Climate Smart Agriculture Sourcebook

Financing and investment

Enabling Frameworks

Financing opportunities for climate-smart agriculture

Agriculture and climate change are inextricably linked. All the agriculture sectors are extremely vulnerable to climate change. The agriculture sectors are also a major source of greenhouse gas emissions, contributing an estimated at 19 to 29 percent of global emissions. By necessity, the transition to climate-smart agriculture is a critical and integral part of global effort to reach SDG 13: 'Take urgent action to combat climate change and its impacts'. The Paris Agreement, the central outcome from the 21st Conference of the Parties (COP21) of the UNFCCC laid a foundation for global action on adaptation and mitigation in agriculture. NDCs are at the heart of this agreement. However, the amount of financing required for implementation of the NDCs for priority adaptation and mitigation interventions in the agricultural sectors far exceeds the funds pledged so far for this purpose. 

Global climate financing is complex and continuously evolving. Funds flow through multilateral, bilateral and national channels, dedicated climate change funds, and the private sector. Multilateral channels include the UNFCCC financing mechanisms, multilateral development banks (MDBs), bilateral donors and other international institutions and funds. National budgets and an increasing number of regional and national dedicated climate funds are also crucial sources of climate finance. 

Available estimates suggest that the private sector is by far the largest source of financing for climate change adaptation and mitigation efforts, contributing approximately 62 percent of the USD 391 billion invested in addressing climate change in 2014 (Buchner et al., 2015 ). Farmers are the biggest investors in agriculture. Most agricultural investments are financed from domestic public and private resources, with only a small share flowing from international sources. The overall domestic government spending on agriculture amounted to USD 252 billion in 2012 (FAO, 2016). While small in comparison, international public finance can serve as an important catalyst for leveraging greater domestic public and private sector investments in agriculture, including investments in climate-smart agriculture. There are a growing number of multilateral sources of climate finance, such as MDBs, Green Climate Fund (GCF), the Global Environmental Facility (GEF), and bilateral donors, which are promoting public-private partnerships to catalyse private sector investment.

The climate finance landscape features many different funding channels with different objectives and eligibility criteria. These options increase the possibilities for developing countries to access climate finance, but they also make the process more complicated. Financing options specifically targeting climate-smart agriculture remain limited but they are increasing. The emergence of these options necessitates strategic uses and combinations of traditional development assistance and dedicated climate finance mechanisms. Activities funded by public finance can have a strong catalytic effect, encouraging the mainstreaming of climate change considerations into national sustainable development plans and programmes, and sectoral development strategies. They can also help remove barriers that hinder agricultural producers, particularly smallholder producers, from adopting new technologies, which will stimulate private sector investment. Public funding can support the development of an enabling environment that is conducive for scaling up climate-smart agriculture, which will also help attract increased public and private financing for the agriculture sectors.

C4 - 2.1 Utilizing international funding sources

International climate finance can act as a catalyst for the broader adoption of climate-smart agriculture practices by demonstrating the feasibility these approaches in terms of their social, environmental and financial returns; facilitating the mainstreaming climate-smart agriculture priorities into national policy and legal frameworks; leveraging private capital; and promoting the creation and transfer of skills, knowledge and technologies. If used correctly, the leveraging of relatively small amounts of international climate finance can help to transform public agriculture budgets and private investments into sources of climate-smart agriculture financing. For many countries, learning how to access and effectively use international financing options represents the first step in the long-term transition towards climate-smart agriculture. 

Globally, the level of international support for climate change mitigation has far surpassed the financial support directed to adaptation. In recent years, however, there has been a shift towards increasing financing for adaptation, particularly by bilateral donors. Forest conservation interventions and programmes in developing countries to reduce emissions from deforestation and forest degradation, and strengthen the role of conservation and sustainable management of forests to enhance of forest carbon stocks (REDD+) have been financed mainly as a mitigation opportunity. However, bilateral donors are now moving towards forest interventions that support both mitigation and adaptation objectives. Funds available for fisheries are predominantly for adaptation.

UNFCCC financing mechanisms

The architecture of the UNFCCC financing mechanisms is illustrated in Figure C4.1.

