DISCUSSION PAPER Scaling up critical finance for sustainable food systems through blended finance Andrew Apampa 1, Chris Clubb 1, Bethany Emma Cosgrove 2, Gretel Gambarelli 3, Hans Loth 4, Richard Newman 5, Vanesa Rodriguez Osuna 3, Joke Oudelaar 4, Angele Tasse 6 1. Convergence 2. Alliance of Bioversity International and the International Centre for Tropical Agriculture (CIAT) 3. United Nations Environment Programme (UNEP) 4. Rabobank 5. International Water Management Institute (IWMI) 6. CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS) Key Messages „ Sustainable agriculture is systemically underfinanced in developing countries – disproportionately, relative to other sectors – despite its critical contribution to many SDGs. „ This paper provides a pathway for scaling investment for food system transformation through blended finance by mobilizing commercial banks, non-bank financial institutions and their clients. „ The development finance community needs to collaborate with private financial institutions and investors to leverage limited public funding and increase investment. „ Investment in sustainable agriculture in developing countries is risky and therefore beyond the investment mandate of most private investors; de-risking through smart blended finance is an effective development tool. „ De-risking through blended finance will introduce new investors and demonstrate commercial viability of investment so blended finance can be phased out over time. About this paper CCAFS Discussion Papers contain preliminary research and are circulated in order to stimulate discussion and critical comment. They have not been subject to a formal external review. The views expressed in this document cannot be taken to reflect the official opinions of CGIAR and/or the contributing institutions. This work is licensed under a Creative Commons Attribution–NonCommercial 4.0 International License. Suggested Citation: Apampa A, Clubb C, Cosgrove BE, Gambarelli G, Loth H, Newman R, Rodriguez Osuna V, Oudelaar J, Tasse A. 2021. Scaling up critical finance for sustainable food systems through blended finance. CCAFS Discussion Paper. CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS). Investment in sustainable food production in developing Platforms to foster countries is heavily constrained by (1) high country and sector specific risks, (2) poor primary data and blended finance for information asymmetries between financial institutions sustainable food systems and potential borrowers in rural financial markets, (3) the mismatch between investment needs of farmers and Platforms like the UN Food Systems Summit and the producing companies and different pools of capital, e.g. Finance in Common Summit, as well as collaborative development finance institutions, banks, pension funds, networks such as the Good Food Finance Network insurance capital, and (4) high transaction costs and small offer great opportunities to different types of actors ticket size. These constraints lead to insufficient pipelines in the financial supply chain for food systems to work of bankable projects. One solution to remedy these collaboratively and make tangible commitments towards deficiencies is blended finance. sustainable, equitable and resilient food systems and change course for the upcoming decade. This paper presents a snapshot of current challenges and opportunities associated with blended finance and calls Within the UN Food Systems Summit, five Action Tracks for a radical sectoral shift in agriculture, using commercial and four cross-cutting Levers of Change have been banks, development finance institutions and other financial developed to address the main challenges of global 1 intermediaries as enablers for food systems transformation. food systems . Action Track 3: “boost nature-positive food production at scale” is the place for engagement We propose six actions for blended finance* to help and action around agricultural solutions that enable to enable and boost the transition towards sustainable produce more food without increasing the environmental food systems, contributing to positive environmental, footprint of food systems through greater land use or social and economic outcomes. These actions apply to greater use of production inputs. Meeting Action Track 3 multilateral development banks (MDBs) and development objectives requires the development of financing models financial institutions (DFIs) that traditionally have been and instruments where food value chain actors, including and are active in this space. However, in addition to these farmers, are given access to capital and incentivized to public financial institutions (i.e. mostly, to some extent, invest in more sustainable production practices. To enable owned by governments), we also show how blended this and other crucial objectives, the Finance Lever has finance can be used by private financial institutions developed one imperative to “use catalytic capital to (owned by non-government shareholders). This includes de-risk investments in innovative sustainable business commercial banks and other institutions that offer models”. This is a call to use blended finance and other financial services but have no banking license. de-risking solutions to reorient investments. Blended finance can help de-risk some of the financial The Finance in Common Summit is a platform where industry and private sector challenges but requires a multi- Public Development Banks convene to reinforce their stakeholder partnership approach between financial sector commitments in support of common actions for climate actors, the food & agriculture industry, NGO’s, multilateral and sustainable development. The 2021 Finance in organizations, donors, investors, as well as the technology Common Summit will focus on the contribution of Public sector to create the right enabling environment. These Development Banks to the transformation of agriculture partnerships need to foster dialogue and gain a better and agribusiness for food security, adaptation to climate understanding of each other’s challenges and agenda, change and biodiversity conservation. leading to more blended finance flowing to producers. A more permanent place for continuous cross-border The primary target audience for this brief is the collaboration is provided by the Good Food Finance development finance community, commercial banks and Network, a multi-sectoral community for collaborative other financial intermediaries; however, many other users innovation, working to bring sustainable food systems may find the propositions made here useful in pursuing to the heart of the finance agenda. This Network is due their mandates. to set up “catalytic groups” to accelerate the transition, * Blended finance as “the strategic use of development finance for the mobilization including a group dedicated to blended finance. of additional finance towards sustainable development in developing countries.” (OECD-Definition-Blended-Finance). The core objective of blended finance is to deploy strategically development-focused funds to mobilize private investors to investment opportunities they would otherwise not invest in, thereby increasing the volume of finance for sustainable development (Convergence 2018). 2 September 2021 Global food systems and solutions, reducing food loss & waste and financing smallholders, is required for the transition to sustainable the funding gap food and land-use systems. This investment could unlock The global food system will need to produce food more US$5.7 trillion worth of economic and social gains to efficiently and sustainably to achieve the Sustainable society 10. Development Goals (SDGs) and meet the climate Further, it is estimated that 270 million smallholders commitments of the Paris Agreement. The global across different regions require US$188 billion annually population is expected to grow to 9 billion by 2050, to cover their agricultural needs, such as agricultural increasing the demand for food by 70% and requiring inputs or investments in mechanization and US$50 billion at least US$80 billion in annual investments to meet each year to cover non-agricultural household related this demand 2. Additionally, income growth in low- and expenses 11. middle-income countries is linked to changing dietary preferences towards higher value agricultural products, Banks are the main providers of private domestic accelerating a transition towards higher consumption of credit, followed by microfinance institutions. Although meat, fruits, and vegetables, relative to that of cereals, agriculture accounts for around 17% of GDP, less than 5% requiring corresponding shifts in output and adding of domestic financial sector assets are provided to the pressure on natural resources 3. agricultural sector 2. The agricultural sector is considered as one of the riskiest sectors for banks, which leads Global food systems contribute a third of total human- to insufficient allocation of capital to finance existing made greenhouse gas emissions and agriculture alone agricultural business models. This finance gap will only accounts for 70% of freshwater withdrawals 4, 5. Most increase considering the additional capital required for the agricultural practices today are unsustainable and have transition to more sustainable practices. been a major driver of terrestrial biodiversity loss and contributed to at least 70% of deforestation terrestrial biodiversity thus far, as well as the degradation of 33% of Challenges and drivers of soils globally 6, 7, 8. Ensuring that food and land systems the funding gap are transitioned to more sustainable models to alleviate Realizing the SDGs requires a transformative agenda climate risks, safeguard environmental ecosystems, for agriculture and food systems. The importance of improve food security, and create more inclusive rural increasing investments and aligning them to sustainable economies is urgent and necessary. development and sustainable agriculture is often Given the interlinkage between climate change and food underlined, but we are experiencing continuous very low systems (our food systems are impacted by climate change levels of investment and anaemic levels of mobilization. and also contribute to climate change), it is imperative Table 1 summarizes the main sources of development that solutions apply a “food systems” approach across finance for agriculture, including mobilization. value chains (upstream, midstream and downstream) i.e. Official development assistance (ODA) and traditional address the key drivers that affect climate change and development