Shifting finance towards sustainable land use: redirecting financial markets
Shifting finance towards sustainable land use: redirecting financial markets
The land sector is a huge emitter of greenhouse gases (GHG). Globally, agriculture, forestry, and other land use (AFOLU) drive about one-quarter of annual GHG emissions. This includes emissions from agricultural production – such as fertilizer use and manure management – as well as the GHGs that are emitted when forests are cut down or become degraded.
At the same time, the land sector is an indispensable part of the climate solution. A move away from business-as-usual land use can provide up to 15 GtCO2e annually in emission reductions and removals by 2050.[i] These emission reductions and removals would stem from a range of activities, including reducing emissions from agricultural production, reducing deforestation, and restoring forests.
But so far tapping into this immense mitigation potential has been challenging. Governments provide incentives to the agricultural sector – and have financial regulations in place to oversee and steer private finance – that overwhelmingly encourage business-as-usual approaches to land use, such as industrial farming. By reorienting and recalibrating these financial incentives and regulations, governments can enable the land sector, and in particular, agriculture, to deliver on this vital component of the climate solution.
The time for recalibrating financial incentives in the land sector is now. Over recent years, private sector interest in the land sector has increased exponentially due to higher-than-expected returns on investment. Yet far too often private finance flowing to the land sector fails to consider the climate impact of the investments made.
Every year billions of dollars are pumped into forest-risk commodities in tropical countries without any regard for whether this money could be driving deforestation. Between 2016–20, around USD 160 billion was invested by financial system actors – mainly banks and fund management firms – in the production of commodities in deforestation hotspots in Southeast Asia, West Africa, and Brazil.[ii]
Reorienting these enormous private finance flows towards climate-compatible activities is vital to fully unlock the mitigation potential of the land sector.
A new report analyzes how current financial incentives are influencing GHG emissions in the land sector. The study provides tangible and actionable recommendations to governments on how to recalibrate incentives to promote low-carbon land use.
Existing voluntary initiatives have not produced convincing results. While voluntary efforts have been around for years, climate-related risks are still weakly integrated into the risk management controls of financial actors. Reforming existing incentive structures that promote grey and brown investments in the land sector will require more than just voluntary effort from capital owners, fund managers, and food and agriculture companies.
There are three key opportunities for governments to recalibrate financial regulations. Together, these can green financial systems and catalyze a powerful transition to low-carbon land use. Binding financial regulations, including regulations on greater and more harmonized disclosure and transparency of climate- and nature-related risks, hold significant potential for aligning private finance with climate change mitigation. Well-designed financial regulations can provide incentives to better manage these risks in the land sector and promote the deployment of much-needed finance to mitigation activities in the sector. Actively promoting sustainable investments and lending is also essential.
- Move from voluntary to mandatory disclosure of climate-related risks to increase transparency and allow investors to revisit capital allocation decisions.
Mandatory disclosure on climate and forests is an essential first step for redirecting financial flows towards investments in low-carbon land use and the protection of natural capital. This should focus on increasing the overall transparency, comparability and quality of disclosures, by harmonizing them within a common disclosure framework. More specifically, governments should consider providing detailed metrics to companies for reporting on forest, soil and biodiversity impacts, building on existing voluntary efforts.
Using, for instance, the reporting framework provided by the Taskforce on Climate-related Financial Disclosures (TCFD) can provide a good starting point to ensure reporting consistency for climate-related risks across different jurisdictions. The TCFD has been gaining widespread support from governments, with the most recent G7 summit expressing clear support for “moving towards mandatory climate-related financial disclosures that provide consistent and decision-useful information for market participants” and recommended basing such regulations on standards developed by TCFD.[iii]
- Enhance risk management frameworks to better identify, manage, monitor, and mitigate climate risks, including deforestation risks from soft commodity supply chains.
Financial system actors typically have a risk management framework in place to understand, manage and report on the risks to which they are exposed. In particular, in the food and agricultural sectors, risks related to climate and nature, as well as rapidly changing consumer preferences (moving away from animal products and into alternative proteins), can represent a considerable risk to business strategies and performance in the medium to long-term.
Through legislation or supervisory guidance, governments can require more comprehensive risk management frameworks. Effectively integrating climate-related risks into such frameworks requires scenario analyses and climate-related stress tests. In addition, governments should impose a legal duty of care and mandatory due diligence to address the risk of deforestation within global commodity supply chains.
- Implement financial measures and instruments that actively promote sustainable investments and lending to climate-aligned land sector enterprises.
Currently, few jurisdictions have supervisory guidance in place that requires banks to increase credit availability to green and low-carbon sectors. Yet, promoting the deployment of sustainable finance can be pivotal for unlocking the land sector’s mitigation potential. Governments can do so by introducing a taxonomy to define the different categories of green and sustainable finance, including for the land sector. In addition, governments should develop green lending guidance for the agricultural sector and increase lending limits for farmers and companies whose practices are aligned with climate mitigation.
About the project
A new, collaborative set of publications seeks to support governments in their efforts to reorient finance flowing to the land sector. Developed together with the United Nations Sustainable Development Solutions Network and ODI, the publications explore the impact of existing finance flows to the land sector, identify the most promising policy options available to governments to make these flows compatible with the Paris Agreement, and provide a reporting framework for State Parties to consider and adopt ahead of the 2023 Global Stocktake.
The full set of publications are available on the Food, Environment, Land and Development Action Tracker here. For more details on redirecting financial markets, please refer to Chapter 5 of the main report ‘Shifting finance towards sustainable land use: Aligning public incentives with the goals of the Paris Agreement’ available here.
The work is kindly supported by Norway’s International Climate and Forest Initiative (NICFI), implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, on behalf of the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU).
[i] Roe, S., Streck, C., Obersteiner, M., Frank, S., Griscom, B., Drouet, L., et al. (2019). Contribution of the land sector to a 1.5 °C world. Nature Climate Change, 9(11), 817–828. Retrieved from https://doi.org/10.1038/s41558-019-0591-9.
[ii] See Is your money destroying rainforests and violating rights? http://forestsandfinance.org/wp-content/ uploads/2020/08/FF_Briefing_Sep_2020-EN.pdf; Warmerdam, W. (2020).Retrieved March 18, 2021, from https://www.ran.org/wp-content/ uploads/2020/09/FF_Briefing_2020-EN.pdf
[iii] See Communique from 5 June 2021 available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploa...