The Impact of Regenerative Agriculture: Financing Food Systems that Restore Nature

As the global demand for sustainable food grows, regenerative agriculture has emerged as a powerful solution to address environmental degradation, food insecurity, and economic inequities. But how can investors, businesses, and policymakers work together to scale these solutions while ensuring profitable, nature-positive outcomes? 

Panelists:
Harriet Jackson, Co-Team Head Africa, Sustainable Food Debt Investments, responsAbility
Arend Kulenkampff, Director, Sustainability-Linked Sovereign Debt Hub, NatureFinance

Hosted by:
Robert Widén, Director Nordics, responsAbility

Transcript

0:02

Welcome to Voices of Impact Investing, the responsAbility investments podcast. We need intensive non sustainable agriculture practices that we have today. Like they're causing like 80% of deforestation. Food systems are causing like about a third of our greenhouse gas emissions. Agriculture is really not working aligned with nature. We we sort of make the case that regen AG is not simply sort of a nice to have sustainability play, but it's actually in many respects of Bible strategy in a context where soil degradation and nature loss are accelerating and where conventional farming practices have diminishing returns. And what we try to do by having like regenerative agriculture and supporting that, it really supports nature, right? It's supporting biodiversity. And this is what so many investors are seeing now. The information provided in this podcast is given for informational purposes only and should be considered neither as investment advice nor as investment recommendation. No liability shall be accepted for the accuracy and completeness of the information. The views presented in this podcast are those of the individual participants and are not necessarily endorsed by responsAbility. Past performance is neither an indicator nor a guarantee for future results. Now join Robert Widen, Director, Nordics at responsAbility and his guests for today's discussion. Biodiversity in nature has really become the topic for investors the past years, and the integration of nature and biodiversity in private markets is set to intensify. However, nature still remains a relatively untapped investment theme and investors are still figuring out how they best can approach this theme. What we will do today is we'll do our best to demystify this topic and and nature investment can be a lot of things. So, so for the sake of time, as we could be speaking the whole day on this topic, we will highlight regenerative agriculture today and focus on the questions that we see are the most frequent. So how to identify and evaluate investment opportunities, what financial instruments are driving nature based solutions and what metrics one can use and measure. And we also share some case study. With that, I'd like to introduce today's panelist. And with us today, we have responsAbility's very own Harriet Jackson. Jackson, she is leading sustainable food depth investments in Africa. And I had to double check this, but you have been at responsibility more than 10 years now. It's great to have you here. Thank you. And joining Harriet, we have Arend Kulenkampff come from Nature Finance where he is the lead of the Innovative Finance Lab. Now nature Finance is quite an exciting organization. It's an international not-for-profit organization dedicated to global finance, nature positive outcomes. Now they lead a lot of different initiatives, one being building using bio biodiversity data to better manage nature related risks. And essentially what they do is that nature finance is making nature count in global finance. It's really great to have you here. Arend's delighted to be here. Thanks, Robert. Herod, I'll turn to you first. Why is nature and biodiversity an important focus for investors today? Well, I hope that the link between agriculture and nature is clear for everyone, right? Like these intensive, really intensive, non sustainable agriculture practices that we have today, Like they're causing 80% of deforestation that the leading biodiversity loss, like food systems are causing about a third of our greenhouse gas emissions at the moment. So as it stands, agriculture is really not working aligned with nature, right? It's kind of anti nature finance. And what we tried to do by having like regenerative agriculture and supporting that, it really supports nature, right? It's supporting biodiversity. And this is what so many investors are seeing now. And Arend, I'll turn to you. You actually, you just came back from the World Economic Forum in Davos. I mean, have you seen a growth in demand and urgency and investing in nature? I'd say so, especially on the demand side. Just looking back four years to when nature Finance was founded as the Finance for Biodiversity Initiative, you know, the concept was really not well circulated and quite vague and nebulous for most investors. And sort of my read on what we saw in Davos last week was that it has landed and that the urgency is there, but that it's where the supply of investment pipeline projects and propositions is where we're currently falling short. So about a year ago at Davos as well, we launched an initiative that we called Beyond 1. 