finance (international financial institutions prioritize outcomes that tackle climate change, such as “IFIs”, multilateral development banks “MDBs” and land use, food loss & waste and consumer preferences. development financial institutions “DFIs”) is critical in developing countries, but they are failing to materially Approaches, such as agroecology, agroforestry, increase sustainable finance and catalyze the required sustainable land use, integrated natural resources private capital at scale. management and climate-smart agriculture can provide part of the solution. Redirecting subsidies, technological • Only around 2% of the US$11 billion of ODA is allocated improvements and reductions in the emission intensity to mobilization / blended finance activities. of production can also help address food systems emissions 9. • IFIs, MDBs and DFIs have minimal amounts allocated to private investment mobilization for agriculture: only The Food and Land Use Coalition estimates that US$300- around 15% of US$45 billion of MDB and DFI own- 350 billions of annual investment capital to 2030, spread financing and 5% of the US$19 billion of “direct private across themes related to healthy diets, nature-based mobilization” annually are for agriculture. SCALING UP CRITICAL FINANCE FOR SUSTAINABLE FOOD SYSTEMS THROUGH BLENDED FINANCE 3 TABLE 1. Main sources of official development finance to agriculture sector in developing countries 15 Agriculture Project Type Source 1 Source 2 Source 3 Official Development Assistance International Financial Development Finance Institutions (e.g. USAID) Institutions (e.g. I BRD) and (e.g. UK CDC) MDBs (e.g. AfDB) Public sector (sovereign) Grants and Sovereign Loans Sovereign Loans and Grants None (~ US$11 billion annually) Private sector (non-sovereign) Commitments to blended IFIs: None MDBs: Loans, Equity Loans and Equity Investments finance Investments and Guarantees (~ US$1-2 billion annually) (~ US$150-300 million annually) (~ US$3-5 billion annually) Various agricultural stakeholders, including smallholder companies. Since the central role of banks includes farmers and agribusinesses need capital to assist in the protecting capital entrusted to them (e.g. savings, current transition to sustainable practices. These financing needs accounts), they are subject to heavy regulation by central can be met using a variety of instruments, i.e. grants, banks. This translates into a strict “risk appetite” that is equity, debt, and risk mitigation products (guarantees monitored and audited that limits committing medium- and insurance products, including hedging). This capital term funding to high risk countries. is typically deployed through a mix of public and private actors. When discussing access to finance, there is an important distinction between large commercial farmers and small- The supply of private sector finance for sustainable holder farmer groups as they operate differently. For agriculture finance and investment in developing commercial farmers, access to working capital facility countries comes mostly from either (i) domestic providers and medium-term capex loans is, to some extent readily of finance (banks, microfinance institutions, private and available. For smallholder farmers and related SMEs and public equity investors, pension funds, fund managers cooperatives, basic access to the financial system is often a and retail investors) or (ii) cross-border financial challenge because of the lack of access to a bank account, intermediaries/investors (international banks, insurance credit (in local currencies) and insurance products. and pension companies, sovereign wealth funds, private Access to lending products is restrictive given the lack of and public equity investors, fund managers and retail collateral, financial track record and distribution channels. investors). All these investors assess potential investment across the risk and non-risk challenges described in As an alternative way to reach out to farmers, corporate Table 2, with systemic underinvestment as a result. actors (e.g. input providers, traders and processors) take up the role of “financing agents”: They act as aggregators, Financial institutions and investors assess these risks and distributing loans to (smallholder) farmers (e.g. for challenges to determine whether a company/project is seedlings, fertilizer) to secure their supply of commodities bankable, near-bankable or non-bankable. (e.g. cocoa, coffee, soy). Despite their role in short-term investments, these corporate actors are often not able to Only 4% of the US$379 trillion of Global Financial Assets provide medium- and long-term financial solutions, as it is are invested in the 145 Developing countries (ex-China), not part of their core business and capabilities. mainly because cross-border investors perceive country risk as very high: only 11% of the sovereign risk ratings Access to finance for a transition to sustainable practices is of developing countries are Investment Grade (S&P- even more challenging given the unproven business case, equivalent “BBB-“ or better) with the median “B.” For most the deployment of new technologies and the requirement potential cross-border debt investors, this risk translates of financing non-cashflow to foster conservation activities. into high expected