The objective of this report, supported by the International Fund for Agricultural Development (IFAD), is twofold.
First, we propose a theoretical framework and methodology that can be used to measure and categorize climate finance flows to small-scale agriculture in developing countries. Second, we provide a snapshot of the current state of climate finance to small-scale agriculture based on the latest data available representing international financial commitments in 2017 and 2018.
Small-scale farmers operating on less than 5 hectares of land represent around 95% of world’s farms and a cumulated area equivalent to 20% of the global farmland. In Asia and Sub-Saharan Africa, small-scale farmers are estimated to provide up to 80% of the food produced. Most of the world’s small-scale farmers live in these regions, where the agricultural sector contributes around 15% of the GDP and provides over 40% of all the jobs.
Climate vulnerability. Small-scale farmers in developing countries are disproportionately experiencing the effects of climate change and variability and are at risk of external shocks such as the COVID-19 pandemic.
Small-scale agriculture actors encounter a number of challenges in accessing the funds they need. Climate finance is subject to barriers that have traditionally affected agricultural development finance in addition to barriers that are typical to climate finance. They include technical, political, and commercial barriers (detailed in Section 1.2 and in Annex I).
Total financial needs of small-scale farmers and agri-enterprises are in the order of hundreds of billions annually. However, the exact level of funding needed for small-scale agriculture climate finance is hard to determine. Nevertheless, estimates of the general needs in this sector give an indication of the magnitude of the climate investments required. Third party research places the agricultural and household-related financial needs of small-scale farmers at approximately USD 240 billion per year globally. Agri-enterprises require additional financing to grow their businesses and to invest in technology or transport to reach remote farmers. In Sub-Saharan Africa alone those needs amount to USD 132 billion per year.
Climate finance for agriculture. Despite the scale of these needs, the cumulative climate finance tracked for agriculture, forestry, and land use was only USD 20 billion per year in 2017/2018, which represents 3% of the total tracked global climate finance for the period.
Climate finance for small-scale agriculture reached USD 10 billion per year in 2017/2018. Out of the total tracked climate finance of USD 20 billion for agriculture, forestry, and land use, only USD 8.1 billion targets small-scale farmers, agri-entrepreneurs and value chain actors serving them. This is equivalent to approximately 40% of the total climate funds committed to the agriculture, forestry, and land use sectors. An additional USD 1.72 billion of climate finance benefits small-scale agriculture actors through renewable energy generation, sustainable transport in rural areas and water management. The total climate finance targeting small-scale agriculture is therefore close to USD 10 billion. It represents 1.7% of the total climate finance tracked and it covers only a small fraction of the general needs of small-scale agriculture actors.
Sources. Largely represented by international finance flows, climate finance for small-scale agriculture is sourced 95% from the public sector, including governmental donors, multilateral development finance institutions and bilateral development financial institutions each contributing 39%, 32% and 16% respectively. The large proportion of funding coming from public sources may be explained by the lack of data on investments from the private sector, as well as the scarcity of investment by the private sector due to a lack of attractive and robust pipelines of investable projects in small-scale agriculture.
Instruments. Grants are the predominant financial instrument used for 50% of finance committed, followed by concessional debt (33%), and non-concessional debt (16%). Such a prevalence of grants is to be expected as financial access in the agricultural sector in developing countries is still limited compared to other sectors. Further, small-scale producers encounter major barriers to access loans due to lack of collaterals and limited land tenure rights.
Climate use. Nearly half (49%) of the tracked small-scale agriculture climate finance was for climate adaptation projects, while projects tackling both mitigation and adaptation objectives received 29% of the total. Mitigation only projects were targeted by 21% of the finance. The high percentage directed towards adaptation is aligned with the increased vulnerability of small-scale agricultural actors to climate change. In comparison, 93% of the total climate finance is targeting mitigation activities.
Type of activities. Low GHG emission and climate resilient infrastructure received the largest share of funds (36%), followed by investments to improve agricultural production at farm level (14%), and improvement of livelihoods of rural communities in general (also 14%). The lack of and poor state of transport infrastructure is indeed a major barrier for finance to agriculture, thus justifying a large share of investments. Technical assistance to governments and capacity building for target groups received similar shares, around 10% of the total each. These types of activities have the potential to tackle many of the technical and political barriers identified, therefore funding towards them needs to be raised in order to achieve transformational impacts.
Recipients and beneficiaries. 41% of funds were targeting rural communities in general. This seems to be aligned with the fact that many projects might adopt a holistic approach to rural development whereby they target general wellbeing of rural communities. Finance benefitting individual small-scale producers and cooperatives constitute 31% of the total for small-scale agriculture. It indicates the strong focus of climate finance on agricultural production at farm level, which should address the knowledge barriers limiting the adoption by farmers of climate-smart agricultural practices. Only 10% of the funds were found to target value chain actors and formal financial institutions. As many of the barriers identified are of commercial nature, climate finance is insufficiently benefitting businesses and financial institutions which are essential for small-scale producers to improve yields and to access markets and finance.
Geographic destination. Sub-Saharan Africa (36%), East Asia and Pacific (20%), and South Asia (16%) were the largest recipients of climate finance for small-scale agriculture. It is worth noting these are also the regions where most smallholders are located. Approximately USD 1.2 billion was committed to transregional programs, equivalent to 12% of the total dedicated to small-scale agriculture.
Climate finance to small-scale agriculture is disproportionately low when compared with the importance of agriculture for developing countries’ GDP combined with the prevalence of small-scale producers in Sub-Saharan Africa and South and South East Asia.
Climate finance covers only a small fraction of the total needs of small-scale farmers and agri-businesses. Therefore, finance directed to small-scale agriculture has a major opportunity to mainstream climate, and particularly to bridge the immediate need for increased climate resilience of small-scale producers and their communities.
Public resources have the potential to de-risk investment in agricultural development and, therefore, to catalyze funding from the private sector.
When increasing climate finance for small-scale agriculture, one must take into account current needs. Those can only be estimated if data collection is improved to cover the major information gaps regarding financial flows from public domestic sources and from international and domestic private actors.