5 that was really about calling time on the lack of realism in the face of what we see a nature of finance as the near certainty that we're going to overshoot 1. 5 and that the effects of severe climate shocks and nature loss on food systems was really going to grow in in number and intensity. And so one year ago we started writing a report that we launched this year where we made that message of world Beyond 1.5, looking at the food systems and the potential dislocations and disruptions that one might expect in that climate stressed future. And I would say, you know, whereas a year ago the reactions were somewhat makes this here it was clear that sort of the actor is in the investment community and the agriculture community had really internalized this story. I will also say though, that the demand outlook at the moment is a bit shaky. It's a bit more uncertain given the global backdrop. And you know, what we're seeing as a backlash of sorts against is cheap and still in the investment community, and especially amongst asset managers and investment shops such as responsAbility, there's still that sober, real and reality of the opportunity that especially regenerative agriculture has and, and is an indispensable part of climate resilience going forward. And so in this report that I mentioned, which was commissioned by the Children's Investment Fund Foundation and which some of my colleagues had authored planning for a future beyond 1. 5 and looking at food systems, we sort of make the case that Regen AG is not simply sort of a nice to have sustainability play, but it's actually in many respects of survival strategy in a context where soil degradation and nature loss are accelerating and we're conventional farming practices have diminishing returns. Regenerative agriculture, and we'll get into this, of course, is about restoring soil health that enhances biodiversity and improves water and retention, promotes ecosystem resilience. And this is actually something I've seen personally. I have a second sort of side hustle, which is running a regenerative farm in southern Chile where we instituted no till farming practices. It did sort of result in a reduction in yield sort of initially, but we are seeing kind of a return to patterns that of production that we had before. So the other point I just want to make on, on the need for planning for a world beyond 1.5 is that regenerative bag is, is critical, but it's not enough given sort of the trend we're seeing in loss of access to arable land and water. And that we need to also look at investments in innovative food technologies like edible insects, vertical farming, cultivated meat. And these are capital tensive, they're quite challenging to do, but we see that as part of of sort of the new toolkit going forward. There's also the more demand for that. But like with regenerative agriculture, the outlook is still somewhat certain. And you know that the ticket price for what we see as that structural transformation to a climate proof future for food systems is in the order of 30 to$65 billion as we estimate in the report. This is over the next 15 years in developed markets. It seems like a large number, but if you compare it to how much we're currently spending on food systems annually, you know, north of 7 billion in developed markets, it's I think a reasonable investment to make. Thank you for that elaborate answer and setting the scene really for for today's discussion. We see there's appetite and you mentioned a bit of the problems there. Perhaps you can just shortly elaborate a bit on the with the biggest financial gaps are what are they and what is preventing regenerative agriculture from scaling globally? Yeah. I mean the challenges of deploying what we call in the report the resilient and fat adaptive food technologies of which regenerative agriculture is one solution there, there are many and you know it's the fact that they are extremely capital intensive and they're technologically complex. And so that introduces challenges around technology transfer and financing of course. And this again is sort of in the context of credit tightening and more volatile global financial sort of risk landscape and perhaps more hesitancy amongst large institutional investors for big investments in transformative place such as no soil technologies or regenerative agriculture. There's also challenges to achieving the kind of scale that we we need to see in order to provide nutrition at the same cost at cost imperity with what we currently have with conventional practices. And of course, there's the socioeconomic role of agriculture and, and the challenges that will come with sort of a structural transformation in these systems that might lead to changes in employment trends in terms of the the financing in particular, you know, awesome to important to note that in many of the agricultural producing countries, there's not only a climate crisis and as we see it, a nature crisis, there's also sort of a debt crisis. And that means there is less funding available, less physical space to kind of promote the changes that we need to see at the macro level in, in terms of promoting regenerative agriculture and investments and more capital intensive food systems. So we do a lot of work at nature finance on innovative instruments, which I'm sure we'll talk about. But the, the other challenge that