losses beyond their investment mandate and criteria 13. Farmers that wish to innovate in the context of food system transition are perceived to entail higher risk. These “speculative” risk ratings have most impact on For example, farmers seeking to integrate reforestation, regulated financial instructions, like banks and insurance agroforestry practices into their existing activities would 4 September 2021 TABLE 2. Risk and non-risk challenges impeding agricultural financing 12 Project-specific risk Project-specific non-risk challenges Country risk issues Business risks from underlying business model, Informality of company: Large majority of Macroeconomic risk: Global emerging markets including new untested business models or companies operate informally, not reporting risk, national fiscal, inflation, etc. transition risks related to sustainability or 100% of revenues failure to integrate environmental social and governance (ESG) considerations Financial risk: Ability and willingness of Lack of conventional security for lender: International, national and local political borrower to repay obligations Lenders lend against security, with preferred agriculture risks: Agricultural trade, sanctions security being clear-tile land and buildings – often not available for agriculture Agronomy risk: Reduced or unpredictable Small borrowing amounts: Large majority of Currency risk: Decline in the value of harvest (quality / quantity) due to agronomic required borrowing amounts are likely less than an investment due to adverse currency practices, i.e. production and technical risks US$100,000 (possible less than US$20,000) movements Natural hazards: Unpredictable weather Lack of domestic financial resources for Political risk: Transfer, conversion, political events, earthquakes, landslides agriculture: Domestic credit is undersupplied, insurrection, civil disturbance and then only small amounts collocated to agriculture Commodity Price Risk: Adverse movements of commodity prices Interest Rate risk: Decrease in ability of company to make debt service payments due to changes in global and local interest rates require longer tenor loans (and grace periods). For these Blended finance as farmers to access long term financing, the supply of financing is very low and pricing (interest rate) is very high catalyzer of the desired reflecting the higher (perceived) risk and the regulatory food system transition capital requirements. The result is that the limited supply of financing is unaffordable. Given the high country and borrower risk, compounded by the novelty and uncertain economic returns of many A sustainable transition for food systems financing sustainable production models 9, the private sector will requires a deep understanding of the banking sector and continue to fall well short of providing the financing support in terms of risk sharing. Longer tenor structures required to achieve sustainable food systems. Without and, in some cases, concessional funding, can help make financing, market premiums and/or financial incentives to these sustainable transition loans viable for both farmers shift towards more sustainable practices, most producers and banks. are likely to continue to operate business as usual. To increase the supply of domestic and cross-border Because of the imperative of aligning “general agriculture” investment to sustainable agriculture, blended finance with the SDGs, massively scaling up blended finance solutions need to address the Risk and Non-Risk mechanisms should lead to catalyze private capital on the Challenges (Table 2). These solutions should lead to one hand and incentivize producers on the other hand. (i) transforming near-bankable into bankable projects, (ii) increasing the supply of finance and investment to Blending public funding with private sector resources to bankable projects and (iii) enabling access to sector and de-risk some of these challenges is the best solution to agricultural transformation knowledge to the various finance sustainable investment at scale. This blended stakeholders involved. At the same time, blended finance finance approach combines impact financing for SDGs approaches need to improve the risk-return investment with the much larger private sector financial resources and profile to acceptable levels for all actors involved to create commercial banks’ client portfolios. Effectively, the public a market-equivalent investment opportunity. catalytic concessional finance will only come into play SCALING UP CRITICAL FINANCE FOR SUSTAINABLE FOOD SYSTEMS THROUGH BLENDED FINANCE 5 when it can be blended with commercial finance. Research organizations have also an important role to play in developing tools and frameworks that can lower the There are two critical forms of commercial finance in transaction costs for investors, improving risk assessment blended finance transactions: (i) organizations that and safeguarding impacts, especially when the target originate, arrange and manage financial assets ranging beneficiaries are smallholder farmers, including women from US$50 to US$100 million to finance the companies/ and youth. These organizations are increasingly shifting projects and (ii) investors that can invest in these financial towards demand-driven R&D delivering innovative, digital