Climate financing holds future for food systems

Smallholder farmers need to benefit from climate financing to be able to feed the hungry population. PHOTO/COURTESY/IFAD

What you need to know:

  • Mitigating the effects of climate change on agrifood systems and concurrently decreasing the carbon footprint of these systems forms the foundation of climate financing.

In the 21st century, agriculture faces numerous challenges, including the escalating demand for food due to population growth and shifting diets, declining crop yields, and diminishing natural resources and biodiversity. The impacts of climate change bring additional threats to agriculture.  

A warming climate could cut crop yields by more than 25 percent, while the extreme weather events associated with climate change can have devastating effects on farmers, their land, and crops. 

To effectively address these challenges, a substantial increase in investment is imperative to revolutionise agrifood systems, making them more resilient, efficient, sustainable, and inclusive. This transformation is essential to ensure that small-scale farmers have access to appropriate financial resources.

The key to transforming the agriculture sector and enhancing resilience lies in significantly boosting the capital available for climate-smart investments. Despite challenges related to perceived low profitability and high risks, robust financial investments are critical to supporting the global food system.

While climate finance reached $632b in 2019/2020, only $16.3b, was allocated to agriculture, forestry, and other land uses. 

The International Fund for Agricultural Development (IFAD) has initiated new financing strategies to enhance access to climate finance for smallholder farmers and SMEs in agriculture, promoting resilience and emission reduction.

Sara Mbago-Bhunu, the director of IFAD’s East and Southern Africa Division, underscores the importance of using climate finance to address key constraints in the agriculture finance landscape. 

This includes inadequate enabling environments, insufficient capacity to manage agricultural risks, and high transaction costs. Mbago advocates using climate finance as a catalyst to unlock additional sources of public and private sector capital, strengthen links between financial institutions, smallholder farmers, and SMEs, and enhance the capacity of both lenders and borrowers.

Mbago emphasises the potential of agriculture for inclusive economic growth, particularly in developing countries.

“With sufficient financing for sustainable and climate-smart production systems, the sector can unlock enormous economic potential while achieving several of the UN Sustainable Development Goals.”

IFAD’s executive board conducted a week-long visit to Uganda to assess the impact of their financing, particularly the oil palm project in Kalangala Islands. In the Eastern and Southern Africa region, IFAD injects $4.5 billion in financing for smallholder farmers.

In the upcoming financing phase, IFAD plans to focus on meat and dairy, aiming to improve efficiency in the livestock value chain. The project will address issues such as breed management, animal nutrition, digital monitoring, livestock insurance, and support for the collection and aggregation of milk and beef.

Adaptation measures to counter rising temperatures and vulnerability to diseases in the animal sector will also be a priority.

“We want to support adaptation because with rising temperatures the animals are more vulnerable to disease. We have mobilised resources from the Green Climate Fund that we shall blend into IFAD financing to support adaptation by the animal sector. This financing should also be useful in reducing emissions from livestock by developing bio fertilisers and animal feeds, for example,” she says.

Mbago stresses the significance of climate financing in enabling farmers to adapt, improve soil quality, and invest in technologies and seeds resistant to drought. She emphasises the transformation that can occur when everyone is involved in sustainable agriculture.

“Climate financing allows farmers to adapt and be able to improve the soil quality, buy the technologies and seeds that are drought resistant. The transformation comes out when everyone is in business.” 
Addressing the need for SMEs to understand Green Financing, Mbago suggests collaboration with banks and the Green Climate Fund to blend climate financing into banking products. 

Profitable mechanism 
IFAD unveiled a new financing mechanism to boost support to small-scale food producers in rural communities in Kenya, Rwanda, Tanzania and Uganda to adapt to a changing climate.

The Africa Rural Climate Adaptation Finance Mechanism (ARCAFIM) is a large-scale model of tailored finance for poor small-scale food producers and rural microenterprises. Small and medium-sized rural agribusinesses will also access concessional loans through this new scheme.

ARCAFIM integrates blended finance and incentivises private sector participation through a risk-sharing mechanism. Equity Bank will contribute $90m. IFAD will channel an additional $90m, with funding from Finland, the Green Climate Fund (GCF), and the Nordic Development Fund (NDF). The total $180m will be devoted to climate change adaptation loans.