I'll finish with is that we, we see tremendous speed and, and, and coming up with new types of products and, and structures, but it's really accelerating the pace of adoption where, where things are falling apart or, or working too slow. And so at Nature Finance, we've launched a lab that is dedicated not only to innovating new products to finance food systems, the bioeconomy and other critical nature assets, but also helping to accelerate the adoption of these new solutions. Thank you. I like that you end on the on the opportunities note not only on the challenges, which I mean, which are clear there, there a lot of obstacles, but it also means there's a way to navigate and there are also a lot of opportunities as well. And with that, Harriet, perhaps I'll turn to you. What does responsAbility do in and sustainable food investments and and why does it protect nature? So I mean responsAbility has been doing sustainable agriculture finance for 15 years. But what we do concretely, obviously as an asset manager, we're providing financing to companies that are moving in the right direction. We can, you know, hire a scientific partner who really can advise. OK, given what you're growing in this region, then you should be looking at XYZ. So this technical advice is something that goes beyond traditional finance. Yeah. And basically we measure and monitor the impact of what we're doing on a like on an environmental and social level, not just the financial level. I will get back to the metrics later because I think that's, that's interesting. But before I do so, I'd like to get back to the point of mobilization of private capital. What what role does blended finance play in, in the risking investments and in regenerative agriculture and, and in this particular case, I guess, especially in emerging markets or is it even needed? So the switch to regenerative agriculture, you know, changing what you're doing or, you know, investing capital investments such as, you know, local processing and factories so that you don't have to ship products all around the world and have loads more CO2 emissions. Like we look at it quite broadly, right? But this transition needs capital and needs, it's a long term transition, right? That's why intensive agriculture has is so widespread, right? And on top of that, all of this measurement and advice isn't free. And so obviously, having development finance institutions or foundations that are willing to support, you know, financing, giving the like the advice and how to measure it, that's also crucial for being able to say, hey, look, this is the impact that we're having, which is obviously what everyone wants to know. Thank you, Harriet. And perhaps Arend, you can elaborate a bit on this. I mean, are there any specific policy innovations or public, private collaborations that that you see could accelerate finance for a regenerative agriculture? Yeah. I mean, sort of zooming out, I'm looking at it from a macro perspective. We do need as much innovation and public policy and financing solutions as we need at the project level. You know, sort of much as the feed in tariff help to finance the rapid global expansion of renewable energy course starting in Germany and then production ramping up in China and then that sort of driving down costs at the early stage of the the innovation curve. We sort of need something similar here for regenerative agriculture and soyless food technologies as well. So, so in this domain, you know, there there's a lot happening also at the sovereign financing level, which has been a particular focus of mine. Harriet mentioned credit enhancement or blended finance. This is an area that we've been focusing on quite a bit. We launched a task force on credit enhancement with over 10 different multilateral development banks and development finance institutions that are specifically focused at how can we Dr. lower cost financing into food systems and developing countries in the context where the risk environment is sort of steadily deteriorating. On the sovereign financing innovations, you know there's a whole range of new types of sustainability linked bonds that embed different targets and key performance indicators that might include written in regenerative agriculture. So we're looking at one project that seems very interesting, which is around targeting school meal program. So picking up a country and at the nationwide level saying we want to increase, you know, delivery of food to to schools by this amount over this time period. And we'd like that to come from regenerative practices. So that creates a pretty massive demand stimulus for this these types of practices. And that's one way that the government can act as can, can introduce these policies to to drive the transitions that we need to see. There are other types of demand side measures of course, that we highlight in the reports of research and development, the long term off take agreements, targeted marketing. But really sort of going back again and looking at the global picture, it's going to be up to middle and upper income countries, especially Brazil, China, the US, India to to help to drive down the costs of these current new technologies for not just regenerative agriculture, but soil is technology as well. And to provide those at A, at a fair and equitable