Frequently Asked Questions
Shifting Finance Towards Sustainable Land Use
1. Finance and the Paris Agreement
What is Article 2.1c of the Paris Agreement?
The Paris Agreement on climate change, a legally binding international treaty adopted by 196 State Parties in December 2015, sets three long-term goals for countries to achieve collectively:
• Article 2.1(a): Limiting the increase in global warming to well below 2°C and pursuing efforts to limit this warming to 1.5°C above pre-industrial levels.
• Article 2.1(b): Fostering climate resilience and low greenhouse gas emissions development.
• Article 2.1(c): Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.
Article 2.1(c) is important as it stresses the need to ensure that financial decisions by public actors are coherent with climate objectives. This recognises not only that “climate-consistent” finance flows need to be increased, i.e. that more finance is needed that targets environmental objectives, but also the need to identify those finance flows and decisions that are currently incoherent with climate objectives and shift these existing flows towards sustainable objectives.
In the land sector in particular, the pursuit of this “climate-consistency” of finance flows must involve re-examining and shifting in the underlying incentives that drive land use and agricultural activities.
Who needs to act on Article 2.1.c of the Paris Agreement to make finance flows consistent with low-emission, climate resilient development pathways?
What is the Global Stocktake? Why is it important in the context of Article 2.1(c) of the Paris Agreement to make finance flows consistent with climate action?
Article 14 of the Paris Agreement obliges Parties to assess collective progress toward the purpose and long-term goals of the Paris Agreement every five years, in a process called the Global Stocktake. The first of these global stocktakes is to be completed in 2023. This milestone in the implementation of the Paris Agreement will consider information and progress at a collective level action to meet the long-term goals of the Paris Agreement, including on Article 2.1(c).
This is the most promising forum under which to systematically explore country action and progress towards Article 2.1(c), i.e., making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. The more coherently and systematically countries approach their obligation and take action towards this long-term goal, for example by using a common reporting framework, the easier and more successful the collective assessment of the Global Stocktake will be.
2. The role of finance in achieving sustainable land use
Why is it important for governments to act now on shifting finance towards sustainable land use?
If we are to successfully limit the increase in global warming to well below 2°C above pre-industrial levels in line with the Paris Agreement, global emissions must be substantially reduced by 2030. Acting in the next decade and aligning policy decisions with this goal will determine whether we will be able to keep global warming within well-below 2°C and minimise the negative impacts of climate change.
The financial incentives that governments put in place in the land sector have influenced – and still influence – the greenhouse emissions arising from land use. The land use sector is responsible for emissions but is also an indispensable part of the climate solution through its ability to act as a carbon sink. To tap into this mitigation potential, public policy needs to ensure that finance is directed to activities that avoid or sequester greenhouse gas emissions while improving resilience of rural livelihoods. Failure to redirect national budgets and align policy frameworks with the goals of the Paris Agreement will put us on a dangerous path to exceed 2°C of global warming.
What is the role of public incentives in enabling the transition to sustainable food and land use systems globally?
The financial incentives that governments put in place in the land sector influence how land is used, and how private investment decisions are made in land management. They influence, for example, decisions to deforest or restore land, which farming practices to adopt, and what final prices consumers pay for their food. Incentives therefore indirectly affect greenhouse gas emissions arising from the land sector, which is driving about one-quarter of global greenhouse gas emissions each year. At the same time, the sector is an indispensable part of the climate solution and can contribute to the annual reduction or removal of the equivalent of up to 15 billion tonnes of carbon dioxide by 2050. To tap into this mitigation potential, public policy needs to ensure that finance is directed to activities that mitigate climate change and improve the resilience of rural livelihoods.
At present, productivity and economic growth remain the dominant concerns for agricultural and land finance decision-making. Public support for agriculture, including direct and indirect subsidies, exceeded USD 600 billion annually between 2017–19, the vast majority of which did not consider any climate objectives.
Public incentives also influence how private finance is invested. The amount of private finance flowing to the land sector far outweighs that of public finance, and most of this private money supports activities that deplete natural assets. Agricultural growth has helped to satisfy the needs of growing populations and reduce poverty, yet it also has triggered an unsustainable rate of natural ecosystem loss.
While investments in sustainable land use have increased in recent years, they are not occurring fast enough. The rate of investment must be accelerated to align public support for the land sector with the achievement of climate goals. The acknowledged and imminent effects of climate change must be central to policymaking, especially in a sector that will broadly shape the health, social and economic outcomes of future generations.
What are "grey" and "green" finance flows?
The term “Green Finance” is generally used to refer to finance that is aligned with objectives for the conservation, protection, or sustainable use of land. This includes finance provided with a clear and stated objective of climate mitigation and/or adaptation in the land sector.
