Catalyzing the Capital Flow Toward Nature-Positive Agriculture

Investor interest in financing nature-based solutions is burgeoning, but given the $711 billion funding gap, you wouldn’t know it. With over half of the global GDP reliant on nature, and the global ambition to achieve goals set in the 2016 Paris Agreement and the Global Biodiversity Framework, financing nature-based solutions is smart business. And yet, the sector struggles to secure the necessary investment to combat nature loss.

The overwhelming majority of capital allocated to climate and nature is directed toward energy, transport and infrastructure- food systems receive only 4%. Underinvestment in agriculture, especially in the transition of global food systems toward regenerative and nature-positive production practices, stands out given the sector’s profound impact on nature. Agricultural production and food systems are the main drivers of biodiversity loss, deforestation, conversion of natural habitats, and topsoil loss. They consume 70% of freshwater and generate one third of global greenhouse gas emissions. 

Moreover, the distribution of available funds is far from optimal. Planet Tracker estimates that 60% of external food system funding, including most of the equity finance, goes to manufacturers and distributors, leaving only 17% for producers and traders, the people most directly connected to nature and climate. In fact, a recent paper on the state of finance for the sector posits that “the unsung giants of climate and nature investment” are not public development banks or venture capital, but rather farmers and producers who use their own savings to invest in climate resilience and sustainable land management.

During my time at Catholic Relief Services, I ran an impact investment fund -Isidro- supporting smallholder agriculture in Latin America and Africa. Countless times, I witnessed how famers —who rise to the challenge of keeping the world fed, amidst climate change, market volatility, and supply chain disruptions—struggle to secure financing for strategic investments in nature. They would propose to invest in water-efficient processing equipment or planting native trees and a secondary crop on the land only to be told: “That sounds interesting, but let’s revisit that proposal next year.” This is not unusual. Every day, well-established farmer cooperatives and small agribusinesses, operating in countries where agriculture is a significant part of the national GDP, easily secure short-term operational loans but struggle to obtain medium-term financing for improving their natural resources base and infrastructure.

This disparity between expressed interest and tangible investment is rooted in the perceived and inherent risks of agriculture. Providing finance to a heavily climate-dependent sector, combined with the longer investment horizons of nature-based solutions, and the complexities of working with smallholder-run agricultural cooperatives, discourage potential supporters. It also reveals systemic and operational challenges, and capacity gaps within the financial sector. Unlike conventional lending for a home mortgage or a car loan, financing agricultural enterprises, especially natural capital investments, pose unique challenges. Financial institutions lack the infrastructure, processes, and capacity needed to deploy large-scale, replicable financing to farmers, land managers, and small agribusiness owners. They don’t have standardized financial products, a due diligence checklist, or a pro forma term sheet for these natural capital deals sitting on the shelf. As a result, impactful solutions investment opportunities are lost. To catalyze progress and move money into farmer led nature-based solutions, regenerative agriculture, and natural capital, financial innovation, capacity, and incentives are needed.

The good news is that there are creative models seeking to bridge the gap between capital supply and demand in agriculture. For example, Aceli Africa uses targeted incentives and capacity-building services for local banks to boost loans to small- and medium-sized agribusinesses in East Africa. By providing additional incentives for loans that meet climate resilience criteria. Aceli has mobilized $152 million of capital since 2020, with an average loan size of $97,000—directed to overlooked agribusinesses that are too large for microfinance and too small for commercial bank loans.

Similarly, AGRI3 Fund, seeks to mobilize private and public capital at scale, to avert deforestation in agricultural value chains. Partnering with local financial institutions, AGRI3 offers financial guarantees and supplemental grant funding for technical assistance. The Brazil-based Responsible Commodities Facility combines concessional capital (from UK retailers) and a de-risking tranche (from AGRI3) to provide farmers with low-interest financing. Participating farmers commit to protecting native vegetation and zero deforestation and strive to implement sustainable agriculture practices. WWF Brazil is part of the fund’s environmental committee.

Both Aceli Africa and AGRI3, while operating in vastly different markets, are financial solutions tailored to address challenges encountered by farmers and small agribusinesses. They offer creative market-based incentives and include features that leverage the crucial role of farmers and agribusinesses as land stewards, thereby promoting positive environmental impact.

Organizations with deep experience in food systems and agriculture have an important role to play in supporting the finance sector to develop new mechanisms and build expertise to bolster investment in nature-based solutions. At Isidro, we looked to examples like Aceli and AGRI3, innovating and improving the fund’s initial model, and putting a special emphasis on making longer term capital available for our client’s climate and nature-linked needs. The funds we deployed, and the technical assistance provided, drove more than food production—they were an investment in rural development, social stability, and environmental conservation.

The author is director of agriculture and innovative finance with World Wildlife Fund in Washington, D.C.