price to lower income countries, you know, I don't again want to downplay the, the challenges the of this at a large scale. So this is akin to basically Germany transitioning its automotive industry from combustion engine to, you know, electric vehicles. It's, it's a massive structural transformation that we need to start soon. And and that's going to require innovation at the policy level as much as the sort of the sovereign financing level. And you, you touched upon school meals. So, but Harriet, I mean, you've been working a responsibly more than 10 years. responsAbility has been working within sustainable agriculture for more than 15 years. Perhaps you can share a specific case study where regenerative practices have generated both financial returns and measurable environmental impact. I mean, obviously there are, there are several. Taking one from Bolivia would be a Brazil nut processing company that we've been working with a long time, a decade even in Bolivia. There's a lot of Amazon rainforest. And then the Brazil trees form a central part of this, like 500 years old, super tall. Like lots of animals are reliant on the Brazil nut tree and vice versa. Like it's really kind of a beacon of die about biodiversity. And by law, these can't be deforested, but there's a lot of illegal deforestation. And so anything that can help to give value to these trees in terms of income for the communities really helps incentivize everybody to, you know, not deforest or not look away as deforestation happens. And so one company we're financing purchases the nuts from these communities and then processes them, you know, takes off the shell, cleans them, etc, and then sells them, like internationally, giving them value and income for the communities. Yeah, both financial and economic and social benefit. And then for instance, another one just to mention briefly is in Sri Lanka, we do an organic tea company. And the more that they grow, the more that they're purchasing from organically managed land. And so we're measuring the soil health of the land, you know, before it was organic. And then as it becomes organic, you know what's happening to the organic soil matter proxy for soil health. So we're really quantifying this and it's like the early stages of this investment at the moment. So we haven't got all of the results yet, but this is something that's externally monitored and measured, right? And that's where the grant funding comes in, this kind of being able to quantify how much of an impact we're having. I really love the examples that Harriet provided on Brazil nuts. I think this is such a an essential crop for preserving the Amazon given its critical role in the biodiversity of the Amazon forest. And you know, I think there are opportunities to to sort of scale up precisely these parts of projects through some new innovative financing instruments that we're particularly interested in and that have come into the markets quite recently. So for instance, there is the outcome bond that the World Bank issued in Brazil, which was around Agri forestry and delivering Agri forestry cops such as cocoa and conceivably also Brazil nuts providing long term off take agreements not only for the underlying product but also credits, carbon credits linked to them. And so nature stewards and producers that are active in forestry, agriculture and using regenerative and sustainable practices can receive income from two different streams, one for the product itself and then from credits that are linked to those credit to those products. And so these types of bonds which are issued by multilateral development banks and our principal protected so very low risk can be purchased by institutional investors and they can create these long term off take agreements for the credits. And that can provide an alternative source of income and greater income smoothing for developers and producers who are under increasing climate stress and face more volatile income close going forward. You know, it's these types of outcome bonds that are being piloted at the moment in Brazil and Vietnam gone on and Indonesia I think can can also work in a Brazil nut context. So Brazil nuts, of course, are require primary forest in many ways to produce and to propagate given the complex pollination chains that they have. And there's an opportunity then for the harvesters of those Brazil nuts to also be able to generate income from carbon credits or even one day biodiversity credits, an area that where we spend a lot of time researching and piloting different types of solutions. And I think that's going to be critical to achieve scale in regenerative agriculture and and other types of nature positive investments. I'd like to get back on and we promised to come back on metrics. Harriet, how does the responsAbility measure impact? You mentioned soil health. What are the key indicators or frameworks? How do we track biodiversity and ecosystem restoration? I mean, those are difficult things to track. Well, I mean said earlier about having this realization, you know, 5-8 years ago, whatever that mitigation isn't enough and that you need to do in, we need to finance adaptation as well. But then yes, measuring that is obviously a lot harder than greenhouse gas emission equivalents, which is very well, fairly straightforward. I mean, it