Impact investing has emerged as a powerful tool for addressing global challenges, particularly in sectors that have been historically underinvested. Agriculture, a critical sector for food security, poverty reduction, and sustainable development, faces a significant investment gap, especially in emerging markets. As climate change intensifies, the food system will continue to be among the sectors that is the most vulnerable. Investments in the sector is required to help farmers and small businesses purchase the goods and services they need to help them adapt to changing weather patterns and reduce emissions.
This blog post explores the key takeaways from an in-person event, hosted by MEDA and IFAD (more information at the end of this blog), that shed light on opportunities for investing in agriculture in emerging markets that provides both a financial return as well as significant impact in terms of poverty, food security and farmer well-being. Two complementary panels explored investments in climate-smart agriculture and investments in financial technology to support the sector. Issues discussed included the importance of long-term transformation in agriculture, blended finance, creativity and partnerships, technological advancements that have offered significant investment and growth opportunities for agriculture, and the need for holistic risk assessments.
Closing the Investment Gap in Agriculture
There is a staggering investment gap in agriculture, particularly in emerging markets. This gap is primarily driven by the perceived risks associated with agricultural investments. Official development assistance (ODA) for the agriculture sector is flat at only 5-6% of total ODA. However, investing in long-term transformation in agriculture is crucial not only for achieving food security but also for reducing poverty and ensuring sustainable agricultural practices in alignment with the United Nations Sustainable Development Goals (SDGs). The supply of finance to the sector is far below the demand, particularly in many emerging markets. Agricultural SMEs face a $65 billion annual financing gap across sub-Saharan Africa, which equates to 3 out of 4 agriculture-focused SMEs that lack access to finance (Aceli Agriculture).
However, investments in agriculture are showing impact on the ground in addition to returns. Recent research by the GIIN looking at the results of impact investing in agriculture has found that every 10% increase in investee revenues leads to a 5% increase in farmer income for most investments and an 8% increase in farmer income in cases where the investor engages heavily with the investee. The 10% increase in investee revenue is also associated with a 2% increase in the number of farmers served.
There are numerous opportunities to invest in climate-smart agriculture. These can include investments in new seed technologies, investments in insurance and microinsurance opportunities, solar and technology-enabled powered drip irrigation systems to address variable rainfall, biocontrol products and precision applicators to minimize the inputs used, solar-powered cold storage, processing and bio-digestors.
One investment opportunity, particularly in emerging markets, is in agricultural and financial technology start-ups. Digital technologies can help improve how resources and capital are used in the field, while off-farm they can help lower the costs associated with accessing markets and services. Digitizing agricultural procurement also enables a transition from cash to digital payments and from paper to digital records, creating a wealth of farm and farmer data that can be used to create economic identities for farmers. Economic identities can inform credit risk assessments, reduce the costs and support financial inclusion, opening access to climate-related services such as insurance. According to McKinsey, between 2020 and 2021, the number of tech start-ups in Africa tripled to around 5,200 companies.
Harnessing the Power of Blended Finance
Blended finance, which combines public or philanthropic capital with private partners, emerged as a key approach to supporting sustainable development projects in emerging markets. Impact investors play a crucial role in this structural landscape, acting as key ingredients that bring together various stakeholders to create a pipeline for investments. By embracing blended finance, impact investors can bridge the investment gap and catalyze transformative change in agriculture.
Convergence recently noted that annual global climate finance stands at about $630 billion, compared to recent estimates of $3-$6 trillion required. They have also identified a growing interest amongst several prominent private investor groups and that incorporating climate outcomes into blended finance transactions will draw-in private sector investors.
Driving Systems-Level Change through Creativity and Partnerships
Creativity and partnerships are important factors in effecting systems-level change through impact investing. Traditional financial models may not be suitable for driving the desired impact, necessitating innovative approaches that incentivize stakeholders across the agricultural value chain. A creative approach to structuring and timing may be necessary. By fostering partnerships with local actors and stakeholders, impact investors can identify and address specific needs, thereby paving the way for sustainable and inclusive growth in agriculture.
Leveraging Technology and Connectivity
Technology, connectivity, and digital marketplaces present significant opportunities for impact investing as they change the economics of connecting producers to markets on a global scale. Digital tools and platforms enable independent producers and suppliers to access the global economy, fostering transparency, efficiency, and increased market opportunities. The advent of fintech solutions further facilitates access to capital and streamlined transactions, as demonstrated by success stories such as Mpesa in Kenya. There is significant and growing opportunity for profitable and impactful investments in agricultural technology start-ups.
The Importance of Holistic Risk Assessment
In many cases, risk assessment in agriculture remains limited and isolated within specific asset classes or silos, failing to consider the broader systems perspective. It’s necessary to understand and address risks in a holistic manner. By embracing data-driven approaches and utilizing technology, impact investors can develop climate scores and risk management tools that account for climate change impacts. This comprehensive risk assessment enables more effective decision-making and ultimately leads to better outcomes.
There is immense potential for impact investing to alleviate poverty and drive sustainable change in agriculture. By addressing the investment gap, leveraging blended finance, fostering creativity and partnerships, embracing technology, and adopting holistic risk assessment approaches, impact investors can play a pivotal role in transforming agrifood systems. Through their efforts, impact investors contribute to achieving the SDGs, ensuring food security, reducing poverty, and promoting sustainable agricultural practices. As we navigate the challenges of our time, impact investing in agriculture emerges as a powerful force for positive change, benefiting both local communities and global society at large.