Figure C4.1.  UNFCCC Climate Financing Mechanisms

Source: Authors

Direct access is an innovative implementation modality of the UNFCCC funds. In line with the Paris Declaration on Aid Effectiveness (2005) and the Accra Agenda of Action (2008), which promote country ownership and leadership on aid coordination and delivery, direct access has become the preferred implementation modality of recipient countries, the United Nations and other financing and development partners. The Adaptation Fund was the first UNFCCC fund to pioneer and fully operationalize direct access to climate financing. The GCF is strongly promoting direct access, and the GEF has also accredited a few national and regional entities as GEF agencies. The GCF has established a Readiness Programme to strengthen countries’ engagement with the Fund, support activities to enhance country ownership and access, and prepare countries to receive and manage climate financing. 

The GEF has been one of the largest sources of finance for climate change mitigation. The fund reported to COP21 that, since its creation in 1991, it has financed 839 projects for climate change mitigation, directing more than USD 5.2 billion in financing to more than 167 countries. GEF has also mobilized USD 32.5 billion in co-financing. Under the Sixth Replenishment of the GEF (GEF-6), which continues to June 2018, activities that support mitigation-focused management practices in land use, land-use change, forests and agriculture, with specific reference to climate-smart agriculture, are priorities in the GEF's climate change focal area. Climate-smart agriculture is also a priority under GEF's land degradation focal area, as well as in the GEF's integrated approach pilot programme, 'Fostering Sustainability and Resilience for Food Security in Sub-Saharan Africa'. Through its Sustainable Forest Management Strategy, GEF has sought to develop long-term, integrated, sustainable approaches for managing forest ecosystems. Support to sustainable forest management figures prominently in the GEF's biodiversity, climate change, and land degradation focal areas, as well as in its integrated approach programme, 'Taking Deforestation out of Commodity Supply Chains'. In the ongoing negotiations on the GEF-7 programming directions (GEF, 2017), the climate change focal area is being aligned with priorities identified in NDCs to the Paris Agreement. 

While the programming directions for the seventh replenishment of the GEF (GEF-7) are still emerging, it is clear that GEF-7 will continue to promote synergies and deliver multiple benefits across GEF focal areas and through GEF's new Impact Programmes, which will provide support particularly to agriculture, food security and forestry. One of the proposed GEF-7 Impact Programmes focuses on sustainable food systems, land use and landscape restoration in an integrated programmatic way. A second Impact Programme focuses on sustainable forest management. Properly conceptualized and formulated, climate-smart agriculture priorities can be supported under both the emerging GEF-7 focal area strategies, the integrated approaches and Impact Programmes. 

Under the guidance of the UNFCCC Conference of Parties, the GEF also administers the Least Developed Countries Fund (LDCF) and the Special Climate Change Fund (SCCF), which were established to support countries in the preparation and implementation of National Adaptation Programmes of Action (NAPAs). NAPAs are country-driven strategies that identify urgent and the most immediate needs of least developed countries to adapt to climate change by increasing resilience and reducing vulnerability. The GEF Council has requested the GEF Secretariat to develop a new strategy for the LDCF, which could further enhance support to smallholder agricultural producers who are facing heightened vulnerabilities from the impacts of climate change. The SCCF is open to all vulnerable developing countries and supports a wider range of activities related to climate change than the LDCF. While adaptation is a top priority for the SCCF, a separate financing window also supports the transfer of climate-resilient technology for both adaptation and mitigation, including in the areas of agriculture, forestry and water management. Regional climate technology centres and networks have been funded through this window.

Activities related to climate-smart agriculture are prominent in the portfolio of LDCF and SCCF projects approved to date. GEF, LDCF and SCCF resources can be accessed through the 18 GEF agencies, which are represented by a range of international, regional and national entities.

