose investments. We may launch an asset management division this year as well.
Finally I also want to highlight work that I am leading for the Climate Bonds Initiative: we are developing sector-specific guidance for the agriculture, forestry and other land use sectors (including fisheries) under the Climate Bonds Standard. This is the only existing standard for the bond markets and is backed by investors representing over $20 trillion dollars. This will draw on scientific expertise through a technical working group and will seek to leverage existing standards and good practices. We also have an industry working group representing major relevant companies including large banks and agricultural traders.
That’s it – many thanks!