Agriculture’s pathway – how financial markets can help

Deforestation, Food Systems, Financial Risk & Reward, Shareholder Engagement

The ‘Breakthrough Agenda’ Report (2023) provides a valuable insight into the low-carbon transition pathway for the global agricultural sector. It is not a comforting read. The sector’s progress report ranks each measure as either showing minimal or modest progress. But the good news is that financial instruments, such as a deforestation-linked sovereign bond, could help deliver a faster transition.

The latest Breakthrough Agenda Report

The Breakthrough Agendai was launched by 45 world leaders at United Nations Framework Convention on Climate Change (UNFCCC) COP26 in Glasgow which committed to work together to accelerate innovation and deployment of clean technologies and sustainable practices, making them accessible and affordable. The sectors targeted are power, road transport, steel, hydrogen and agriculture sectors. Building and cement were added in 2022. The annual reports, of which this is the second, are compiled by the International Energy Agency (IEA), International Renewable Energy Agency (IRENA) and the United Nations Climate Change High Level Champions, providing an independent evidence base and expert recommendations for where stronger international collaboration is needed.

This report is part of the IEA’s support of the first global stocktake, which will be finalized in the run up to UNFCCC COP28.

The agricultural pathway

The reports notes that ‘in agriculture, emissions remain on a long-term upward trend, crop yields are not improving at the rate needed, and agricultural expansion continues to drive deforestation’. It observes that ‘agriculture emissions continue to increase to 7.3 GtCO2 in 2022. They need to fall to 5.7 GtCO2 to get on track for net zero’.

While the authors note new international commitments to investment in research and development, they list several needs including a requirement for increased development assistance, sustained and substantial policy exchanges and cooperation on standards and trade.

Top of their recommendations are sustainable agriculture solutions, especially those which could be rapidly deployed such as the use of low emission fertilisers, measures to reduce livestock methane emissions, and reductions in food loss and waste.

The progress report on the agriculture sector shows that three of the five areas examined – finance & investment, standards & certification, and trade conditions – have shown minimal progress and the remaining two modest progress. On finance and investment, hopes rest on roadmaps that are planned to be delivered at UNFCCC COP28.

Indeed, during the UN Food System Summit +2 in Rome, the UAE Presidency announced the UNFCCC COP28 Food Systems and Agriculture Agenda, which comprises both a government and a private sector streams of action.ii Planet Tracker very much supports credible roadmaps particularly for the financial markets. Please see ‘Financial Markets Roadmap for Transforming the Global Food System’ which proposes six priority actions including two of the top solutions recommended in the Breakthrough Agenda report: requiring fully traceable supply chains by 2030, halving food loss and waste before 2030, stopping deforestation before 2030, cutting agri-methane emissions by 45% before 2030, making agricultural systems regenerative before 2030 and investing in alternative proteins – see Figure 1.

Figure 1: Breakthrough Agenda Report 2023 – Agriculture Sector Progress Report

Source: IEA Breakthrough Agenda Report 2023 – Agriculture

The report reveals that agriculture emissions continued to increase to 7.3 GtCO2 in 2022, but they need to fall to 5.7 GtCO2 to get on track for net zero. Although gains and losses in global cropland are roughly equal, this small net change masks that agricultural expansion that continues to drive deforestation globally, particularly in the tropics. The commodity groups most commonly associated with deforestation were cattle meat, forestry products, oil palm, cereals and soybeans, though variation between countries and regions was large.iii The report notes that ‘this expansion needs to stop if 2030 targets are to be met’.

Deforestation and finance

In mid-2021, Planet Tracker proposed a deforestation-linked sovereign bond (DLSB). This financial instrument links coupon payments to the success in reducing deforestation, helping countries with valuable state-owned forests to fund their transition to a sustainable economy. A DLSB would align a government’s fiscal and sustainability incentives and boost the country’s sovereign health – see Figure 2.

Figure 2: The mechanisms of a Deforestation-Linked Sovereign Bond. (Source: Planet Tracker)

This financial structure has been used by Uruguay’s Ministry of Economy and Finance when it launched a USD 1.5 billion sovereign sustainability-linked bond (SSLB) in October 2022.iv The bond had two key performance indicators (KPI) – one for the reduction of gross aggregate GHG emissions [KPI -1] and the other for the maintenance of native forest [KPI-2]. This SSLB included a step-down and step-up coupon structure which we hope other sovereigns will follow – see Figure 3 for Uruguay’s native forest key indicator for the SSLB .

Figure 3: Uruguay’s SSLB step-up and step-down mechanism for the native forest key indicator

Source: Republic of Uruguay, Ministry of Economy and Finance, presentation October 2022

Radical action is required

The IEA’s Breakthrough Agenda report clearly shows that the global food system is continuing down an unsustainable pathway, generating more GhG emissions not less, and it is continuing to add to the harms to nature through actions such as deforestation.

This cannot continue if we are to meet our interlinked Paris and Montreal-Kunming climate and nature goals.

Rapid transformation is required. UNFCCC COP28 this December is being promoted as a crucial decision-making point – the food system is on the agenda, but will we see concrete actions or just more words?

i IEA (September 2023) Breakthrough Agenda (2023)

Related Content

The latest reports to your inbox

Don’t miss out! To receive Planet Tracker's reports just click below and complete the contact form.

Sign up