assets. The former are generally banks, microfinance tools for portfolio level risk assessment, M&E and pipeline institutions (MFIs), fund managers and value-chain prioritization that can be incorporated into the investment financiers (and MDBs, DFIs and national development decision making process of blended finance vehicles. banks in public sector). And the latter can be the entire spectrum of the investment community. The transformation enabled by blended finance will encompass the following stages: Working with banks and MFIs at global, regional and local levels has its advantages. Banks are in constant contact 1. Blended finance mechanisms will increase finance and with their client base (including in the food and agriculture investment to bankable projects and improve near- industry) on financing needs. The corporate actors in bankable projects to become bankable. the food and agricultural supply chain are directly linked to farmers, input providers (e.g. seeds, fertilizer) and 2. The financed entities that build up a successful and off-takers (traders, processors). These corporate actors robust track record will have a demonstration effect. (sometimes referred to as “aggregators”) can assess SDG The perceived risk by private investors of the whole interventions in their supply chains that “boost nature- sustainable food systems will decrease and as a result, positive food production at scale”. overall investments in this segment will increase, attracting larger pools of capital and institutional Banks can support their clients with the investments investors. needed to implement those sustainable practices. Domestic banks can also have an easier reach to farmers, 3. Over time, the importance of commercial finance will access to local knowledge, infrastructure and currency increase as the role of concessional finance decreases: to provide appropriate lending programs. In summary, once proof of concept that sustainable food system commercial banks offer a strong and natural loan approaches are profitable and reduce overall credit distribution channel in the agricultural sector through risks is achieved at scale, more commercial finance will their large existing client bases, their kitchen-table be made available, without the need of concessional relationships and their infrastructure (branches, mobile capital. solutions, cooperation with mobile network operators). This is the channel to scale, because it can help remedy Blended finance: lessons the lack of a deep pipeline of bankable projects (see “Key learned, best practices Messages” above). and opportunities for This scaling up effort by banks requires transactional scale simplification and standardization. Otherwise, transactional costs will be prohibitive, especially when Convergence, the global network for blended finance, has a large group of stakeholders is involved. This can be compiled a database of 650+ blended finance transactions accomplished, for example, by designing standardized in developing countries. According to this database, in the loans to farmers in a specific sector including SDG era (since 2015), 13 blended transactions on average environmental and social impact targets, standardized each year have targeted agriculture, accounting for around approach to portfolio risk sharing of smallholder loans, US$1.2 billion in financing per annum 14. Overall, the but also standardizing and measuring environmental and Convergence database records 146 blended transactions social impact indicators. that have targeted the agriculture sector and/or SDG 2 representing aggregate financing of US$13.4 billion (Figure 1). 6 September 2021 Some of the key lessons learned of blended finance cases Accordingly, funds are the most common blended finance in the agricultural sector include: vehicle type for agriculture*** (Figure 2) accounting for 53% of agri-transactions, compared to 39% of total Agriculture transactions are typically smaller compared blended finance transactions 15. to the blended finance market. Agriculture represents 22% of total blended transactions, but only 9% of Rural communities and smallholder farmers appear as financing volumes (Convergence), demonstrating the the end beneficiaries in 86% of agri-transactions, with relatively small size of transactions targeting the sector.** nearly half of agri-transactions targeting micro, small and Some examples from the Convergence Matchmaking medium enterprises (MSMEs) (49%) as direct beneficiaries. Platform are listed in Table 3. Agri-transactions most often target agricultural inputs / farm productivity (36% of agri-transactions) and agri- Most of the underlying projects or recipients of funding finance (35%), although climate-resilient / sustainable in the sector have small financing needs, less than US$1 agriculture (18%) is becoming increasingly important, million – likely amongst the lowest compared to other with agribusinesses under increased pressure to ensure sectors/SDGs. sustainability within their supply chains, down to the Hence, mobilizing financing through blended finance primary farmer. to critical projects requires aggregation at a portfolio level. This type of scale can be achieved in particular by *** Funds are the most common blended finance vehicle type for agriculture because channelling finance through