Catalysing Green Finance
1. Finance flows in the land sector are not currently aligned with climate commitments
The signing of the Paris Agreement governments committed to make ‘finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’ (Article 2.1c). Parties to the agreement pledged to align all finance flows with climate action. This demands not only new finance, but more importantly, the repurposing of existing baseline -grey- financial flows towards climate-proof investments. For the land sector this means to re-direct potentially harmful money with no stated climate objective towards purposes that are aligned with the Paris Agreement.
Through Article 2.1c, the Paris Agreement recognizes the need for coordinated shifts and reforms to ensure climate change is considered in financial decision-making, both through increasing finance flows towards climate-positive actions and reducing and redirecting those flows that are high-emission or increase climate change vulnerability. This also acknowledges the need for changes in the institutions and systems that govern these financial flows.
The financial incentives that governments put in place have the capacity to greatly influence the resilience and greenhouse gas emissions of the land sector. The land sector is driving about a quarter of anthropogenic GHG emissions each year. At the same time, the sector is an indispensable part of the climate solution and can provide up to 15 GtCO2e/year. To tap into this mitigation potential, public policy needs to ensure that finance is directed to activities that avoid or sequester GHG emissions, while improving resilience of rural livelihoods. In order to meet long-term climate goals, failure to redirect national budgets and align policy frameworks with this commitment is not an option.
The amount of public support provided for agriculture is substantial, and only approximately 5 percent of the more than USD 600 billion of annual support is explicitly linked to environmental goals. Between 2017-19, public support for agriculture provided by the OECD countries and 11 major developing economies amounted to approximately USD 619 billion per year; almost double the value received by the sector a decade before, and 56 times the USD 11 billion of climate finance aimed at land use. Nearly a third of this support is tied to the production of specific commodities. Around 75 percent of these commodity transfers go to rice, pork, beef and veal, maize and milk; many of which are top greenhouse gas emitters.
Reforming public finance alone will not be enough to enable a shift to sustainable land use and revert ecosystem losses already incurred.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. Business as usual private finance for agricultural, forestry and fishing totaled USD 191.6 trillion between 2010–16, or USD 27 trillion per year on average. And global investments in meat and dairy activities– the top GHG emitters in agriculture along with rice production – topped USD 478 billion between 2015–20.
2. There are many opportunities for redirecting public support to agriculture
Almost all countries provide some form of preferential treatment for their agricultural sector. Public support to agriculture influences decision-making through providing incentives to bring land into production, determine which commodities to produce and influence how to farm. This includes decisions on, for example, whether to deforest or drain peatland for agriculture, whether to farm products that generate high or low greenhouse gas emissions, and whether to farm in a manner that depletes or regenerates soils.
Three overarching recommendations can help to overcome the barriers policy makers face in reorienting finance.• Policymakers need to have a good understanding of the scale and impact of current and planned support on climate, land use decisions and rural incomes in order to make a strong case for change. • Repurposing support must aim to reduce emissions without jeopardizing other important development goals, that is, reducing emissions must be part of policies that maximize synergies and minimize trade-offs with other environmental, economic and social goals in order to achieve a just rural transition. • Policymakers should be prepared for opposition from specific interest groups. Ensuring that any re-purposing of support goes hand-in-hand with a carefully constructed communications strategy can also help to develop clear, targeted and appropriate messaging.
3. Private capital can be shifted by adapting existing financial regulations
Investors are channeling large volumes of finance to the land sector, much of which is driving GHG emissions through financing industrial agriculture and incentivizing tropical forest loss. This finance flows to the land sector through a variety of forms, including investment funds, bank loans, trade finance, revolving credit facilities, stock markets, and project finance. Financial regulations can ensure that investors and traders consider climate and ecosystem impacts when investing, offering credit or providing other financial services. Notably, governments and supervisory authorities can induce a structural shift in private capital allocation by adapting existing financial regulations. A combination of climate-related prudential requirements and active promotion of sustainable finance can foster new and more climate-friendly agricultural practices and ensure that financial system actors involved in agricultural supply chains have an interest (and duty) to mitigate the adverse impacts of their businesses and redirect financial flows at scale.
