Driving finance for sustainable food systems

Food systems are key to achieving the Sustainable Development Goals (SDGs) and other climate and nature targets, yet their current trajectory is unsustainable and requires an urgent transformation. The way we produce and consume food contributes greatly to climate change; at least one-third of total global greenhouse emissions from human activities can be attributed to the way we produce, process, transport and package food. The expansion of agricultural commodities is the largest driver of deforestation worldwide and food systems remain a key contributor to global nature loss with profound implications for people.

A substantial funding gap of up to USD 350 billion per year by 2030 exists for transforming food systems to achieve climate mitigation and adaptation targets, as well as to meet other SDGs. Public financial resources, including multilateral development assistance, are not sufficient. Private finance is therefore essential to fill the funding gap.

The financial sector can support the transition to a net-zero, nature-positive economy by modifying its lending and financing decisions to ultimately align clients’ portfolios with sustainable production. Given the multi-dimensional nature of food systems, private sector institutions must ensure that their operations and investments avoid harmful consequences and enhance positive impacts across various dimensions from climate to nature, health/ nutrition, and social equity. Banks, investors, and insurers can influence clients and suppliers to improve their policies and practices, demand accurate monitoring and reporting from investees and drive financial flows towards more sustainable food systems.

The newly launched UNEP-FI report ‘Financing sustainable food systems’ shows how private financiers can implement meaningful action starting by identifying both the positive and negative impacts of loans, investments, and operations across environmental, social and economic impact areas. Additionally, the report calls for financial institutions to assess and measure performance, set targets, monitor and disclose impacts.

This report includes insights, lessons learned, and examples of food system targets set by members of the High Ambition Group of the Good Food Finance Network, a group of mostly financial institutions. The first tranche of these targets exemplifies how finance can be redirected towards sustainable food systems through concrete and timebound steps, addressing different ESG dimensions and geographies. Targets include a wide range of measurable environmental and social goals to build a sustainable food system, such as increasing the use of technology to modernize agricultural practices, avoiding deforestation, investing in climate adaptation, and unlocking smallholder farmer income through incentivising carbon removal.

Besides the target-setting framework, the ‘Financing Sustainable Food Systems’ report also includes insights on how a combination of innovative new instruments and financing techniques can foster more capital flows for sustainable food systems, using strategies that have been proven effective in other sectors. New debt instruments offer alternative financing mechanisms, including sustainability-linked loans and bonds, environmental impact bonds, use of proceeds bonds, and diverse securitisation techniques.

Developing a strong portfolio of blended finance vehicles is also particularly important for food systems to attract private investments to projects that exhibit high levels of risk while offering high potential for positive impacts. However, drawbacks include a perceived tedious and lengthy process that is unacceptable to some clients and often, a lack of consideration of the different risk appetites of participating institutions. Ultimately, any business model ought to be able to stand on its own without the use of subsidised loans or other forms of risk mitigation, which means that public funding in blended finance transactions has to decrease over time. For this to happen, financial institutions need to be able to correctly price the risks and cash flows of new, sustainable food production models.

Furthermore, developing an enabling policy environment is key to channeling sustainable finance to food systems. It consists of regulatory frameworks, policy instruments, and public services directed at both financial and non-financial actors. The enabling policy environment can be structured in three pillars: 1) risk framework for the food value chain including the setup of specialised risk agencies and a finance agency as a one-stop-shop for blended finance for food systems, 2) incentive framework including repurposing harmful agricultural support policies and generate higher public financial flows through, for example, sovereign green bonds, and 3) the establishment of effective signalling mechanisms to inform and influence behaviour of market participants, potentially through green taxonomies, green monetary policies, and mandatory disclosure requirements.

This article is a summary of a report published by United Nations Environment Programme Finance Initiative. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.