The term “Grey Finance”, on the other hand, is defined as finance that has no stated objective to positively impact emissions from the agriculture, forestry and other land use sectors - but has potential to impact it. The impact – whether positive or negative – depends on the context, as well as the design and implementation of these activities.
Finance can also have a clear detrimental impact on the climate. This climate misaligned finance supports carbon-intensive activities that have few if any safeguards against resulting climate impacts. This can include, for instance, fossil fuel investments or finance that supports deforestation and peatland drainage.
What are some of the instruments that governments can use to direct finance flows towards sustainable land use?
Governments must take actions to redirect national budgets and align policy frameworks with sustainable land use to make finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development,
The system by which public finance flows to what activities, how and in what amount is complex but Governments have an array of policy instruments at their disposal to direct finance flows towards sustainable land use. They include financial policy and regulation, fiscal policy, public finance instruments as well as soft law instruments.
Some of these instruments, such as fiscal policy instruments, can influence the cost of production and commodity pricing, and directly influence land use decisions by channelling significant portions of public finance to sustainable land use. Other instruments, such as financial regulations, can put in place requirements for financial institutions to address financial risks posed by climate change, as well as play an active role in supporting low-emission development pathways through green taxonomies and green credit allocation, among others.
The reports published as part of this project seek to support governments in their efforts to achieve the long-term goal of Article 2.1(c) of the Paris Agreement and identify what policy options are available to them in their respective context.
3. The importance of the land sector for climate action
Why is the land sector important for climate action?
Land provides the main basis for human livelihoods and well-being: it supplies food, freshwater and many other ecosystem services, and is home to biodiversity. In terms of climate change, the land sector - which includes land used for agriculture, forests and other non-aquatic ecosystems - acts both as a source and a sink of greenhouse gases: it is both part of the climate problem and solution. It is also one of the sectors most heavily impacted by climate change.
Unsustainable land use practices such as deforestation, the conversion of natural to managed land and ecosystem degradation can disrupt terrestrial carbon stocks, turning land into enormous emitters of carbon dioxide. Land-use changes are responsible for the bulk of carbon dioxide (CO2) emissions of the land sector, whereas agricultural production is responsible for emissions other powerful greenhouse gases: the digestive processes of livestock, the practices used to manage their manure and the unsustainable use of fertilizers generate significant emissions of methane (CH4) and nitrous oxide (N2O). Together these land activities account for almost one-quarter of global man-made greenhouse gas emissions. Using current production techniques, these emissions are projected to increase significantly over the coming decades, in order to feed an increasingly large and wealthy global population with changing consumption patterns.
While agricultural production and land-use change are today significant sources of GHG emissions, they also hold huge potential to support global climate-change mitigation efforts. Mitigation activities can involve the reduction or avoidance of greenhouse gas emissions through improved agricultural or forest management practices and the direct removal of greenhouse gases from the atmosphere, through sequestering carbon in soils and biomass.
What is the mitigation potential of the land sector?
While agricultural production and land-use change are today significant sources of greenhouse gas emissions, they also hold huge potential to support global climate-change mitigation efforts. Mitigation activities involve the reduction or avoidance of greenhouse gas emissions through improved agricultural or forest management practices and the direct removal of carbon from the atmosphere through its sequestration in soils and biomass. By 2030, the land sector is estimated to have a mitigation potential similar to that of the energy sector. By 2050, it can contribute to the annual reduction or removal of the equivalent of up to 15 billion tonnes of carbon dioxide. The world currently emits over 40 billion tonnes of greenhouse gases each year.
In tropical countries, the biggest potential will come from avoiding deforestation, peatland fires and mangrove conversion. In middle- and high-income countries, mitigation opportunities include ecosystem restoration, forest and agricultural soil management, and lifestyle choices such as reducing food waste and shifting to a low-carbon diet.
To tap into the mitigation potential of the land sector, public policy needs to ensure that finance is directed to activities that mitigate climate change and improve the resilience of rural livelihoods.
4. Public support to agriculture
How do public incentives affect decision-making in agricultural and farming practices?
Public support to agriculture impacts land transfer, land management and the production behavior of agricultural actors that, in turn, influence the GHG emissions generated by the sector. The behavior of farmers is influenced by the economic conditions created by the public support they receive. Usually farmers will – rightfully – seek to maximize their profits and align their land management practices and production behavior so as to benefit as much as possible from the financial support offered.
Public support to agriculture can, therefore, influence (1) whether to bring land into agricultural production, including whether to convert forest or peatland into productive land; (2) which commodities to produce; (3) how to farm, including how to manage land, which inputs to use and in what quantities, and whether to employ more sustainable production practices.
