How to finance Scope 3 emissions reductions on farms

As the food and agriculture industry takes a closer inventory of its climate impact and companies start setting science-based targets, reducing Scope 3 emissions becomes top of mind. It’s where 80 to 90 percent of the industry’s climate footprint lies. But how do you transform today’s agricultural system to one that sequesters rather than emits carbon along with delivering other ecosystem benefits? 

Redesigning financial incentives is one part of the answer. And that work doesn’t just lie in the hands of agricultural lenders and other financial institutions. Food companies can play an essential role in breaking down the barriers that prevent farmers from adopting practices such as cover cropping, reduced tillage and conservation strips. 

To help companies get started, a working group at the industry collaborative Field to Market published a report last week. It looks at the intersection of corporate supply chains and farm finance, laying out the barriers and opportunities for financial innovation and providing examples for effective value-chain collaboration.

Understanding the barriers

Regenerative and conservation agriculture are increasingly hyped for the myriad benefits they can provide to soils, water and a farmer’s bottom line. So why are additional financial incentives necessary to scale them? Shouldn’t farmers already have plenty of reasons to level up their practices?

It’s not that easy. The report points to a web of social, administrative, educational and financial barriers that prevent regenerative agriculture from going mainstream, even if they promise bigger profits in the long run. 

“Very, very few people really understand how to implement cover crops successfully, and how to overcome the hurdles. … The risk up front and the cost up front and the lack of know-how is a massive barrier to entry. The financial hurdles can all be overcome when you know how to do it, when you have the right help and you understand the principles and the tactics on how to be successful,” said Mitchell Hora, a seventh-generation farmer from Iowa who provided input to the report. 

Even when farmers are willing to take the risk and dive into the technical details, the experimentation can be uncomfortable. Andy Hineman, a fifth-generation farmer from Kansas who was also consulted for the report, said: “It’s not always a welcome practice as far as the neighbors are concerned; it’s a little different, it’s a little bit out there. Sometimes if you try some of those things like cover crops, it’s not viewed as the typical crop rotation or something necessarily acceptable.”

Understanding these barriers is vital even if a company can’t influence its suppliers’ neighbors. Targeted financial products can nudge farmers in the right direction, especially regarding risk-sharing and upfront investments. 

Options abound

Where do you start when considering financial incentives for farmers? Many options exist, and this topic gets technical quickly. The authors did a good job here. They laid out five essential tools, illustrating their mechanisms, value for farmers and supply chain impact. Here’s a preview of what you’ll find in the report: 

1. Blended finance combines public, corporate and philanthropic funds to scale up investments.
   • Details: Public and philanthropic capital can be used as so-called “catalytic capital” that may bear the first losses within a fund, increasing private sector investment in regenerative agriculture
   • Barriers addressed: Crop yield risk, lack of return on investment, lack of operational and agronomic knowledge, lack of profitability
   • Examples: Better Cotton Growth & Innovation Fund, Resilient Agriculture Accelerator Fund
2. Sustainable finance creates financial products or services to encourage the development of new green activities or minimize the environmental impact of existing activities.
   • Details: Includes loans, bonds, debt mechanisms and investments that offer farmers and companies favorable financing terms for sustainable projects and practices 
   • Barriers addressed: Lack of sufficient capital, lack of favorable financing rates, upfront costs, flexibility of capital, lack of return on investment, lack of secure income
   • Examples: Walmart’s Project Gigaton Supply Chain Finance Program, Mad Agriculture’s Perennial Fund
3. Transition risk-sharing offers mechanisms that back farm risks associated with adopting new conservation practices, aiding in the initial transition period. 
   • Details: Includes sustainability-linked crop warranties, crop insurance endorsements and subsidies and sustainable reference pricing
   • Barriers addressed: Crop yield risk, price volatility, market risk, lack of return on investment 
   • Example: A private crop insurance subsidy piloted by Precision Conservation Management and the Illinois Corn Growers Association with the support of PepsiCo
4. Pay for performance programs incentivize farmers for the environmental outcomes they provide — instead of paying a farmer 75 percent of the cost of implementing a filter strip, payments would derive from the pounds of nitrogen and phosphorus reduced in farm runoff. 
   • Details: This alternative approach lets farmers decide the best method to deliver the environmental outcome at the lowest cost
   • Barriers addressed: Upfront costs, lack of return on investment, lack of secure income
   • Examples: Soil and Water Outcomes Fund, municipal ag-watershed partnerships
5. Land tenure and leasing incentives facilitate moving from informal verbal to written farmland leases, incentivizing conservation by setting expectations on using certain practices or management systems and giving farmers longer investment time horizons.
   • Details: Farm operators and landowners can also define how costs, risks, and benefits will be shared in the transition or use of regenerative practices
   • Barriers addressed: Lack of secure access to land, socio-cultural challenges
   • Example: Tillable’s Sustainable Flex Lease

Finding the right starting point

Having too many options can be overwhelming. Maggie Monast, a lead author of the report, urges companies interested in exploring these financial tools to scale regenerative agriculture to think about two key issues.

First, companies should get clarity on the problem they want to solve. What change do they want to see on farms? What financial barriers stand in the way? Answering these two questions will provide guidance on which tools to use. The resulting focus should ideally align with a company’s interests, strengths and existing relationships. 

Second, companies should assess potential collaboration partners within the established financial landscape — such as agricultural lenders and crop insurance providers. This can leverage existing infrastructure and trust while bringing broader change to the industry, not just one supply chain. 

And finally, it’s important to remember that these financial mechanisms are just one tool to reduce Scope 3 emissions. They should work together with other approaches companies are already using or developing, ranging from technical assistance to purchase commitments and preferential marketing and procurement contracts.