Financing food systems transformation

What is driving the need for food systems transformation?

A series of global crises combined with socio-economic determinants, including an aging population and rapid urbanization, have amplified the need for a global food system transformation. Food systems combine everything it takes to produce and consume food on a day-to-day basis. Its transformation aims to “generate a future where all people have access to healthy diets produced in sustainable and resilient ways that restore nature and deliver equitable livelihoods.”

Climate change is the predominant factor undermining the resilience of our global food systems. Climate shifts and resulting natural disasters change soil fertility and crop yield, which threaten food security in many parts of the world, most acutely impacting vulnerable populations in LICs and LMICs. In 2021, it is estimated that between 702 and 828 million people faced hunger. Climate change also poses a threat to diet quality. LMICs often face the double burden of malnutrition with high rates of both undernutrition and obesity. An unbalanced diet is a major cause of mortality and morbidity.

The COVID-19 pandemic has further exacerbated food shortages and made interventions even more complex. WHO has projected that in 2020 alone, an additional 83-132 million people were added into the undernourished bracket as a result of the economic recession triggered by COVID-19 measures.

Wars, such as Russia’s invasion of Ukraine, result in food supply shortages causing food prices to surge, exposing the most vulnerable populations globally. Sudden price fluctuations and similar economic shocks particularly affect LICs, as they spend more than 40% of their household income on food, with countries most greatly impacted, like South Sudan, spending more than 85%.

In addition to building resilience against external forces, food systems are facing the need for internal transitions. The latest research shows that food systems accounted for roughly one-third (31%) of global greenhouse gas emissions in 2019. Mass monocultural food production approaches use large amounts of fertilizers, often cause deforestation, and require mass livestock production. Beyond elevated greenhouse gas emissions, global food systems significantly contribute to the loss of biodiversity, water pollution, and soil degradation.

Why is financing food system transformation challenging?

While the 2021 Food Systems Summit set the stage for global food system transformation to achieve the SDG 2 – “Zero hunger” by 2030, implementation progress is reportedly slow, as financing transformation presents a series of unique challenges.

Ceres2030 research suggests an additional US$33 billion annually are needed to eradicate hunger, double smallholder farmers’ income, and protect the climate, with 42% of this funding needing to come from donors. Despite the urgent need for investment, donor funding levels for agricultural adaptation remain low. Adaptation funding to LICs and LMICs where the need is most acute accounts for less than half of public financing from OECD donors. The current levels of investment in agriculture and food systems transformation are not sufficient to meet the demands of a growing population, ensure food security, and tackle the challenges of climate change.

With a range of processes and stakeholders involved from the local to global level, each with different views on how this should happen, it is challenging to achieve alignment and coherence in funding priorities and disbursement mechanisms. This often results in funding approval and disbursement delays. Additionally, the lack of systems for aligning existing and new investments to country needs can result in overlapping investments and missed opportunities in core funding areas.

Food system transformation requires significant investments, but can be seen as higher risk, resulting in limited investments from donors. As the projects may not be credit-worthy, and the risk assessment for investments is not always clear, the lack of information and a risk averse impulse often deter investors from supporting projects that could deliver significant benefits that strengthen food systems.

What could be done to address these challenges?

While slow, steps are being taken to overcome the challenges of financing food system transformation. The Bridgetown Initiative raised by Barbadian Prime Minister Mia Mottley at COP27 calls for an overhaul of the development finance system, especially through MDB reform, to better support those nations most acutely impacted by the climate crises. Such reforms could unlock much-needed capital for food systems transformation in several ways:

Addressing insufficient funding through increased MDB lending and crowding in private capital

MDBs can play a crucial role in providing financing, technical assistance, and policy advice to LICs and LMICs. One of the Bridgetown Initiative’s asks is to expand MDB balance sheets to channel more funding to develop sustainable agriculture and food systems projects. Through a mix of relaxing the capital adequacy requirement (i.e., allowing MDBs to lend more without increasing shareholder capital) and adopting financial innovations, MDBs could increase their concessional lending to LICs and LMICs who generally cannot access loans at market terms. This also prevents countries from accumulating debt when faced with multiple overlapping crises on top of the pressing need to adapt their food systems to climate change.

The private sector and DFIs can play a more prominent role in financing food systems transformation. As part of the Bridgetown Initiative, it is projected that the Global Climate Mitigation Trust could leverage US$3 to 4 trillion in private funding, using US$500 billion in SDRs as collateral, to support countries with mitigation measures and reconstruction efforts after climate disasters. Increasing private sector funding can help bridge the financing gap, but this requires clear risk assessments and adequate incentives for private investors to invest in resilient agriculture and food systems. Enhanced transparency through tracking of climate adaptation funding and agricultural data can help investors understand LIC and LMIC markets, assess risks, and, in turn, increase their likelihood to invest.

Better coordinating and aligning between funders and recipients

A larger supply of funding for food system transformation is necessary, but quantity does not always equate to quality. Better coordination is critical to ensure that funding is directed to the most impactful and efficient projects. More effective alignment of investments, project assessment criteria, and disbursement mechanisms help to best channel this potential increase in supply. Closer local-level engagement is also important to evaluate unique needs and should be a prerequisite to designing, strengthening, and adapting food systems in recipient countries.

ODI underlines four key coordination mechanisms that could improve funding quality and increase uptake of lending to countries:

1. Better alignment between MDBs’ funding interests and national priorities;
2. Reduced complexity and more agile lending processes and requirements;
3. Technical advice and capacity building that match local needs; and
4. Greater impact demonstration in recipient countries, rather than the mere focus on shareholder accountability.

Trade and cooperative building

The formation of cooperatives can enable farmers to pool resources, reduce transaction costs and perceived risks, and more easily access financing from banks and other financial institutions. These intermediaries can also support farmers with adapting their farming practices, accessing supply chains, and strengthening their negotiation power.

What are moments to advance financing food systems?

While overall progress towards financing global food systems is slow and does not match the scale of ongoing challenges, strong pressure from advocates has helped to fuel ongoing discussions. However, if actions continue at this pace, advocates fear transformation may not be fast enough to realize SDG 2 – “Zero Hunger.” The current momentum generated from discussions around MDB reform should be leveraged by advocates to push for the importance of global food systems transformation.

Looking ahead, advocates should look out for important upcoming events:

• June Intersessional-Bonn Climate Change Conference has a dedicated session to follow up on the Sharm el-Sheikh work focusing on the implementation of climate action on agriculture and food security. It will be interesting to see what has been done since COP27 in November.
• Summit for a New Global Financial Pact will be held in June 2023 and focuses on MDB reform, innovative financing and internal taxes, and SDRs, among other topics. With Barbados being part of the steering committee, advocates should keep an eye out for further developments on the Bridgetown Initiative.
• NYC Climate Week, where a core theme covers the question “What does deep, systemic change for climate action look and feel like? What are the next frontiers – and opportunities?” A question that helps changemakers to frame the future of sustainable food system transformation.
• Regional Climate Weeks will be key to build momentum for COP28 and conclude on the first Global Stocktake, designed to highlight the gaps for fulfilling the Paris Agreement’s key goals, including meeting SDG 2 – “Zero hunger.”