financial institutions and standardized funds can better mobilize at scale, often by financing local banks and funds that extend debt (and possibly equity) or directly to MFIs with retail distribution networks to better reach local farmers. corporate value chain actors that can manage a portfolio of projects. ** Agri-transactions have a median size of US$38 million (compared to US$57.1 million for all transactions); with over half (57%) less than US$50 million (44% for all transactions) and 26% in the US$10-25 million range. $16 146 160 $14 134 140 118 $12 107 120 $10 9484 100 $8 69 80 57 $6 47 60 38 $4 28 40 $2 20 $0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cumulative transaction count Aggregate financing US$ FIGURE 1. Market size and growth of blended finance for agriculture 14. SCALING UP CRITICAL FINANCE FOR SUSTAINABLE FOOD SYSTEMS THROUGH BLENDED FINANCE 7 Billions TABLE 3. Examples of blended finance for agriculture Historical blended finance transactions Blended finance transactions currently fundraising Mercon Coffee Facility US$450 million fund SDG 500 Fund US$510 million fund Silverlands Fund US$450 million fund Samunnati $343 million facility African Agriculture Fund US$246 million fund Octobre Liquidity facility US$183 million Africa Agriculture Trade and US$146 million fund One Acre Fund US$159 million Investment Fund IFC Blended Finance Project for US$12 million loan program Food Securities Fund US$101 million Hazelnuts in Bhutan Convergence operates a platform to match project sponsors, private investors and development organizations to blended finance transactions in fundraising mode – currently 80 transactions. For more information, contact Convergence Blended Finance. Bond / note 3% Company 20% Facility 10% Fund 53% Impact bond 1% Project 12% Agriculture All FIGURE 2. Agriculture transactions by blended vehicle type. 8 September 2021 With agriculture finance highly decentralized and having Scaling up also requires identifying the most effective many providers, and preferred blended finance solutions and efficient vehicles or models that have demonstrated capable of scale occurring mainly at the fund level, success, and then funding those approaches with achieving scale requires investments in funds that can catalytic/concessional development funds that can attract finance a large number of providers. Achieving scale private investment to achieve scale. will also be helped by investing in funds that support innovative business models in food and agriculture, Lastly, standardization and consolidation / integration are especially by targeting key nodes within the sector or needed to reduce transaction costs and attract investors. specific value chains that can de-risk the entire sector The small scale and bespoke nature of investment vehicles, and signal possibilities for the wider market. However, including blended vehicles, in this sector is an important innovation in agriculture must be balanced against limiting factor, as it brings along higher transaction costs efficient finance structures that are simple and replicable. and risks for investors. Blended finance solutions should therefore prioritize standardization and the reduction of Investing in capacity building of (i) financial intermediaries transaction costs. Scale can then be achieved through the providing financing directly to companies/projects and replication and adaptation of a limited set of structure (ii) producers is key to scaling up financing for sustainable archetypes, similar to the experience of other sectors agriculture. The starting point to mobilize larger amounts (e.g. renewable energy). Finally, the consolidation or of investment into sustainable agriculture is to identify integration of similar or complementary structures (e.g., the main financial intermediaries that can provide direct similar thematic or geographical approaches) into sizeable financing and value-chain financing, and then to increase facilities and platforms would also help to attract more their expertise, funding and risk-bearing capacity to institutional investment into agriculture. finance more sustainable agriculture companies/projects. At the same time, technical assistance for producers and de-risking is needed to improve near-bankable projects to bankability. BOX 1 TWO BLENDED FINANCE CASES IN THE AGRICULTURE SPACE The AGRI3 Fund was incorporated in 2020 by UNEP, Rabobank, IDH (the Sustainable Trade Initiative) and FMO (Dutch development bank). The fund looks to mobilize financing from financial institutions and blends public and private capital to enable projects that would otherwise not materialize due to their risk profile. The public-private partnership aims to unlock $1 billion for forest protection and sustainable agriculture, and to bridge the gap between the needs of farmers and the limitations of banks. The fund de-risks loans from banks to various actors in the agricultural value chain, while the ultimate beneficiary is always the farmer willing to transition to more sustainable practices. The technical assistance facility (managed by IDH) supports pipeline development, monitoring and evaluation, and capacity building for producers to transition to sustainable and climate-smart agriculture 16. Utilising a different blended finance approach, the Tropical