Opinion: Enabling food system transition by unlocking capital

In 2050, the global population will grow to nearly 10 billion, increasing the demand for food by 70%, while dietary preferences of a large part of the population will shift toward higher value agricultural products, such as meat, fruits, and vegetables.

But global food systems are currently already a major source of greenhouse gas emissions, deforestation, and the loss of biodiversity. The expected increase in food production will only add further pressure to these natural resources. That is unless the global food system transforms and adopts more sustainable practices, allowing it to produce more while protecting and restoring natural resources. This is easier said than done.

Anticipating this, in April 2021, over 100 public and private stakeholders — including U.N. Environment Program, the World Bank, Convergence, CGIAR Research Program on Climate Change, Agriculture and Food Security, the Dutch Ministry of Foreign Affairs, and Rabobank — came together to host the Food System Summit dialogue #RestoreOurEarth. The objective was to discuss how to finance game-changing food systems solutions through blended finance.

A new discussion paper outlines the key outcomes of that discussion. Among those outcomes is Rabobank’s thoughts on how banks can contribute to the food system transition with the help of the development community.

The primary agricultural sector is under-financed

The agricultural sector needs long-term finance to be able to transition toward sustainable agricultural production and we believe that blended finance is a good solution.

But it has only been implemented at a limited scale thus far. Real food system transformation requires finance at a large scale. Commercial banks can offer that scale.

However, many banks shy away from agricultural lending in general due to the sector’s high risk profile. Banks that do lend to this sector strictly limit their exposure based on risk management considerations. Commercial banks are strongly regulated entities that prioritize protecting the savings of their depositors. They are required to formulate boundaries for the risk that they take on their balance sheet.

As a result, most farmers — especially in low- and middle-income countries — have limited access to finance. First, banks consider agriculture as one of the riskiest sectors due to problems in securing land-titles and uncertain cash flows. Second, the primary agricultural sector is scattered over large rural areas, making onboarding and monitoring costly, and the returns from small loans limited. Finally, longer loan repayment schedules are often not available for investments, especially in LMICs. Even in cases where the bank can lend, the interest to be paid is often unaffordable as it reflects the risks.

Despite this, commercial banks and non-bank financial institutions are best-placed to reach out to farmers to enable their transition. They have huge client networks in the agricultural sector — from the larger, corporate farmers to the smallholders — and the infrastructure, including the branch network, digital banking solutions, systems, and policies, to reach out and lend.

No other actor can offer this outreach to those in the agricultural sector as banks do, if only solutions can be found for the risks and the hurdles. That is where blended finance comes in.

Blended finance is the key

Blended finance is the strategic use of development finance and philanthropic funds to mobilize private capital flows. These funds can form the backbone of the providing risk mitigation and concessional funding tools to banks, such as guarantees, and thus unlock a bank’s private capital that would otherwise not have been available to the agricultural sector.

Guarantees will only be provided for the portion of the risk that banks cannot take on their balance sheet. In addition, it will only be available as long as the loan and the borrower comply with a pre-agreed environmental and social framework, capturing conditions for the borrower related to the transition to sustainable practices. In this way, it has the potential to unlock capital flows, at scale, for the transition of food systems. The more banks participate, the higher the impact.

AGRI3 Fund provides an example for structuring blended finance through commercial banks. It was set-up by Rabobank, but is now independently managed by fund managers who work with banks worldwide. AGRI3 Fund is funded by public and private entities, blending capital at the fund level.

That blended funding is subsequently used to provide guarantees to banks — enabling them to lend to the agricultural sector. That means that those blended funds are able to mobilize even larger private capital flows on the client level. In this sample structure, the concessional funds are leveraged twice, which offers an efficient use of development finance and philanthropic funds.

To scale up blended finance solutions for banks for the benefit of the food system transition, cooperation between the development community and banks is essential, especially on standardization of transaction structures and SDG impact criteria. Understanding each other’s objectives and realities is of utmost importance. For example, holding on to a long list of very stringent conditions, will limit the deal sourcing capacity of banks.

The transition of food systems won’t happen if all other systems remain as they are. Blending capital requires the related public and private communities to blend as well, and go off the beaten track. Who will join Rabobank toward impact at scale?

Read more on scaling up critical finance for sustainable food systems through blended finance in this discussion paper, written by Convergence, UNEP, Rabobank, and CCAFS/CGIAR.