Financing Climate Smart Agriculture

Climate change will have an outsized impact on the agriculture industry; agri-food systems are very vulnerable to climate change. We are seeing the impacts of drought, flooding, and increased incidence of pests and disease. Climate change will disrupt traditional farming practices. In some regions, traditional crops are no longer suitable, and farmers must find alternative crops and use alternative production practices. With continued climate change, NASA suggests corn yields may decrease by 24 percent by 2030, partially offset by a rise in wheat yields.

Agriculture must adapt to climate change while also considering its contributions to the problem. The agriculture industry must adapt to climate change while reducing GHG emissions and using water more sustainably. However, it is also important that this transformation does not decrease global food production. The United Nations forecasts continued population growth, with the world population growing to 9.7 billion in 2050.

There are ways for the agriculture industry to decrease GHG emissions without decreasing food production. Most of these practices will also help farmers adapt to climate change and increase or stabilize farm revenues. As farmers make changes to their production practices, it is also important to ensure that the industry is financially sustainable.

Climate Smart Agriculture practices are solutions that will allow agriculture to adapt to climate change and/or reduce emissions without decreasing food production. Financing is required in all parts of this sector, including farmers, input suppliers, service providers, and value-added businesses. Farmers need financing for both operating expenses and capital expenditures to implement climate smart solutions. Private sector financial institutions in Europe and Central Asia (ECA) can increase the “green” content in their portfolios by financing Climate Smart Agriculture projects.

“A well running food system will help build human capital, lift communities out of poverty, and improve climate resilience. Instead, our global food system generates an estimated $12 trillion in hidden social, economic and environmental costs each year – including being the source of nearly 1/3 of global greenhouse gas emissions.

Juergen Voegele

Vice President for Sustainable Development, World Bank

World Bank Blogs, January 2023

Adaptation and Resilience

There are many practices the agriculture sector can implement to adapt to climate change, enhance resiliency to climate change, decrease emissions, and increase or maintain yields and profits. Best practices are region-specific, dependent on weather patterns, soil types, and the type of crop grown or livestock kept.

The following actions are examples of potential Climate Smart Agriculture practices that have the potential to increase long-term profits and sustainability but require capital or operating financing to implement.

Farmers are dependent on rain patterns to optimize crop yields. In many areas of Eastern Europe, existing irrigation infrastructure has fallen into disrepair. Updated irrigation systems can decrease water use, lower the amount of power needed, and allow farmers to add optimal amounts of fertilizer along with water during the growing season (fertigation). A farmer with an updated system will use less water, fertilizer, and power, and will also be more resilient to changes in rainfall patterns.
Grain and oilseed farmers till the soil to control weeds and prepare seed beds for upcoming crops. Deep tillage releases carbon dioxide into the air and disrupts soil organic matter. Adopting minimum- or zero-till systems allows farmers to sequester carbon in the soil and improve soil health. To change tillage systems, most farmers need capital financing to purchase seeding equipment that can seed through the previous year’s residue. Once tillage changes are established, fields are more resilient to droughts or excess rainfall, decreasing yield variability. Soils are also healthier, increasing yields.
Grain and oilseed farmers can plant “cover crops” after harvest and before seeding the next year’s crop. These crops keep the ground covered, reducing moisture loss and adding additional nutrients to the soil. Cover crops are not intended to be harvested and sold, but instead worked into the soil to increase soil organic matter, sequestering carbon in the soil. Over time, this healthier soil will produce higher yields, but farmers may need short-term loans to purchase cover crop seed.
Grain and oilseed farmers using precision GPS steering technology to operate machinery will have perfectly straight rows with almost no overlap. With these systems, farmers can use less inputs and less diesel fuel. Capital financing can allow farmers with older machinery to purchase and retrofit new GPS equipment.
Seed genetics have improved dramatically in recent decades. Many farmers use saved seed. With short-term financing, farmers can purchase new seed varieties that are higher-yielding or drought resistant. These new genetics can increase food production with little or no impact on GHG emissions.
Fruit producers are vulnerable to damage from hail. Consumers pay less for hail-damaged produce. Purchasing hail nets and installing them to protect fruit makes farmers more resilient to variable weather and protects revenues without increasing GHG emissions.
Much of the nitrogen in synthetic (non-organic) fertilizer is released into the air as GHG emissions. Using slow-release fertilizer helps to ensure that more nitrogen remains in the soil where it can be used by plants. Slow-release fertilizer is more efficient, providing more nitrogen to crops. However, farmers may need short-term financing to purchase this higher-priced fertilizer.
Cattle farmers can make better use of their pastures with more efficient grazing practices. With portable electric fences, farmers can confine animals to smaller areas, moving animals more frequently to optimize grass use and prevent overgrazing in any one area. Cattle owners can use short-term financing to purchase portable fences for this purpose.
Agri-food companies can also adopt Climate Smart Agriculture practices. For example, a milk processing company may need financing to purchase more efficient storage tanks. A fruit processing company may benefit from purchasing refrigerated trucks, or developing more efficient collection routes.