The Adaptation Fund was established under the Kyoto Protocol of the UNFCCC for the purpose of financing adaptation projects and programmes in developing countries that are parties to the Kyoto Protocol, which help communities that are particularly vulnerable to the adverse effects of climate change. Primary funding comes from a 2 percent share of proceeds of the Certified Emission Reductions (CERs) issued by Kyoto Protocol's Clean Development Mechanism (CDM). More recently, contributions from bilateral and private donors have become an increasingly important source of funding. Contributions to the Adaptation Fund total USD 618.84 million, of which USD 480.34 million has been committed. The World Bank serves as the interim trustee of the Adaptation Fund, and 2017 figures can be found at the World Bank's Adaption Fund web page. Many Adaptation Fund projects are focused on building adaptive capacity to climate change through agriculture, food security and nutrition activities and/or directly promoting climate-smart agriculture. 

Established in 2010, the GCF is the newest and largest multilateral climate fund. An important share of new multilateral funding is expected to be channeled through the GCF. As of September 2017, USD 10.3 billion has been mobilized for the period 2015 to 2018, of which USD 10.1 billion has been committed. Forty-three projects have been approved for USD 2.2 billion in GCF resources for a total value of USD 7.5 billion (with co-financing). Projects in the agricultural sectors represent an important share of approved projects.

The GCF seeks to trigger a paradigm shift by supporting developing countries towards low-emission, climate-resilient development pathways. Investments in the agricultural sectors are well aligned with the GCF’s stated priorities. Out of its eight strategic results areas, four are directly linked to the agriculture sectors. One of these areas is reducing emissions from deforestation, forest degradation and land use, which addresses mitigation. The other three areas, which focus on adaption are: increasing resilience of health, food and water security; livelihoods of people and communities; and ecosystems and ecosystems services. GCF-funded activities should be country-driven, linked to NDCs, National Adaptation Plans (NAPs), and Nationally Appropriate Mitigation Actions (NAMAs), and integrated into national development plans and strategies. The GCF promotes an equitable allocation of resources (50/50 split) between mitigation and adaptation, with 50 percent of the adaptation portfolio to be allocated to small island developing states, least developed countries, and Africa. The GCF recognizes the tremendous potential of private sector investment, notably in the areas of agriculture and forestry. An important GCF innovation, the Private Sector Facility, uses public investment to stimulate private finance for climate-friendly, low-emission, climate-resilient development. 

GCF resources can be accessed directly through regional, national and subnational accredited entities or through international accredited entities. As of 30 September 2017, out of the 54 accredited entities, there are 24 direct access entities, 8 private sector entities and 22 international entities. Country ownership and direct access are guiding principles of the GCF. Through its Readiness Programme, the GCF seeks to enhance country ownership. The Readiness Programme also strengthens the institutional capacities of the National Designated Authorities and direct access entities so that they can engage directly with the Fund, build a pipeline of activities and manage resources. The Readiness Programme also supports the accreditation of regional, national and subnational entities. 

MDBs are an important and growing source of climate finance. The Joint Report on Multilateral Development Banks’ Climate Finance provides data from the world’s six largest multilateral development banks: the African Development Bank Group (AfDB), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the Inter-American Development Bank (IDB) and the World Bank Group. According to the 2016 report, MDBs invested a total of USD 27.4 billion into climate financing in developing and emerging countries, up from USD 25 billion in 2015. Collectively, since 2016 the banks have committed over USD 158 billion in climate finance in developing countries and emerging economies (AfDB et al., 2016). 

Agriculture and related agricultural and ecological services are receiving a growing share of these financial resources. Financing directed to crop production and food security, for example, increased from 18 percent in 2015 to 23 percent in 2016. As MDBs are increasingly incorporating environmental sustainability criteria into their agricultural lending practices and providing more support for climate action, opportunities are growing for countries to obtain financing from the MDBs for climate-smart agriculture activities.  An indication of the magnitude of potential MDB climate financing, is the fact that the EIB has made climate action one of its top priorities and will provide approximately USD 100 billion for climate-related projects over the next five years. 

