How to finance Scope 3 emission reductions on farms
As the food industry takes a deeper inventory of its climate impact and companies begin to set science-based targets, reducing Scope 3 emissions becomes a priority. This is where 80-90% of the industry’s climate footprint is located. But how do we transform today’s agricultural system into one that sequesters rather than emits carbon while delivering other ecosystem benefits?
Overhauling financial incentives is part of the answer. And this work is not only in the hands of agricultural lenders and other financial institutions. Food companies can play a critical role in removing barriers that prevent farmers from adopting practices such as cover cropping, reduced tillage and conservation strips.
To help businesses get started, a task force from the Field to Market industry collaboration released a report last week. It examines the intersection of corporate and agricultural finance supply chains, exposing barriers and opportunities for financial innovation and providing examples of effective value chain collaboration.
Understand the barriers
Regenerative and conservation agriculture is increasingly being touted for the myriad benefits it can bring to soil, water, and farmers’ bottom lines. So why are additional financial incentives needed to scale them? Shouldn’t farmers already have plenty of reasons to improve their practices?
It is not so easy. The report points to a web of social, administrative, educational and financial barriers that prevent regenerative agriculture from becoming mainstream, even if it promises greater long-term profits.
“Very, very few people really understand how to set up cover crops successfully and how to overcome the obstacles. … The initial risk, the initial cost and the lack of know-how are a huge barrier to entry. Financial obstacles can be overcome when you know how to do it, when you have the right help and understand the principles and tactics for success,” said Mitchell Hora, a seventh-generation farmer from Iowa who contributed to the report. .
This is not always a welcome practice when it comes to neighbors; it’s a bit different, it’s a bit over there.
Even when farmers are willing to take the risk and delve into the technical details, experimentation can be uncomfortable. Andy Hineman, a fifth-generation farmer from Kansas who was also consulted for the report, said: “It’s not always a welcome practice when it comes to neighbors; it’s a little different, it’s a little there. Sometimes if you try some of these things like cover crops, it’s not considered typical crop rotation or something necessarily acceptable.”
Understanding these barriers is vital even if a company cannot influence its suppliers’ neighbors. Targeted financial products can nudge farmers in the right direction, especially with regard to risk sharing and upfront investments.
Where to start when considering financial incentives for farmers? Many options exist, and this subject quickly becomes technical. The authors have done a good job here. They presented five essential tools, illustrating their mechanisms, the value for farmers and the impact on the supply chain. Here is an overview of what you will find in the report:
- Blended financing combines public, corporate and philanthropic funds to increase investment.
- Details: Public and philanthropic capital can be used as “catalytic capital” that can support early losses within a fund, thereby increasing private sector investment in regenerative agriculture
- Obstacles addressed: Crop yield risk, lack of return on investment, lack of operational and agronomic knowledge, lack of profitability
- Examples: Better Cotton Growth & Innovation Fund, Resilient Agriculture Accelerator Fund
- Sustainable finance creates financial products or services to encourage the development of new green activities or minimize the environmental impact of existing activities.
- Transition risk sharing offers mechanisms that support the agricultural risks associated with the adoption of new conservation practices, easing the initial transition period.
- Details: Includes sustainability-linked crop guarantees, crop insurance endorsements and subsidies, and sustainable reference pricing
- Obstacles addressed: Crop yield risk, price volatility, market risk, lack of return on investment
- Example: A private crop insurance grant driven by Precision Conservation Management and the Illinois Corn Growers Association with support from PepsiCo
- Performance pay programs incentivize farmers for the environmental results they deliver – instead of paying a farmer 75% of the cost of implementing a filter strip, the payments would come from the pounds of reduced nitrogen and phosphorus in the agricultural runoff.
- Details: This alternative approach allows farmers to decide on the best method to achieve the environmental outcome at the lowest cost.
- Obstacles addressed: Upfront costs, lack of return on investment, lack of secure income
- Examples: Soil and Water Outcomes Fund, municipal agriculture-watershed partnerships
- Land tenure and tenancy incentives facilitate the shift from informal verbal to written leases of farmland, incentivizing conservation by setting expectations on the use of certain practices or management systems and giving farmers longer investment time horizons.
- Details: Farmers and landowners can also define how costs, risks and benefits will be shared when transitioning or using regenerative practices.
- Obstacles addressed: Lack of secure access to land, socio-cultural challenges
- Example: Tillable’s Sustainable Flexible Lease
Find the right starting point
Having too many options can be overwhelming. Maggie Monast, one of the report’s lead authors, urges companies interested in exploring these financial tools to scale up regenerative agriculture to think about two key questions.
First, businesses need to get clarity on the problem they want to solve. What change do they want to see on farms? What are the financial barriers against it? Answering these two questions will provide guidance on which tools to use. The resulting orientation should ideally align with the company’s existing interests, strengths and relationships.
Second, companies need to assess potential collaboration partners within the established financial landscape, such as agricultural lenders and crop insurance providers. This can leverage existing infrastructure and trust while bringing about broader changes to the industry, not just a supply chain.
And finally, it is important to remember that these financial mechanisms are only one tool among others to reduce Scope 3 emissions. They should work in conjunction with other approaches that companies are already using or developing, ranging from technical assistance with purchase commitments and preferential marketing and supply contracts.