Finance to facilitate food systems transformation

Are the food systems that nourish us also contributing to climate change, natural resource degradation and malnutrition? How can we leverage partnerships to leverage action on food system transformation and climate action? What is the role of donors and international financial institutions in catalyzing change?

The Hesat2030 initiative, a collaborative effort involving the Food and Agriculture Organization of the United Nations (FAO), the Shamba Centre for Food & Climate and the University of Notre Dame, aims to investigate the role of financing to facilitate agrifood systems transformation.

David Laborde, Director of the Agrifood Economics and Policy Division (ESA) at FAO and one of the three co-founders and directors of Hesat2030, presented at a COP28 side event on Monday, 4 December 2023, the research for the FAO report “The State of Food and Agriculture 2023” examining the true cost of food for sustainable agrifood systems. According to the report, the ‘hidden costs’ to our health, environment, and society have reached at least USD 10 trillion per year, representing 10% of global GDP.

“In the last few years, people have realized planetary boundaries have been put under pressure and, in many cases, crossed. While food is central to our life, it also has significant impact on the environment and health,” he said.

Addressing these negative impacts is challenging, because people, businesses, governments and other stakeholders lack a complete picture of how their activities affect economic, social and environmental sustainability when they make decisions on a day-to-day basis. In hopes that assigning a value to the hidden costs could help to quantify the impact, the report used true cost accounting (TCA) to assess the situation in 154 countries.

The biggest cost burden was driven by unhealthy diets, accounting for more than 70% of total costs. But this was not only due to undernourishment and its related social costs from poverty – much of it was actually due to obesity and non-communicable diseases, which cause productivity losses. The combination of overnutrition (obesity) and undernutrition (stunting) results in “a double burden of malnutrition,” Laborde said.

The report also found that one-fifth of the total costs impact the environment, from greenhouse gas and nitrogen emissions, land-use change and water use. And the hidden cost of food places an outsized burden on low-income countries relative to their national economies. While the global hidden costs are quantified as being equivalent to 10% of GDP, these costs represent an average of 27% of national GDP in low-income countries.

Focusing on partnerships

Food systems transformation and climate imperatives, far from being competing priorities for government action and funding, are inextricably linked and equally critical for a sustainable future. An emerging narrative highlighting this complementarity is essential to optimizing the use of resources and identifying synergies. Policy interventions are needed that can eliminate hunger, improve nutrition support smallholder farmers while also ensuring climate resilience.

To better understand the areas for common action between climate and agriculture, the Zero Hunger Coalition, a project of Hesat2030, has co-hosted a side event entitled “A Prioritization of Policy and Programmatic Options: What are the actionable points of synergy between Agrifood Systems Transformation, Nutrition, Poverty Reduction and Climate Action?” with the participation of David Laborde, ESA Director at FAO. The event showcased the complementarity between climate action and food system transformation by identifying areas for synergies and resource optimization.

Do international financial institutions facilitate agrifood systems transformation?

International financial institutions (IFIs) play a pivotal role in shaping global development by providing billions of dollars in loans and grants to borrowing countries for large-to-medium scale projects in the agrifood sector. But are they helping to bring about the more holistic food systems transformation required to ensure a more sustainable, food secure future?

Using large language models and other AI tools, a team led by data scientist Jaron Porciello from the University of Notre Dame and Havos. Ai and co-authors from FAO and Cornell University analyzed the agrifood systems outcomes reported by six major agencies—World Bank, African Development Bank, Asian Development Bank, IFAD, Inter-American Development Bank, and Global Food Security and Agriculture Program (GASFP).

IFIs provide financial assistance and policy advice to borrowing countries in the form of grants, loans, and technical assistance, and their project design documents describe how development finance is intended to be implemented by a borrowing country. This analysis included nearly 1,000 board-approved project design documents from 2015–2022, and focused on outcomes, an important feature to explore as they serve as a barometer for any project.

Despite estimates from the World Bank that an additional USD 300–400 billion of investment per year is needed to transform agrifood systems, the analysis highlights that many of the aims of agrifood systems transformation are not being met. Among the team’s findings, there was a startling lack of emphasis on environmental and climate change outcomes, as well as little focus on women’s empowerment, inclusivity, and agency. Fewer than 20% of all projects include these as specific outcomes in their projects.

While there is very little change year-to-year, there was an exception in 2021 and 2022, where an increase in food security and nutrition outcomes – and a decrease of economic growth outcomes – occurred. Notably, there was a nearly 20% increase in projects that focused on food security and nutrition outcomes in 2022 as organizations and agencies hastened responses in the wake of the global pandemic. This is an encouraging signal from the data that agencies have both alacrity and capacity for responsiveness in the wake of global crises to focus on high-priority areas.

Artificial intelligence is an important tool to promote better assessment and accountability in projects designed to transform agrifood systems. Here, we used it to establish a baseline across organizations that all agree on a set of common goals. The analysis helps us pinpoint opportunities to reduce malnutrition for rural families and increase overall food security in the household; improve incomes and productivity for small-scale farmers as well as the inclusion of these farmers in economic processes; make diets healthier and more affordable; reduce greenhouse gas (GHG) emissions; and build adaptive market and consumer systems that respond to climate change and conflict in an inclusive manner. So, is progress where we expect it to be seven years after launching the Sustainable Development Goals and two years after the Food Systems Summit? This data raises concerns about whether organizations are implementing strategies and approaches fast enough.

This analysis was conducted and first shared as part of FAO’s Resilient and Inclusive Transformation Impact Initiative (RITII) consultation. The goal of RITII was to explore pathways that ensure leaving no one behind—which is at the core of FAO’s efforts to improve and enhance resilient livelihoods by strengthening policies, increasing empowerment and scaling investments to enhance the focus on resilience and inclusion in the processes of agrifood system transformation. Many of the findings from RITII, including the full results from this analysis, are expected to be published early next year.

Unleashing the catalytic power of donor financing

How are donors working to make their financing more catalytic? What would be the impact If donors and development finance institutions (DFIs) took higher risks with their grants and lending?

Higher risks could lead to higher rewards, with every donor dollar having the potential to mobilize four dollars in commercial finance, according to the report “Unleashing the Catalytic Power of Donor Financing to Achieve SDG 2” presenting the findings and recommendations of the enquiry on sustainable finance in agrifood systems conducted by the Shamba Centre for Food & Climate for the members of the Global Donor Platform for Rural Development (GDPRD).

The result: more financing for agrifood small and medium-sized enterprises (SMEs), greater participation by domestic lenders, and more affordable borrowing prices delivered by the markets.

Other key findings and recommendations, based on interviews with over 70 stakeholders, include: First, domestic banks and financial intermediaries in low-income economies must be crowded-in as the flow of finance cannot be improved without their participation. Despite decades of cooperation with development finance institutions, domestic banks remain conservative. A new generation of results-based incentives which are accompanied by long-term knowledge development should be prioritized. Second, blended financing must be less timid. Donors can reduce transaction costs and share risks by working together to collectively pool their expertise, capital and risk appetite. Third, development finance institutions must finance the transition towards the SDG which will require a new approach to the use of the development finance tools at their disposal. Finally, donors and the development community will benefit from clean and comparable data on the performance of SME lending, within and across projects, programmes, funds and portfolios.


This article was originally published by: FAO