Landscape Finance Facility (TLFF)* consists of a loan facility that funds early-stage projects using credit-enhancing instruments of development investors to leverage private finance. Once the projects reach maturity and generate sustainable cash flows, they are aggregated and repackaged as medium-term notes sold by BNP Paribas to patient capital investors in tranches according to risk capacity. The facility aims to reach US$1 billion by offering long-term loans to projects in renewable energy and sustainable agriculture whose outcomes include improved livelihoods, reduced deforestation, improved agricultural efficiency, and restored lands. In 2018, TLFF launched its inaugural transaction: a US$95 million loan to help finance a sustainable natural rubber plantation in two heavily degraded landscapes in Indonesia, which will train, employ and provide stable revenues to farmers while also protecting tropical rain forests on the plantations 17. *A partnership between ADM Capital/ADM Capital Foundation, BNP Paribas (BNPP), UN Environment Programme (UNEP) and World Agroforestry Centre (ICRAF). SCALING UP CRITICAL FINANCE FOR SUSTAINABLE FOOD SYSTEMS THROUGH BLENDED FINANCE 9 BOX 2 BLENDED FINANCE AS AN EFFECTIVE TOOL TO MOBILIZE CAPITAL FOR GENDER EQUALITY AND ACCELERATING WOMEN’S SOCIO-ECONOMIC EMPOWERMENT Women make up 43 percent of the global agricultural workforce. However, female farmers receive only ten percent of total aid for agriculture, forestry, and fishing, and as little as five percent of all agricultural extension services 10. Research suggests that if women had the same access to productive resources as men, they could increase yields on their farms by 20–30 percent, potentially resulting in 100-150 million fewer hungry people in the world 19. This requires investors to take a gender-smart approach, that mainstreams gender analysis in the investment decision-making process, to provide the necessary capital to women-owned and led companies so that women farmers are empowered across the entire food system. Blended finance can be an effective tool to incorporate such approaches, as it can de-risk solutions that simultaneously address sustainable food production, climate resilience, and gender equality. Examples include the Land Degradation Neutrality Fund, which is supported by first-loss capital to invest in projects that reduce or reverse land degradation, while advancing gender equality from project design through to implementation 20. Industry wide initiatives such as the 2x Challenge, also provide important sources of capital which can be applied through blended finance solutions to address gender gaps in financing 21. Action plan to increase Upper Middle-Income Countries where mobilization is easier. If they provide around US$5 billion of financing investment in sustainable to private sector agriculture projects, and they increase food systems their mobilization to a factor of 2, then an additional US$10 billion of private investment could be mobilized. The authors propose a six-point action plan to increase Combined with the amount above, an additional US$20 investment in more resilient and sustainable food systems. billion of private investment could be mobilized using All actions are simple but critical, fully within the control existing official development finance resources. of the development community and can be realized within 3. Development community and private sector the next 18 months using existing financial resources. directly collaborate including mapping the financial 1. Donors commit to allocate 10-20% of their ODA intermediation chain for sustainable food systems and funding to private investment mobilization then boosting investment through the chain Sustainable agriculture in developing countries requires Development finance actors need to map the financial traditional ODA grants. The development community intermediation chain for sustainable agriculture including: should commit to allocate at least 10-20% of its agriculture ODA to private investment mobilization. If 15% of the • the demand for capital by agriculture companies US$11 billion of agriculture ODA would be allocated and projects, including value chains and smallholder to private investment mobilization achieving six times agriculture such as debt from banks, microfinance leverage, then an additional US$10 billion of private institutions and value chains and equity from equity investment would be invested. The US$9.4 billion of fund managers. traditional ODA and US$10 billion of private investment • the supply of investment capital to the agricultural would achieve more development impact than US$11 sector (domestically and internationally) from billion of ODA alone. commercial banks, non-bank financial institutions, 2. Shareholders govern MDBs and DFI with targets for total institutional investors, asset managers, fund managers, investment and mobilization to sustainable food systems commercial banks, MDBs and DFIs. Emphasis should Only a small percent (estimated at 5-10%) of MDB and DFI be placed on the financial institutions that originate financing transactions for agriculture include private direct and arrange the direct financing to the companies and mobilization. The shareholders of MDBs and DFIs should projects such as institutions that have outreach to the govern them to require 50-75% of their transactions different types of farmers (large, emerging, smallholder) to mobilize private direct finance – possibly 100% in and to more downstream SMEs, corporates and, companies in the value chain. 