depends on which fund we're talking about and what the goal of it is. Basically, we have goals on a fund level and on some key indicators which you can describe that we decide on each individual investment. OK, what's the most relevant ones here? And we have some key indicators which are water productivity, you know, like the amount of use of fresh water per unit of agriculture output, soil health. So again, it kind of depends on the area which is the most appropriate metric. But in one recent one, it was the presence of organic matter as a proxy of that. And then there's also obviously greenhouse gas emissions equivalent like reducing the amount of CO2 from the agriculture practices or avoiding food waste and gloss if you're able to increase the yields and sustainably, that is the key point, not just on a one off harvest, but in the long term. And we measure the use. So we make an assumption at the beginning of the investment with a baseline based on an external and scientific party and then follow up annually on, OK, but what has the actual improvement being? And then we address the figures according to me. And then on top of that, we have loads of other secondary indicators or cross cutting indicators depending on what the investment that we've done is. But I think it's important not to measure everything, but just to kind of have a few key select indicators and have an overall like high level but fairly accurate idea of the impact. Yeah, and as you mentioned, it's quite costly measuring everything obviously. So I guess it's it's a limit how how far you can go. But at the same time, it adds to the credibility to the investments, obviously. And Arend, finally, perhaps you can mention some key metrics investors should use to measure both ecological and financial impacts of regenerative agriculture investments. The ones that Harriet cited are also the ones that we refer to. And I think you know these types of projects that responsAbility is doing are really key for us who look at it more from a macro level and, and and sort of in wholesale finance to have KP is that we can then scale up and replicate and put into other types of financing arrangements. So we spend as I said a lot of time on sovereign debt and KPI linked debt in particular. So we refer to the same types of indicators that might work at a project level and see whether those can be applied to a sectory or even country level. So to give one example, Uruguay issued a sustainability linked bond in 2022 that had a KPI linked to forest cover, right? And we, and so the bond said that if forest cover increases, you get a reduction in the interest rate on that bond during the life of the bond. So these are the types of innovations that can leverage the KPIs that Harriet mentioned and sort of one that I find might have promises at a sector level. If we can measure how many farms are practicing regenerative agriculture and we can take that as a share of overall production or even GDP, then that can be a target that governments can pursue and even embed in a sustainability link financing structure. So now I encourage the sharing of this sort of knowledge around KPI linking and performance tracking with the broader community so that we can develop these types of transformative financing plans that can apply to the whole country in that way sort of to achieve the outcomes that we're all trying to get to. Thank you, ARN, I mean it's interesting to you some incentives as well in order to promote regenerative agriculture's. There's one question which has popped up and we've touched upon it a bit, but perhaps we can just highlight again what financial mechanism can be used to finance nature maybe. ARN, do you want to touch that? Sure. We are focusing quite a bit on biodiversity credits, which channel funding into the preservation of biodiversity. This would be a compliment to other types of financing, of course, for regenerative farming, but then to also provide the nature stewards and the regenerative agricultural producers with an income source that also rewards them or preserving biodiversity on their lands. And this could be, you know, on the periphery of the productive land or even in the case of agroforestry within the productive area itself. That is a very nascent and incipient market. We've done quite a bit of landscaping seeing how it's being done in Latin America, in Africa, but it requires a much bigger and more concerted effort to get the kind of scale that we need where we have a big investor base buying credits whether locally or across borders to, to generate meaningful meaningful income flow. I've already sort of cited and referenced our work on sustainability linked debt. So embedding regenerative agricultural KP is and financing that provides incentives in the form of interest reductions or green bonds that direct financings for specific regenerative projects. You know, these are becoming mainstream and increasingly being deployed in agricultural practices as well. Perhaps if I turn to you, Harry, there's a question here in terms of how you see regen AG playing a role in replacing conventional and industrial farming practices also in developed markets. Like everyone needs to think more long term, right? I think maybe we're still losing the argument a bit in terms of, OK, but we need to like maximize with