In many cases, financing from dedicated climate funds, such as GEF and other sources, often in the form of grants and technical assistance, are blended with MDB lending to specifically address climate change. Independent of MDB financing, the net total of climate co-financing committed during 2016 resources was USD 37.9 billion. When this is combined with the MDB climate finance, 2016 total climate finance amounted to USD 65.3 billion (AfDB et al., 2016). At the core of grant-based climate finance provided through the MDBs are the Climate Investment Funds (CIFs), a joint initiative of the World Bank Group and the regional development banks. CIFs provides climate finance in line with the UNFCCC framework and consists of four major programmes, including the Pilot Program for Climate Resilience (PPCR), which provides concessional financing to integrate climate risk and resilience into core development planning and lending operations. The PPRC represents an important financing option for climate-smart agriculture and its funding is earmarked for climate adaptation activities. Eligible countries have a unique chance to receive significant funding for implementing a climate-smart agriculture approach on a large scale through the PPCR process. 

In addition to the jointly implemented CIFs, several of the MDBs also administer their own specific climate change financing mechanisms. IFAD manages the ASAP, which has become the largest global financing source dedicated to supporting the adaptation of poor smallholder farmers to climate change. The IDB, in partnership with GEF and a number of bilateral donors, has launched the Climate-Smart Agriculture Fund for Latin America and the Caribbean (CSAF), which works to leverage private sector investment in sustainable agriculture, forestry and rangeland systems (see Box C4.3). Other examples include The World Bank’s and the AfDB’s Forest Carbon Partnership Facility (FCPF) and the Congo Basin Forest Fund (CBFF), respectively, which support sustainable forest management and complement the United Nations Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (UN-REDD).

Box C4.3  Climate Smart Agriculture Fund for Latin America and the Caribbean (CSAF)

In 2015 the IDB announced the establishment of the CSAF to provide incentives to private sector companies in the region to scale up investments in climate-smart agricultural practices in order to increase carbon sequestration, build resilience to climate change and improve farmers’ livelihoods. Created in partnership with the GEF, CSAF seeks to unlock greater private-sector investment in sustainable land use and climate-resilient agribusiness.

Climate-smart agriculture investors face a number of hurdles in accessing finance, including lengthy payback periods. They also can encounter significant barriers in obtaining information on sustainable climate-smart practices. As a result, climate-smart investments may be put off indefinitely, which perpetuates poor land-use management, contributes to greenhouse gas emissions, increases the vulnerability of agricultural producers to climate change and lowers incomes for small producers.

CSAF addresses these barriers by offering risk-tolerant capital to catalyse private investment by insuring early losses and providing a concessional tranche of resources that can transform projects into sustainable business investments. Associated technical assistance will enable IDB to build the necessary capacity for project implementation and disseminate lessons learned to other private sector investors.

Bilateral Climate Finance

Data indicates that bilateral development assistance has been the dominant source of international public finance for climate change adaptation and mitigation in crop and livestock production, forestry and fisheries and aquaculture. Bilateral development assistance has provided financing for the UNFCCC financing mechanisms, as well as to the funds set up with a specific climate focus under the United Nations and the MDBs (e.g. UN-REDD and the MDB climate funds mentioned in the previous section). This bilateral assistance has also supported bilateral and multilateral initiatives dedicated to climate action. 

In terms of agricultural priorities, bilateral donors and dedicated multilateral climate funds have a significant focus on capacity development, including policy development and institutional strengthening in all the agriculture sectors. That focus is most pronounced for the forestry sector, where 57 percent of bilateral finance and 75 percent of dedicated multilateral finance supports policy development, particularly for REDD+ readiness, which assists governments in developing national REDD+ plans and strategies. Similarly, in the fisheries sector, 43 percent of bilateral climate funding, and more than 90 percent of multilateral climate funding, were allocated to supporting policy development and strengthening institutions. Recently, support has grown for cross-cutting programmes in the forest and agricultural sectors. 

Most bilateral and dedicated multilateral climate funding for agriculture supports both agricultural development and agricultural policy, although funding is spread across a wide range of subsectors. Approximately 40 percent of bilateral agricultural climate finance is tagged broadly for agricultural development, with donors focusing overwhelmingly on rural development. Bilateral donors have specifically sought to support smallholders in moving from subsistence farming to producing a marketable surplus by improving irrigation, strengthening agricultural value chains and promoting inclusive models for contract farming. There are only a few dedicated climate projects that support low-carbon and climate-resilient crop and livestock production. They account for 4 percent of total reported bilateral finance for crop production and 0.1 percent for livestock production (FAO, 2016).

