Our agricultural system must transition to farming systems and technologies that reduce greenhouse gas emissions and improve resilience to the impacts of climate change – all while maintaining productivity and sustainable livelihoods. A shift of this magnitude will require transformative investment from supply chain companies, agricultural banks, governments and others. While many of these actors recognize the need to rapidly scale investment in climate-smart agriculture, most action is still in the early stages. Agriculture can learn from other economic sectors how to de-risk new types of climate-smart investment, allowing experimentation and innovation to accelerate and hasten our arrival at financial incentives that are effective for farmers and environmental outcomes. Green banks have been effectively deployed in the clean energy sector and would be a valuable next step for climate-smart agriculture.
A green bank is a nonprofit, public, or quasi-public institution that identifies gaps in the market of climate solutions and offers low-cost, flexible capital to support and mature investment products and strategies to fill those gaps. Green banks are typically capitalized with public funds but seek investments that will be returned or repaid so that the money can be revolved over time into new investments. For example, a green bank in the clean energy sector might loan money to a company that is installing solar rooftops or provide a loan loss reserve for local lenders financing home energy upgrades.
Environmental Defense Fund and the Soil and Water Outcomes Fund are working to advance innovative finance in climate-smart agriculture and have identified specific gaps where an agriculture green bank could accelerate these solutions.
Environmental Defense Fund is collaborating with agricultural banks to identify opportunities to reduce climate risks and finance climate-smart agriculture. A 2022 survey of agricultural banks found that 87% of respondents expect climate change to pose a material risk to their business, yet just 24% significantly factor climate change impacts into their decision-making. In addition, market research conducted with farmers in Iowa shows that half would be interested in a soil health transition loan. EDF has collaborated with Farmers Business Network on the Regenerative Agriculture Financing program, which offers a 0.5% interest rate rebate on operating loans for farmers that meet nitrogen and soil health standards. The $25 million pilot fund was oversubscribed with nearly 50 farmers, and has now doubled in size in its second year. Green bank funding could bring more agricultural banks to the table in creating such offerings for their farmer clients.
The Soil and Water Outcomes Fund is working with corporations, government agencies and farmers to drive the adoption of new climate-smart practices through financial incentives aligned with environmental outcomes. Farmers new to climate-smart practices cite yield risk, new equipment costs, and input expenses as common barriers to adoption. Early adopters wanting to sustain climate-smart practices express frustration at being excluded from ecosystem markets and conservation program funding due additionality requirements. Providing additional sources of value, such as lower-cost loans, would reduce upfront transition and ongoing operating costs for both new and early adopters. While the major agricultural lenders serving the Soil and Water Outcomes Fund producers have expressed interest in developing new climate-smart lending products, most require several years of data to evaluate and incorporate climate-smart practice adoption in underwriting. A green bank providing a temporary credit enhancement or low-cost subordinated financing would allow agricultural lenders to offer new low-interest climate-smart products while gathering the required data to incorporate loan performance data into underwriting.
Green bank funding could also be used to address the challenges farmers of color face in accessing finance for their operations and supporting them in implementing climate-smart practices. For example, Akiptan is a Native-owned community development financial institution that offers long-term, flexible financing for Native American farmers and ranchers. Green bank funding could support Akiptan and other community development financial institutions to expand their loan and investment programs for farmers interested in climate-smart agriculture but facing challenges in accessing capital that meets their needs.
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A green bank would not replace existing financial actors in the agricultural system but would instead unlock their ability to innovate and collaborate with farmers and ranchers on financing linked to climate-smart practices and systems. A report released last year by Field to Market: The Alliance for Sustainable Agriculture™ offers 12 investment blueprints ready to be scaled through such an opportunity.
The Environmental Protection Agency’s Greenhouse Gas Reduction Fund, established by the Inflation Reduction Act, is a potential source of green bank funding and offers an opportunity for the agriculture sector to invest in our food system and rural communities. This funding competition for $27 billion will be announced in the summer of 2023, expanding the reach of low-cost, flexible funding to communities and economic sectors nationwide.
Agriculture sector stakeholders should seize this opportunity and similar ones that could establish a green bank for climate-smart agriculture. Such investments in our food system and rural communities are essential for the future.
Maggie Monast is senior director, Climate-Smart Agriculture at Environmental Defense Fund, and works with farmers and agricultural finance institutions to mitigate the risks of climate change and capture climate-related opportunities.
Dan Yeoman is a managing director of the Soil and Water Outcomes Fund, which provides financial support and technical assistance to producers adopting climate-smart practices.
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