Harnessing Insurance To De-risk Agri-food Investment And Grow Sustainable Food Systems

Food production is not for the faint-hearted.  Multiple risks to farming – especially for small and medium farmers – can include climate change, social instability and supply-chain disruption.  One small but powerful intervention can make all the difference.  

Food security is a human right.  But the combination of disruptions caused by a two-year pandemic, climate change, economic and social instability, coupled with the global supply chain interruption due to Russia’s invasion of the Ukraine, has had one major significant impact – a sharp increase in food shortages and rising food prices around the world.  

The food crisis was discussed in detail during a recent side event on “Finance for Agrifood Systems Transformation in the context of the Addis Ababa Action Agenda” in the margins of the 2022 ECOSOC Forum on Financing for Development.

Kicking off the event, the Deputy Director of the Inclusive Rural Transformation and Gender Equality Division (ESP) at the Food and Agriculture Organization of the United Nations (FAO), Lauren Phillips highlighted the importance of an about-turn. “Transforming agrifood systems would require a fundamental change in the way agriculture is financed,” she said.

Dr Máximo Torero Cullen, Chief Economist of the FAO, explained that food insecurity is mainly among the rural poor – especially women, young people and other vulnerable groups. “But farmers who serve the rural poor are also the most vulnerable to climate change and social instability.  Three quarters of small farmers are under-banked and under-financed – only 1.7 percent of the global climate finance goes to smallholder farmers.  They lack collateral and financial security.’’

“Financing of agrifood systems should be directed towards business models, which are sustainable, inclusive, resilient and that promote healthy diets,” he added. “Linking to green and sustainable finance solutions can be a powerfully transformation tool, particularly to develop multisector, locally anchored strategies for more inclusive, sustainable outcomes.” 

Dr Torero Cullen went on to say: “Transforming food systems requires mobilising additional financial investments in agrifood systems;  creating an enabling environment for unlocking finance and investment; re-orienting government expenditures for agriculture and food systems towards public goods and services and  promoting Green and Sustainable inclusive finance”

According to the joint FAO-UNDP-UNEP report, subsidies in the form of producer support account for almost USD 540 billion a year, or 15 percent of total agricultural production value. Under
a continuation of current trends, this support could reach almost USD 1.8 trillion in 2030.

Addressing imbalances

Many agricultural practices will require significant investment to change the way they operate, and a discrepancy exists between the production of food, its distribution and availability to consumers. In Africa, especially, there is this imbalance, said Jennifer Blanke, non-executive Director at African Risk Capacity Insurance Company Limited (ARC), speaking at the side event.

“The continent produces the raw product, exports it, and then buys back the processed result.  This is akin to exporting good jobs and increases the cost of food in Africa, as well as food insecurity.  Changing this will lead to significant job creation and economic benefit.  However, without significant investment in the agri-food sector, this will not change.” she said.

Added to this is the issue that most farming practices are unsustainable, said Marina Piccioni, Head of Sovereign, Multilateral Financing and Blending Partnerships of Cassa Depositi e Prestiti (CDP) Investment Banking.  These are leading to “environmental destruction, loss of biodiversity, and water shortages – all contributing to climate change.  It is estimated that around USD 300 to USD 400 billion is urgently needed to assist agri-food producers to reduce their carbon footprint.  That might sound like a lot of money, but it is only 1 percent of the global GDP.”

With a view to resolving this, highlighted Geeta Sethi, Advisor and Global Lead for Food Systems at the World Bank, one of the first things that must be done is to identify a definable goal for reducing the impacts on climate change of the food-producing agricultural sector.  “For the energy sector, it is clear:  reduce emissions.  But in the food sector, it is not so clear.  So we need to change the way we fund the food sector to de-carbonise it, we need to introduce funding that is attached to clear carbon-reduction goals.  There needs to be short-term funding as well as medium-term funding.” 

Sethi added: “The small and medium agricultural undertakings seem quite contradictory. They are high risk, yet low returns.  They are concentrated yet dispersed.  They are local, yet global.  Such a specialised field of activity requires specialised solutions.”

Mitigating risk

The one factor that everyone agrees on, is that small and medium size farming operations can be risky undertakings.  But ‘de-risking’ the agricultural sector, especially in under-developed economies such as in Africa, is difficult.  

“Even more important than the real risk,” said Blanke, “is the perceived risk.  Investors are wary of the food sector, especially now with the visible effects of climate change that are manifesting in droughts and floods.  Enormous amounts of investment are needed, but the traditional impediments to funding – such as default risks and political risks – are increasingly compounded by growing environmental risks.”  

A simple yet effective mechanism that has shown to work in several case studies, is insurance.

“Climate insurance can be a difficult sell in places like Africa.” said Blanke.  “Individual farmers with limited resources are reluctant to take insurance because of the perceived cost, and unclear benefits.  But if the insurance is bundled with other services, and if it is subsidised, the take-up is larger.  In advanced economies, insurance premiums tend to be highly subsidised – sometimes by up to 60%.  This increases the attractiveness of investment from the private sector, because it immediately reduces risk.”  

“The irony is that de-risking the agricultural sector in Africa is actually a massive economic opportunity,” she continues.  “And insurance is a good mechanism to encourage more sustainable behaviours: if a farmer adopts climate-appropriate farming methods, if governments create sustainable infrastructure – that can reduce the cost of premiums. So insurance is not a get-out-of-jail-free card for unsustainable policies, there is a built-in mechanism to encourage climate awareness and climate-change mitigation measures.”  

“It is a simple and effective intervention that can have a massive impact,” said Blanke.  “But education is required because the culture of insurance in Africa is lacking. But there are a number of different insurance products available – one can combine sovereign insurance with private-sector insurance, or simply offer subsidies to farmers for individual insurance.”  

The main benefit with insurance products that combine sovereign policies with private-sector and individual policies, is that extreme weather events often cross-national borders, which would require multi-country policies. 

“When disaster occurs, insurance can pay out within days, instead of the months sometimes required for the provision of emergency aid.  The effectiveness of the payments is also more reliable as the funding goes directly to the claimants and is not dispersed through aid agencies or through middle-men, which is a good unto itself.” Blanke concluded.

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