Supporting regenerative systems through financial innovation

September 25, 2022

Rather than simply focusing on the management of negative externalities, regenerative systems seek to contribute to positive environmental and social outcomes. Building on the movement in sustainable investment, both agriculture and reforestation are sectors that present significant potential for regenerative finance. In this briefing paper, we review key goals for restoration finance and provide an overview of how selected mechanisms work in practice.

• What are some of the key goals for financing projects in agriculture and reforestation?

In its essence, regenerative finance aims to rebuild natural systems that have been degraded or destroyed through a range of innovative programs and mechanisms.

Through sustainable land management programs, degraded land can be brought back into productive use, not only supporting local communities but also providing a natural carbon sink. For example, the Land to Market Programme is working with supply chain partners to create economic incentives for regenerative grazing practices worldwide. In addition, innovative planting and water-capture strategies can increase tree cover and cooling capacity in order to mitigate the effects of climate change.

Equally, with a growing world population and changing climate patterns, ensuring food and water security is a key challenge. Investing in regenerative agriculture can help build resilience to climate shocks and support smallholder farmers, as well as investing in infrastructure and systems to improve water security. One example of this is the development of drought-resistant crops, which can help farmers mitigate the impact of climate change on their livelihoods. In addition, investing in irrigation systems can help to reduce water usage in agriculture, which currently accounts for 70% of global freshwater consumption.

Climate change mitigation and adaptation strategies are also essential components of regenerative systems. The Bonn Challenge, for example, is a global commitment to restore 150 million hectares of degraded and deforested land by 2020, with private sector involvement crucial to achieving this ambitious goal.

• What are some examples of innovative financial structures for regenerative agriculture and reforestation?

There are a number of innovative financial structures that allow private capital to be redirected to regenerative projects in the agriculture and reforestation space. One example is the creation of a regenerative fund, which would invest in farmers who are using practices that improve soil health. For example, the Regenerative Fund for Nature seeks to transform agricultural practices by providing grants to farming groups and project leaders to test, prove and scale regenerative practices that ensure the long-term viability of the land and deliver benefits for farmers, nature and the climate.

Another example is a reforestation project finance facility, which provides financing for tree-planting projects such as agroforestry in coffee plantations or reforestation of degraded lands. Such facilities can also support the development of carbon markets, by providing financing for projects that generate carbon offsets. Technology solutions such as that offered by the Open Forest Protocol can help close gaps that make accurate and transparent measuring, reporting and verification a challenge.

Equally, by supporting small-scale farmers and agroforestry projects through blended financial structures, we can help to build resilience in the global food system. For example, the Food and Agriculture Organization of the United Nations (FAO) has created a toolkit for financing small-scale fisheries. This includes providing guidance on how to use a variety of financial instruments, including grants, loans, and equity investments, to support small-scale fishing communities.

In addition, green bonds can be used to finance environmental projects by both public and private entities, and the proceeds can be used for a wide range of activities, including regenerative agriculture and reforestation. For example, the Green Climate Fund has coordinated a joint commitment of $100 billion by advanced economies to address the pressing mitigation and adaptation needs of developing countries. In another example, the World Resources Institute's Land Accelerator trains and supports entrepreneurs whose companies restore degraded land, including through the Rural Prosperity Bond funding instrument.

Moreover, social impact bonds are another type of financial instrument that can be used to support regenerative agriculture. They are similar to traditional bonds, but the proceeds are used to fund social or environmental projects. For example, the Forest Resilience Bond was launched in 2018 to help finance the restoration of degraded forests in the United States. The bond is structured as a social impact bond, with private investors providing the initial funding. If successful, it will generate returns for investors while also supporting the regeneration of critical forest ecosystems.

Philanthropy also plays a role in financing regenerative agriculture, whether through private foundations, charities or corporations. For example, one foundation that is supporting regenerative agriculture is the Rodale Institute, which works to build regenerative food systems through research, education and training to farmers, as well as financial support for regenerative agriculture projects.

Equally, small grants and subsidies are increasingly being offered by cities and regions that are looking to become greener, including at the European Union level. In France, the city of Lyon has created a €3.5 million subsidy program to support urban agriculture projects, including those using regenerative agricultural practices.

• What are some of the advantages and disadvantages of these financial structures?

On the one hand, by redirecting impact investing towards regenerative agriculture and reforestation, we can harness the power of the private sector to finance much-needed environmental projects and create economic incentives for conservation by farmers, residents and specialists on the ground.

In addition, by developing carbon markets and supporting small-scale farmers and agroforestry projects, we can provide financial incentives for sequestering carbon dioxide through reforestation projects. These approaches can also help to build resilience in global food and water systems.

The main challenge is often finding the right balance between short-term profitability and long-term sustainability. Agricultural and forestry projects can take years or even decades to come to fruition, and there is often a tension between the need for immediate financial returns and the necessity of investing in long-term environmental protection.

Another key challenge is ensuring that financing reaches the smallholder farmers and forest communities who are most in need. To be effective, regenerative finance must not only reach key stakeholders but also also take into account their health, education and other development goals, supporting projects that go beyond simply offsetting negative environmental impacts.

Although these financial structures are still in their early stages of development, they hold promise for financing the regeneration of critical ecosystems. By redirecting capital towards these types of projects, we can help to create a more sustainable future for our food systems, our water systems and our climate.

CPM