C4 - 2.2 Integrating climate in national budgets

Domestic government budgets constitute a much more significant source of public investment in agriculture than international public climate finance institutions. Importantly, using domestic budgets to effectively implement climate agendas allows governments to leverage international climate financing and pave the way for a broad, effective financing strategy for climate actions at the national level.  

Accessing and utilizing global climate financing from sources such as GCF and other multilateral and bilateral funds, provides the opportunity for governments to scale up national climate change adaptation and mitigation activities. However, for countries to receive these funds, robust finance and governance structures need to be in place to support the effective, efficient and accountable implementation of activities that are funded by these global climate financing mechanisms.  Examples of the new national level climate finance institutions include national climate funds (NCFs). NFCs have emerged as an important part of the institutional architecture for the management of climate change expenditures. The institutional mandates and governance arrangements of NCFs may differ from one country to the next. Some NCFs cover both adaptation and mitigation actions. Some build on existing environment funds, while others have been created as new institutions dedicated to climate change (see Box C4.4). NCFs can play an important complementary role in the management of climate change expenditures within a broader institutional framework centred on the government’s core budget and planning systems.

To date, experience and evidence from studies at the national level highlight the need for capacity development to allow governments to move towards the systematic integration of climate change actions into their budgets (UNDP, 2015). Dedicated climate finance should support the strengthening of national systems and the development of capacities for mainstreaming climate change actions into policy frameworks. This includes:

  • reviewing planning and budgeting processes and related institutional roles, to identify and address bottlenecks in policies, incentives and institutions, which impede an integrated approach to climate change;
  • strengthening the capacity of institutions and stakeholders at national and subnational levels, particularly the technical and functional expertise needed to translate policies into programmes and budgets, and track and assess performance; and
  • enhancing transparency frameworks to demonstrate results and ensure accountability.

Efforts to enhance the integration of climate change into government budgets should always be aligned within ongoing efforts to strengthen the management of public finances and expenditures (World Bank, 2014). Just as climate change should not be considered as a stand-alone issue, climate change budget mainstreaming needs to be addressed in the context of a country’s overall financial management systems. More work is needed to improve methodologies for reviewing climate-relevant public expenditures and assessing their effectiveness, and develop practical guidelines and tools that countries can adapt to their specific circumstances, including tools that can support the integration of climate change in cost-effectiveness analyses and investment appraisals.

Box  C4.4  Mobilizing and managing climate finance at national level: Examples of National Climate Funds

The Government of Rwanda is one of a few countries that have developed a national climate change and environment fund: Rwanda’s Green Fund, known as FONERWA. Built on the newly adopted national Green Growth and Climate Resilience Strategy, FONERWA is designed to ensure sustainable financing is accessible to support environmental sustainability, resilience to climate change and green growth. FONERWA is intended to be the primary mechanism through which Rwanda accesses, programmes, disburses and monitors international and national extra-budgetary climate and environment finance. Funds will be distributed to government agencies, private sector groups, civil society organizations and communities to implement a range of projects. The management team of the fund, which began operation in early 2013, works in close collaboration with the Rwanda Environment Management Authority, the Rwanda Development Bank and the Ministry of Finance.  

The Indonesia Climate Change Trust Fund (ICCTF) is an example of an NCF designed to develop innovative ways to link international finance sources with national investment strategies. Created by the Government of Indonesia, it acts as a catalyst to attract investment and implement a range of alternative financing mechanisms for climate change mitigation and adaptation programmes. The ICCTF receives non-refundable contributions from bilateral and multilateral donors. The main funding mechanism of the ICCTF is the ‘Innovation Fund’, which provides grants to line ministries to support climate change related projects within the government. ICCTF became a national trust fund in 2015 and has been allocating funds for climate change programmes in accordance with 2015-2019 National Mid-term Programme Plan. ICCTF has received funding and commitment supports from various development partners, including the United States Agency for International Development (USAID), United Kingdom Climate Change Unit (UKCCU), and the Royal Danish Embassy, as well as funding support from State Revenues and Expenditure Budget (APBN) as a commitment of the Government of Indonesia to combat climate change. ICCTF has also been increasing its engagement with other parties, including the private sector.