a growing population, we need to maximize output per hectare. It's like, yeah, we do, but we also need to keep doing that in 10 years, 15 years, 20 years, 50 years, you know, like, yeah, you got I think long term, not short term, like no matter which continent. I don't know. And if you want to add to that, you mentioned some countries which should take the lead in getting costs down. Is that something which could help as well? Absolutely. You know, bringing costs down, but also setting standards and introducing new trade rules. This is particularly true for the more capital intensive and technology driven innovations in agricultural practices. So SOILUS agriculture for instance, as we mentioned, not quite regenerative agriculture, but requiring also or the countries that have the capacity to deploy that kind of capital to do that research and development to then also share it with the rest of the world. Of course, you know, in the current context that that looks much more challenging, but it has to be done given the trends we're seeing in, in soil degradation and, and climate shock and, and all that. If you see how much like public subsidies that are towards harmful agriculture, I mean, that's just it, right? It's not, it's a bit like fossil fuel subsidies, right? Like if you're going to be supporting renewable energy, then you also need to be looking at what you should be supporting on the fossil fuel side as well. The same goes for agriculture, right? There's no point in supporting something if you're also supporting something else that's actively against it. So it's a very complex system, et cetera. But it like we shouldn't just look at regenerative agriculture, of course, we should be looking at OK, conventional agriculture, What part of it's OK, what part not like how much are we supporting that? Yeah, but that's that's more policy level. And I think we have time for one more question. And I think this is highlights a bit of the the importance as well. I mean, investors need return. So how can financing nature restoration be done while giving clients the IRR that they they request? Or maybe it's a bit of a cop out to say it depends on the consumer. So it depends on all you guys as well. In an environment right, where there's increasing demand for food that is well grown, then you see that these companies do well, OK. But when you see like, you know, the cost of living crisis etcetera, this causes a decrease in demand for, you know, well grown food, etcetera. The companies that we're financing do feel that OK, so they're not going out of business or anything, but they're saying, OK, look, no one's able to afford like well grown food anymore. So that we've seen the proportion that we're doing under normal agriculture has increased. So the return goes hand in hand with what the demand is. I mean, I'd also just mentioned that you know, the impact on yield regenerative practices can be positive in terms of being able to produce more. Certainly on our farm. That is a trend that we've seen. It takes time. It's a difficult transition that needs to be funded as well. But over the medium to long term, yields do also improve under regenerative practices and lots and lots of that stuff is about avoiding loss, right? OK. And if you're managing to avoid loss and increase the amount you can sell, then of course this is going to have best better yields like you're more efficient as a company, right? I think we either, there are good arguments for why it goes hand in hand and actually can perhaps increase returns overtime as well. Now finally, last question, more of a call to action. What advice would you give to investors and businesses looking to end this? Enter the space. We have to think through the implications of what a world that is increasingly current climate stressed will look like in the and what that means for food security, food production. So we really have to take, in our view, kind of an integrated approach to sustainable, affordable and accessible nutrition. And that will just require a much more concerted effort to shift towards regenerative practices and new adaptive food technologies. So, yeah, investors and businesses should do climate risk assessments. Like you see what's happened to cocoa prices in West Africa this year with them, the yield being like 30% down last year. It's caused havoc in the sector. But it also comes down to us and what we choose to buy it. So, yeah, Well, thinking long term, I think that's a that's a great way to to end today's session. And as we wrap up, I just like to thank you, Harriet and Arend, for very insightful discussion. It's been really, really interesting to to hear your experiences, very inspiring stories. Also, I'd like to thank you everyone who's been listening in. And as we mentioned, please feel free to reach out through our contact details. And if you have any follow up questions or we want to have further discussions, we're happy to pick that up. Also, if you don't already do so, we're more than happy if you would like to follow us either on LinkedIn or on YouTube. There's a lot of interesting content coming up. And also we have our podcast series, Voices of Impact Investing. And with that, I would like to wish everyone a wonderful day and hopefully you got some food for thoughts. Thank you, thank you, thank you.