The design of public support to agriculture currently rarely considers climate impacts and provides little incentive to farmers to switch from high to low emissions-intensive production or commodities. Of the total support provided, only five percent is linked to specific environmental objectives.
5. Public sector incentives to drive private capital
What public sector incentives can be used to encourage private actors to make climate-aligned investment decisions in the AFOLU sector?
Private finance flowing to the land sector far outweighs that of public finance, and most of this private money supports activities that deplete natural assets. Governments and supervisory authorities can employ a range of policy instruments to shape private sector behaviour and reorient capital flows towards sustainable land use, including by reforming or adjusting financial regulations.
Financial regulations refer to standards that impose restrictions on the operations of financial institutions such as banks and capital market intermediaries. Financial regulations come in the form of laws that regulate the functioning of the financial sector, as well as through other (binding and non-binding) supervisory instruments created by financial authorities
The types of financial regulations that are more likely to directly benefit the land sector are: • Disclosure and reporting requirements. These aim to ensure that relevant and accurate information is made publicly available so financial system actors can make well-informed financial decisions and regulators can adequately monitor financial activities • Risk management frameworks. These focus mostly on ensuring the safety of the financial system by limiting the exposure of an individual institution or a whole financial market to both systemic and specific financial risks but are increasingly also considering adverse impacts to the climate and nature. • Standards and rules that actively promote sustainable finance. These include instruments that can ensure quality and comparability in green financial assets and actively entice financial institutions to invest in sustainable activities
What is meant by the process of “financialization” of the agriculture and land use sector?
Over the last two decades, an increasing volume of finance has been channelled to the land sector through the financial industry. Growth in the commercialization of financial products associated with agricultural commodities and farmland by banks, agricultural commodity trading firms and investment funds has led to a financialization of the agricultural sector. Through this process, financial system actors have gained greater influence over economic policy and economic outcomes. Improvements in agricultural investment models and innovations across agricultural value chains, including precision farming and farm robotics, have attracted a wide range of investors who previously did not have a meaningful influence on land use, including pension funds, hedge funds, and high net-worth individuals. As a result, finance and food provisioning are increasingly more intertwined, with agricultural actors becoming progressively more interested in finance and financial players engaging directly in various stages of commodities supply chains.
The continued financialization of agriculture and food systems directly impacts how land is used around the world and who benefits from it. This process has intensified competition resulting in the consolidation of a small number of suppliers and buyers in the global agricultural supply chain.
What are the main financial risks associated with grey investments in the AFOLU sector?
Financial actors, including banks, asset managers, institutional investors and publicly listed corporations are exposed to financial risks associated with grey investments in the AFOLU sector. These are both climate- and nature-related, and the table below explains and compares both risk dimensions.
There are clear interlinkages between climate and nature-related risks. For example, deforestation is an important climate risk and a major driver for biodiversity loss. At the same time, environmental degradation lowers climate resilience, and climate change, in turn, exacerbates the drivers of nature loss. Understandg these interactions helps to design effective financing pathways, taking into consideration both the climate and nature and their impacts on the economic activities dependent on them.
These risks can be classified according to their nature – whether linked to physical impacts of climate change or to the transition towards a low-carbon economy – and whether they are related to climate, nature or market impacts.
6. Enabling the transition to sustainable land use
What broader conditions need to be in place to facilitate a shift in finance to sustainable land use?
The shift in finance towards sustainable land use can be facilitated by the presence of a number of enabling conditions. These include:
• Establishing long term regulatory predictability: Private investors need long-term regulatory certainty on which to base their investment decisions. This is because agricultural and forest-related investments often carry high up-front costs with long investment return horizons.
• Promoting policy coherence and complementarity to minimize trade-offs and maximize synergies: Reducing conflicting policies across government ministries and identifying complementarity among policies can improve the attainment of policy goals. Identifying potential trade-offs is important to avoid or minimize any potentially negative impacts on socio-economic and environmental goals.
• Building strong public-private coalitions: Public-private partnerships can work as collaborative advisory and information programs to replicate best practices and promote widespread adoption of low-carbon practices.
• Establishing robust land governance and land tenure regimes: The presence of strong institutions, transparent and inclusive processes leading to land-use decisions, effective forest law enforcement and the management of competing interest and conflicts can enable and encourage investment.
• Strengthening the rights of and engagement with Indigenous peoples and local communities: Ensuring the participation and involvement of indigenous communities in forest and land management is essential to the long-term sustainable use and preservation of ecosystems.
• Addressing gender inequalities in the allocation of land, access to finance and resources: Enabling women’s full participation in agriculture can increase agricultural productivity, lower hunger, and promote economic growth.