A new report by the Environmental Defense Fund and Climate and Forest Capital finds there is a profound need and opportunity for catalytic capital to support and scale new climate-smart financial models for U.S. agriculture.
The report, "Catalytic Capital and Agriculture: Opportunities to Invest in Healthy Soils, Resilient Farms and a Stable Climate," was supported by a USDA NRCS Conservation Innovation Grant. The report identifies barriers to investing in sustainable agriculture and presents opportunities for catalytic capital to address these barriers, as illustrated by five case studies.
“Investing in climate-smart agriculture is a hot topic, yet farmers continue to face poor economic conditions stemming from trade disputes, COVID-19 supply chain disruptions and extreme weather,” said Vincent Gauthier, EDF research analyst and co-author of the report. “It’s clear that more innovation is needed to make our food system more resilient, fast. Catalytic capital can help.”
Catalytic capital is traditionally defined as the use of blended finance tools to improve projects’ risk-return profiles to match the requirements of market rate investors. The report emphasizes that catalytic capital should also involve funding to support research, policy and technical support alongside direct investments to maximize impact.
The case studies featured in the report include descriptions and analyses of five unique investment models, including:
- The Soil and Water Outcomes Fund by Quantified Ventures and Iowa Soybean Association. The project is built on an investor-funded revolving loan structure that funds conservation practices on farms and is refilled through revenue generated by the sale of environmental outcomes (water quality, greenhouse gas mitigation) to beneficiaries such as municipalities, state and federal government entities, and supply chain companies.
- The Perennial Fund by Mad Agriculture. The fund offers three-year operating loans to farmers transitioning to organic production, with market off-take support and repayment over eight to 10 years through a 10 to 50% revenue share.
- Regional Restore Programs by Zero Foodprint. This model seeks to establish city- and county-wide initiatives for restaurants to add 1% surcharges to restaurant bills to be aggregated into grantmaking funds to spur local carbon farming projects.
- Agrarian Commons by Agrarian Trust. The trust uses program-related investments to acquire farmland from retiring farmers and places it under the control of a local non-profit entity, Agrarian Commons, which is designed to convey long-term affordable multi-farmer tenure in support of sustainable agricultural management.
- FarmStart by Farm Credit Council. The Farm Credit East FarmStart program supports young and beginning farmers to build equity and improve access to operating loans. Investors for FarmStart LLP purchase equity in farms, which helps young and beginning farmers access operating loans, and the farmer buys back the equity after five years. The model could be translated to regenerative agricultural practices.
“These case studies illustrate how catalytic capital has the unique ability to develop and scale new financial models for sustainable agriculture, providing several insights for funders and investors,” said Daniel Pike, an independent consultant for CFC and co-author of the report.
The case studies in the report feature three key areas of investment that show promise for effective catalytic capital deployment: transition finance, environmental markets and regional value chain development.
“There is great untapped potential for innovative funding mechanisms using creative investment structures to support the expansion of sustainable farming practices,” said Mark Lambert, a director at Quantified Ventures and co-designer of the Soil and Water Outcomes Fund featured in the report, alongside Iowa Soybean Association. “These are the types of solutions that responsible, forward-looking impact investors should be excited about.”
"These investments will help farmers and ranchers get more conservation on the ground, which is the priority of this NRCS Conservation Finance CIG project,” said NRCS Acting Chief Kevin Norton. “Voluntary conservation practice implementation can benefit when investor priorities and agricultural producer priorities align.”
“Emerging innovations can help provide a business case for NRCS conservation practices, the economics of regenerative agriculture and sustainable supply chain initiatives that will help deliver innovative agricultural solutions to our nation’s largest environmental challenges while delivering a more resilient food system,” Norton said. “The findings of this report can inform a more strategic and effective use of catalytic capital to build agricultural resilience in the U.S. and beyond.”