4. A consistent framework for reporting on Article 2.1.c could be used as global best practice to support climate-consistency in AFOLU finance flows
Through Article 2.1c, the Paris Agreement recognises the need for coordinated shifts and reforms to ensure climate change is considered in financial decision-making, both through increasing finance flows towards climate-positive actions and reducing and redirecting those flows that are high-emission or increase climate change vulnerability. This also acknowledges the need for changes in the institutions and systems that govern these financial flows.
There is a key opportunity to incorporate reporting towards Article 2.1c in the first Global Stocktake of the Paris Agreement. The Global Stocktake obliges a collective assessment of progress climate-consistency of finance flows every five years, the first of which will be completed in 2023. Yet, there is no common understanding or UNFCCC guidance on what such climate-consistency of finance flows looks like, how to get there and what each constituent countries’ role should be. A common framework allowing state and non-state actors alike to report on the climate-consistency of finance flows into agriculture, forestry and other land uses (AFOLU) is needed.
We propose an assessment framework that can be used to develop a nationally appropriate set of indicators on climate-consistency of AFOLU finance flows. This will support the identification of the actions already being taken that are climate-consistent and highlight opportunities to fill gaps. The framework is intended to be flexible and non-prescriptive, allowing for nationally driven indicators to be selected and designed in light of a country’s climate-change objectives and the degree to which the AFOLU sector is relevant to their climate objectives. Countries will further need to consider a just transition away from climate-inconsistent (grey) finance flows and consider the socio-economic impacts of reform options, as well as political economy factors, that have long challenged efforts to pursue sustainable forest and land use.
The wide-application of this reporting framework could progress global best practice in the pursuit of climate-consistency in AFOLU finance flows. The lack of UNFCCC guidance on Art. 2.1 reporting hinders the forward momentum needed to face the climate emergency. The first Global Stocktake in 2023, as the only space in climate negotiations under which to discuss progress towards the long-term goal of the consistency of finance flows, is an opportunity to use the proposed framework to develop learning and best practice on progress towards reaching this long-term goal.
A number of government levers together have the potential to provide strong and credible signals to AFOLU investors and financiers towards more climate-aligned practices. These levers can be applied in combination at a range of scales, for particular commodities or across groups of actors. Together, they have the potential to provide strong and credible signals to AFOLU investors and financiers towards more climate-aligned practices.
5. Financing land resources more sustainably requires appropriate policy frameworks that consider diverse environmental and social objectives
The land sector lies at the intersection of many policy priorities, achieving these diverse and potentially competing policy objectives demands effective leadership. Various policy objectives -ranging from food and nutritional security, to economic development and poverty alleviation, to sustainability and climate change – determine political land use decisions. Addressing them requires coordinated and well-informed policy making that integrates various policy objectives. Good policy making includes establishing clear policy goals and long-term regulatory predictability to give private investors the securities needed for investment; promoting policy coherence and complementarity to minimize trade-offs and maximize synergies; building strong public-private coalitions; establishing robust land governance and land tenure regimes to enable and encourage investment; strengthening the rights of and engagement with indigenous peoples and local communities; and addressing gender inequalities in the allocation of land and access to finance and resources.
Any transition to using land resources more sustainably must be done in an equitable manner that protects and enhances the resilience of rural livelihoods. The land sector is of vital importance to many millions of farmers and rural and indigenous communities who depend on it to support their livelihoods. Achieving a just rural transition involves supporting farmers and rural communities to adopt sustainable practices; and to adapt to the impacts of climate change. It involves creating employment in the rural economy that benefits the natural environment; and ensuring that all – especially the poor – have access to affordable, healthy and sustainable food. Policy makers that are serious about tackling the climate crisis need to ensure that the policy frameworks they have in place do not harm the future of the people they represent. Governments and markets continue to incentivize farmers and corporations more to exploit natural assets than they do to use them sustainably. This jeopardizes the ability of land to continue to provide the food, water and resources we need to sustain a growing global population.