by Tanja Havemann, Dr. Christine Negra, Fred Werneck
Agriculture is a critical sector for food security and environmental integrity as well as an engine of socio-economic development in emerging economies. To achieve agriculture-related SDGs, investments are needed in innovative technologies, greenfield production, infrastructure, working capital, and trade finance. Given the tremendous impact of the COVID-19 pandemic, agriculture-dependent economies need effective, efficient finance more acutely than ever. Ensuring the agricultural systems are ‘climate-smart’ (i.e. climate adapted) is also increasingly urgent. But the public sector can deliver only a fraction of the necessary funding. Significant private investment in sustainable agriculture must be mobilized by ‘blending’ public and private capital sources to maximize development impact.
To encourage increased SDG-related agriculture investments, Clarmondial and Versant Vision have published “Blended finance for agriculture: exploring the constraints and possibilities of combining financial instruments for sustainable transitions” in the journal Agriculture and Human Values. In surveying the current landscape, this paper describes the pros and cons of diverse blended finance modalities and clarifies the roles and limitations of public and private funders. Its insights will also inform the forthcoming Intergovernmental Panel on Climate Change (IPCC) report on climate adaptation in agriculture.
Blending commercial and concessionary capital will not lead to superior development results if agricultural investments do not address context-specific priorities and respond to the incentives of different stakeholders. To efficiently and effectively use limited concessionary funding to mobilize additional private capital toward SDG-related agriculture investments, blended finance structures must:
- Tailor finance strategies – such as debt, equity, technical assistance funds, guarantees, insurance, and grants – to underlying assets, business opportunities, and development needs;
- Combine the right mix of expectations for financial and non-financial return-on-investment;
- Suit stakeholders’ fiduciary responsibilities, regulatory and budget constraints, risk tolerance, and time horizons; and
- Build investor confidence, while rewarding demonstrated social and environmental improvements.
Blended finance is essential to achieving sustainable agriculture, but challenges must be overcome. Particularly in emerging markets, remote location of counterparties and high opportunity costs will require innovative partnerships among agribusinesses, government agencies, technology companies, private capital providers, and NGOs. Furthermore, information systems do not yet fully support informed assessment of risks and opportunities by agricultural value chain players and financial institutions, limiting participation in blended finance structures. With advances in impact monitoring of social and environmental performance, testing of new investment strategies, and cultivation of appropriate structures and intermediaries, the utility of specific blended finance strategies will crystallize, enabling greater SDG-related agriculture investment.