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Prioritizing Climate Finance for Small-Scale Farmers in Developing Countries

Smallholder farming systems provide livelihoods and food for hundreds of millions of the world’s poorest households. A warming climate could cut crop yields by more than 25 percent, while the extreme weather events associated with climate change can have devastating effects on farmers, their land and crops.

Strong impacts on crop production and food security are mainly forecast in fragile areas, where most livelihoods rely on small-farm agriculture and annual rain-fed crops to satisfy basic food needs. Transforming the agriculture sector and building resilience will not be possible without significantly increasing the amount of capital available for climate-smart investments in agriculture. Access to finance has long been a challenge for agriculture due to perceptions of low profitability and high risks. More than ever, robust financial investments are needed to support the global food system.

Smallholders distinctively adapt to climate shocks and stressors. Their future adaptive capacity is uncertain and conditional upon the severity of climate change and socioeconomic changes from regional development. Smallholders present a greenhouse gas (GHG) mitigation paradox. They emit a small amount of CO2 per capita and are poor, making GHG regulation unwarranted. But they produce GHG-intensive food and emit disproportionate quantities of black carbon through traditional biomass energy.

Effectively accounting for smallholders in mitigation and adaption policies is critical and will require innovative solutions to the transaction costs that enrolling smallholders often imposes. Together, our findings show smallholder farming systems to be a critical fulcrum between climate change and sustainable development.

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However, climate finance to small-scale agriculture is disproportionately low when compared with the importance of agriculture for developing countries’ GDP combined with the prevalence of small-scale producers in Sub-Saharan Africa and South and South East Asia.

Small-scale agriculture actors encounter a number of challenges in accessing the funds they need. Climate finance is subject to barriers that have traditionally affected agricultural development finance in addition to barriers that are typical to climate finance. They include technical, political, and commercial barriers.

Despite the mitigation potential in agriculture, and the overwhelming focus of climate finance on mitigation, agriculture has accounted for only 1–3% of the approximately US$ 1 trillion of climate finance pledged or delivered from 2012 to 2016. About two thirds of mitigation finance is from commercial or private sources, is available as market-rate debt, equity or balance sheet financing, and is delivered through private sector organizations.

Since public climate finance is limited and should be used to fund the incremental costs of climate action, the efficient use of public funds is important. Guidance for the Green Climate Fund, for example, indicates a preference for projects that leverage additional public or private finance and ensure reflows to the fund by limiting the use of highly concessional loans or grant.

While, the cumulative climate finance tracked for agriculture, forestry, and land use was only USD 20 billion per year in 2017/2018, which represents 3% of the total tracked global climate finance for the period. Out of the total tracked climate finance of USD 20 billion for agriculture, forestry, and land use, only USD 8.1 billion targets small-scale farmers, agri-entrepreneurs and value chain actors serving them, according to a report by the UN’s International Fund for Agricultural Development (IFAD) and Climate Policy Initiative (CPI).

This is equivalent to approximately 40% of the total climate funds committed to the agriculture, forestry, and land use sectors. An additional USD 1.72 billion of climate finance benefits small-scale agriculture actors through renewable energy generation, sustainable transport in rural areas and water management. The total climate finance targeting small-scale agriculture is therefore close to USD 10 billion. It represents 1.7% of the total climate finance tracked and it covers only a small fraction of the general needs of small-scale agriculture actors.

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Climate finance covers only a small fraction of the total needs of small-scale farmers and agri-businesses. Therefore, finance directed to small-scale agriculture has a major opportunity to mainstream climate, and particularly to bridge the immediate need for increased climate resilience of small-scale producers and their communities.

Small-scale farmers operating on less than 5 hectares of land represent around 95% of world’s farms and a cumulated area equivalent to 20% of the global farmland. In Asia and Sub-Saharan Africa, small-scale farmers are estimated to provide up to 80% of the food produced. Most of the world’s small-scale farmers live in these regions, where the agricultural sector contributes around 15% of the GDP and provides over 40% of all the jobs.

Public resources have the potential to de-risk investment in agricultural development and, therefore, to catalyze funding from the private sector. When increasing climate finance for small-scale agriculture, one must take into account current needs. Those can only be estimated if data collection is improved to cover the major information gaps regarding financial flows from public domestic sources and from international and domestic private actors.

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Climate finance covers only a small fraction of the total needs of small-scale farmers and agri-businesses. Therefore, finance directed to small-scale agriculture has a major opportunity to mainstream climate, and particularly to bridge the immediate need for increased climate resilience of small-scale producers and their communities.

If agriculture is to attract climate finance in support of large-scale mitigation action, a diversified, demand-responsive approach to financial innovation is required that engages different types of financial institution to support access to both savings and credit services tailored to the varied needs of men and women smallholder farming systems.

Existing report makes recommendations for how climate finance can accelerate climate smart investments in the agriculture sector:

  • Designing innovative mechanisms and adapting others to leverage additional sources of both public and private capital that can be directed toward climate-smart investments in agriculture.
  • Identifying key entry points, for directing climate finance into agriculture and linking financial institutions, smallholders and agricultural SMEs.
  • Providing the necessary technical assistance to build the capacities of everyone involved in the financial ecosystem, including both lenders and borrowers.

Meeting the financing requirements for climate-smart agriculture implementation will be a significant challenge, but one that is central to addressing global food insecurity and poverty.

Agriculture can offer an opportunity for inclusive, economic growth, particularly in developing countries. With sufficient financing for sustainable and climate-smart production systems, the sector can unlock enormous economic potential while achieving several of the UN Sustainable Development Goals.

 

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