“Transforming our food systems is paramount to protecting nature, safeguarding food and nutrition security, and combating climate change. We are facing a dual climate-nature crisis, and we must act with appropriate urgency, ambition, and scale.”

Razan Al Mubarak

UN Climate Change High-Level Champion for COP28,

News Release, December 2023

Incentives to Implement Change

Farmers can increase financial returns and resilience by adopting Climate Smart Agriculture Practices. Farmers in EU countries have additional incentives: the European Green Deal requires farmers in member countries to make changes to their production practices.

The Farm to Fork strategy developed as part of the European Green Deal lays out many requirements that will make the EU’s food system more environmentally friendly. For example, the Farm to Fork and Biodiversity Strategies include a target of reducing the use and risk of chemical pesticides by 50 percent by 2030. The Farm to Fork strategy also addresses crop nutrients. The strategy calls for the reduction of nutrient losses by 50 percent, while protecting soil fertility. This is expected to reduce the overall use of fertilizer by 20 percent by 2030. Livestock owners in EU countries will need to adopt improved animal handling practices to improve animal welfare, which will decrease the need for medication and protect biodiversity.

Farmers in the EU will face penalties or lose access to Common Agricultural Policy subsidies if they do not adopt the practices included in the Farm to Fork strategy. Farmers in countries outside the EU may lose access to EU markets if they do not follow the more environmentally friendly practices endorsed by the EU.

The EU is not the only body setting targets in this area. In December 2023, at COP28, the UN announced intentions to transform agrifood systems from net emitters to a carbon sink by 2050, capturing 1.5 gigatons of GHG emissions annually.

We stress that any path to fully achieving the long-term goals of the Paris Agreement must include agriculture and food systems. We affirm that agriculture and food systems must urgently adapt and transform in order to respond to the imperatives of climate change.”

Heads of State and Government

COP28 UAE Declaration on

Sustainable Agriculture, Resilient Food Systems, and Climate Action

Carbon Farming

Carbon farming can provide farmers with an additional revenue stream as they implement Climate Smart Agriculture practices. When farmers adopt practices like reduced tillage or growing cover crops, they sequester carbon into the soil, removing GHGs from the atmosphere. The amount of carbon sequestered in the soil will vary based on weather, soil type, and farm practice.

When the farmers making changes to sequester more carbon take part in an established program, soil carbon can be measured or estimated, and verified by a reputable firm. Two of the firms working to verify carbon sequestration are Gold Standard and Verra. Every ton of carbon sequestered in the soil is equivalent to one “carbon credit.” Farmers, or the operators of the program they are working with, can sell these carbon credits to voluntary buyers.

Private sector companies choose to buy these carbon credits to offset their own GHG emissions and/or demonstrate their green credentials to their customers and shareholders. Individual consumers may also choose to purchase carbon credits to offset their own GHG emissions.

Several companies are working in this sector. Some offer just one of the services listed here; others offer several of these services.

Helping farmers implement profitable Climate Smart Agriculture practices.
Measuring the carbon farmers sequester in the soil using CSA practices.
Verifying the sequestration and issuing carbon credits.
Buying carbon credits from farmers and re-selling them to non-farm buyers.

Carbon credits and carbon markets are well-established in other sectors, such as power generation, but are still relatively new in agriculture. Methods of measuring carbon emission reductions and carbon sequestration are not fully established. One reason for this is the concern that sequestration may not be permanent. Future tillage or weather changes may release previously sequestered carbon into the atmosphere. Methods of measuring reduced emissions are also not yet fully formalized. As this market becomes more established, farmers will welcome an additional revenue stream as they adopt Climate Smart Agriculture practices.

Some European farmers have already used this process to receive carbon credits and have sold them for €32 to €36/ton of carbon. The amount of carbon farmers can sequester varies by soil type, crop type, weather, and other factors, but there are estimates that farmers can sequester between 1 and 1.47 tonnes of carbon per hectare.

Start Your Green Journey

Many financial institutions have not been actively involved in agriculture. IFC’s agricultural experts can help banks and other institutions identify appropriate regional Climate Smart Agriculture practices and attract agricultural clients with a need for financing to adopt these practices. Offering Climate Smart Agriculture financial instruments can allow financial institutions to expand their range of clients or offer more products to existing agricultural clients.

IFC’s Green Banking Academy (GBAC) is an online banking knowledge initiative designed to help financial institutions in ECA learn how they can make positive contributions toward sustainability, including Climate Smart Agriculture solutions. GBAC offers the tools and supports financial institutions need to develop and implement new Climate Smart Agriculture instruments, or to participate in financial instruments developed by other institutions.

For more information about GBAC or to schedule an assessment of your climate capabilities, please email ecagbac@ifc.org to contact a member of our ECA GBAC team. IFC experts are available to provide you with more information about Climate Smart Agriculture financial instruments. We are looking forward to working with you. Stay green!