The investment community – national and multilateral development banks (NDBs and MDBs), international financial institutions, local and national commercial banks and insurance companies, impact investors, microfinance institutions, mobile money providers, fund managers, public donors and philanthropic organizations – is facing increasing pressure from investors and stakeholders to incorporate environmental and social responsibility into its operations. It is becoming increasingly clear that any investment in agrifood systems must become future-proofed in the face of a changing climate. The notion that “business as usual is a high-risk proposition” is resonating.83, 84
The financing of national agricultural development strategies, including national agrifood systems pathways, relies heavily on NDBs and MDBs, which have complementary strengths that can be harnessed for global agrifood systems transformation. While NDBs wield much greater financial and institutional power in financing supply chain investments in local agrifood systems, MDBs have broader expertise, international networks and resource mobilization capacity. Increased collaboration between MDBs and NDBs to foster localized investment, innovative finance, climate innovation and advanced risk assessment tools, while enhancing NDBs’ engagement in policy discourse, is already taking hold as an important step in addressing the financing challenges faced by supply chain actors.85
In response to the increasing pressure, other actors in the investment community are also spurring change. Investors representing USD 18 trillion in assets and coordinated by the Farm Animal Investment Risk and Return Initiative have called for a roadmap for a resilient sector that can deliver global food security while striving to mitigate climate change and biodiversity loss:
As investors, we recognize the financially material risks to which the food system is exposed, from climate change, biodiversity loss, malnutrition and antimicrobial resistance, as well as the material impacts that food system activities have on the environment.86
In addition, over 30 financial institutions with more than USD 8 trillion in assets under management have joined forces to launch the Finance Sector Deforestation Action initiative, outlining their commitment to eliminating deforestation driven by agricultural commodities. Another example is Rabobank, a leading private financial institution, which is proactively demonstrating how financial institutions can drive positive environmental and social outcomes in agrifood systems. Box 19 discusses Rabobank’s true value approach to supporting sustainable agrifood systems investments in the Kingdom of the Netherlands.
Box 19Investing in sustainable agrifood systems in the Kingdom of the Netherlands
Rabobank is a cooperative and socially engaged bank in the Kingdom of the Netherlands that specializes in providing financial services to the food and agribusiness sectors, both domestically and internationally. Its approach focuses on five key transitions: sustainable and regenerative agricultural practices, diversification of protein supply, reduction of food loss and waste, strengthening rural livelihoods, and producing nutritious foods for all in a sustainable way.
Rabobank espouses a true value approach as a financial model, suggesting that maintaining competitive agrifood systems requires accounting for the true value of food, which includes environmental, climate, health and animal welfare costs and benefits.87 It advocates for government implementation of target-based policies, providing incentives for farmers to achieve sustainability goals set out in national regulatory frameworks and environmental policies.88
In the Kingdom of the Netherlands, Rabobank has developed a systemic change scenario up to 2040, which aims to benefit businesses, stakeholders and society while meeting growing consumer demands for better production conditions and reduced environmental impacts.89 Specifically, the bank mobilizes financial resources towards sustainable entrepreneurial activities using a true value approach to help manage long-term risks more effectively. Ensuring such initiatives contribute to sustainability at scale requires the combined effort of all stakeholders, including government, consumers and farmers.
Other initiatives, such as Transformational Investing in Food Systems (TIFS), have created a network of actors interested in investing in agrifood systems transformation, offering applied learning through investor labs and the sharing of due diligence and investment challenges and opportunities.90 Box 20 features findings from a TIFS report covering the experiences of 23 funds financing food and agriculture companies in East Africa.91 Despite many such initiatives, the agriculture sector is still receiving less than 1 percent of concessional blended finance in low-income countries with weak enabling environments, limited institutional capacities and a lack of well-designed projects, where financing costs can be up to seven times higher.85 Government action to improve the enabling environment and institutional capacities needs to be complemented with a TCA approach to analyse the holistic costs and benefits of investment opportunities.
Box 20Investing in agroecological businesses in East Africa
Agricultural producers and agribusinesses that use agroecological, organic and traditional practices are integral to food supply chains in countries in East Africa. However, they encounter significant challenges in attracting investment.
A predominant factor is the modest scale of their operations, with data showing that around 59 percent have annual revenues of less than USD 50 000 and 83 percent bring in less than USD 200 000. These entrepreneurs often grapple with a financial void, commonly referred to as the “missing middle” or “innovator’s gap”, which spans revenues from USD 50 000 to USD 200 000.96 Another challenge is that donations and grants, while supportive, do not allow businesses to demonstrate their ability to repay investments, a key step in securing future funding.
From the perspective of impact investors, the companies’ small ticket size can be a deterrent, especially when the businesses operate in unfamiliar markets and have business models and motivations that may be considered unconventional. Smaller funds may be best positioned to finance such businesses. For larger investment funds, in particular, organizing financing vehicles large enough to manage big investments while deploying small tickets is a key operational challenge. One remediating pathway is for funds to work through local intermediaries.
An important challenge for all funds, as noted in a 2023 Transformational Investing in Food Systems report, is that investors do not differentiate between agribusinesses that are agroecological and those that are not.91 Investors and fund managers can use an impact investment fund assessment tool and an enterprise-level assessment tool to consider multidimensional measures of success early on in the investment process. These tools help investors move beyond oversimplified key performance indicators of yield or income increases to bring a more holistic set of metrics into the investment equation.
Sustainable investing according to ESG principles is about materiality, to narrow the focus of investors amid a plethora of potential goals. According to the Sustainability Accounting Standards Board, the material issues for companies in food retail and distribution include GHG emissions, energy management, access and affordability, fair labour practices, and fair marketing and advertising.92 In cases where natural capital – such as land use and deforestation, water and biodiversity – is material to long-term corporate strategy, large institutional investors such as Blackrock are requesting corporate disclosures that include assessments of risk, risk oversight and understanding of how dependencies and impacts on nature are managed.93, 94 Despite the momentum behind ESG investing, one of the main barriers to sustainability reporting by companies is that it tends to be aimed not at investors but at other stakeholders, such as non-governmental organizations, so is of little use to investors. Efforts are underway, however, to plug this gap.92 The coming into force of the Global Reporting Initiative standards for the agriculture sector (GRI 13) in January 2024 is expected to increase the completeness and comparability of sustainability information for all businesses involved in crop cultivation, animal production, aquaculture and fishing.95
By facilitating the comparison of externalities with other financial indicators, TCA can provide a holistic picture of long-term sustainability, which can help investors make more informed decisions. True cost accounting has been pitched as an approach that can inform and broaden the scope of conventional ESG investment criteria.71 After participating in training on applying the TEEBAgriFood Evaluation Framework to the business context, Yunnan Astral ESG Investment Co., Ltd., an investment company actively engaged with local farmers and Indigenous Peoples in Yunnan, China, reported that TCA complemented ESG investment guidelines and helped identify quality projects contributing to its key goal of biodiversity conservation.50
Both ESG and TCA communities are calling for the standardization of indicators and reporting to advance sustainability in agrifood systems. By collaborating, they can improve risk assessments and demonstrate value from transformation to spur progress on credit and insurance conditions for sustainable businesses.