10 September 2021 Development finance actors need to build a bridge ongoing donor programs to intermediate and introduce between the development community and a small potential pipeline to relevant finance actors. number of private-sector financial institutions with comparative advantage in agriculture, e.g. by setting up • The finance and investment community share relevant working groups / collaborative tables to improve mutual information on blended finance transactions to understanding and jointly boost high-impact investments strengthen the case for main-streaming institutional in a cost-efficient way. investors: a) develop a track record in the sector and at portfolio level, b) collect and disseminate primary 4. Development community creates Call for Proposals data that allows public and private investors to more to allocate collaboratively their scarce catalytic ODA accurately value risk-return profiles and assess impact. financial resources to the best mobilization proposals. The best blended finance proposals, based on 6. Build inclusive and resilient agricultural value chains combination of lessons learned (presented in prior section through evidence-driven incentives and coordinated for transactions in agriculture) and new innovations, technical assistance programmes should be determined through competition and then Firstly, financial institutions that lend to corporates and funded. The main criteria should be high development MFIs need to incorporate ESG criteria and incentives additionality and financial additionality 18, scale private linked to their loans that improved traceability and investment, standardization and temporary intervention resilience, especially regarding supply chain origin. to permanent solutions without concessionality. All Aggregators, off-takers and MFIs provide access to finance organizations involved in the financial intermediation and market linkages between smallholder farmers and chain should be invited to submit proposals. supply chains. This relationship is key to facilitating the Standardization of a handful of best practice blended/ dissemination of technical knowledge and services, layered capital structures to create a well-understood such as climate adaptation interventions and insurance asset class for investment by mainstream investors is products for smallholder farmers. Such guidance on ESG critical. criteria, incentives, interventions should be informed by the public knowledge hubs (mentioned in action point 5). 5. Champion public knowledge hubs for successful financing solutions that foster sustainable food systems Secondly, donor capital and government subsidies should The finance and development community (including strategically allocate for technical assistance by targeting research organizations, extension service providers and both capital providers, such as regional and local banks, NGOs) need to collaborate through multi-stakeholder and capital receivers, such as farmers/SMEs. Pipeline working groups to develop a common understanding and development programmes and R&D projects can support methodologies concerning sustainable food systems and and accelerate the investment-readiness of early-stage blended finance. Knowledge sharing and dissemination investments, especially those that cater for smallholder should be managed through well-coordinated, donor farmers. These programmes need to be coordinated funded, public knowledge hubs. through corporates/banks and supported by research organizations and NGO’s. • Development community need to create and share a wealth of data and knowledge on sustainable food systems: a) Public capital providers and government donors should align on standardized and simplified ESG criteria built off sound scientific evidence, b) Donor funded R&D programmes should support the development of digital tools for risk assessment and management that can be applied at portfolio level to lower transaction costs for investors, c) Donor programmes and government agricultural extension services should systematically share agricultural field data to support investor due diligence, d) Public capital providers perform a systematic re-view of previous/ SCALING UP CRITICAL FINANCE FOR SUSTAINABLE FOOD SYSTEMS THROUGH BLENDED FINANCE 11 Endnotes 17. 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Smallholder and Agri-SME Finance and Investment Network, 10. 13. OECD and UNEP. 2020. Framework for SDG Aligned Finance. https:// www.oecd.org/development/financing-sustainable-development/ Framework-for-SDG-Aligned-Finance-OECD-UNDP.pdf 14. Convergence. 2021. Blended Finance and Agriculture. Data Brief. https://www.convergence.finance/resource/0fdfc957-abd8-4a55-a315- 36ac28cb1559/view 15. Convergence. 2020. The State of Blended Finance 2020. https://www. convergence.finance/resource/1qEM02yBQxLftPVs4bWmMX/view 16. Agri3 Fund – AGRI3 Fund aims to mobilise additional public and private capital at scale, to contribute to sustainable agricultural value chains and avert deforestation. https://agri3.com 12 September 2021