This is the million-dollar question that the Global Donor Platform on Rural Development (GDPRD) seeks to answer through its timely stakeholder consultation on sustainable finance.  The Shamba Centre for Food & Climate, which is designing and leading the consultation, is ready for the challenge. 

Food is a distinctly a human issue. It is at the core of our cultures, civilizations, trade and innovation. Being free from hunger is a fundamental human right. Delivering sustainable food systems encompasses existential, livelihood and biological issues. To get the system right, we must change what we eat, how we produce our food and how money flows through the system, from farms to plates and waste bins. Some changes will be small and incremental, and others will require gigantic and disruptive shifts. Bearing this in mind, the consultation will not only track the money flows.  We also want to understand the mindset of concessional and commercial funders as well as how they work to ensure the right to food alongside their interests in planet and profit.  

Understanding the consultation 

The consultation begins by delving into the trends gleaned from the Overseas Development Assistance (ODA) Tracker that we are building with the Food and Agriculture Organisation (FAO) and the International Food Policy Research Institute (IFPRI).   

We will then speak to the members of Global Donor Platform for Rural Development on how their programmatic work addresses market failures, how they select grantees that are continuously innovating and how they seek to ensure the ‘additionality’ of their funding.  The opportunity cost of funding decision is paramount given that donor funds are a precious commodity which face ever increasing and competing priorities.  Money spent on one priority means that less funds are available for others.  The 1970 target according to which country members of the OECD Development Assistance Committee should spend 0.7% of their Gross National Income on ODA has not been met by many donor countries.  This makes it very important for us to also discuss credit enhancement, impact funding, pay-for performance and more.  Again, the opportunity cost of donor funds are paramount - ‘every decision is a foregone opportunity.’ 

But donors will not be our only focus. We also seek to engage with:  

• Development finance institutions which are on the cusp of ‘greener’ reforms.  The new President of the World Bank Group has already highlighted the importance of credit enhancing opportunities to bring in commercial capital providers, scaling digital technologies for improving productivity and ‘working for lower income countries while not turning its back on middle income countries’.  

• International public funds, such as the International Fund for Agriculture and Development (IFAD), the Global Environment Facility (GEF) and the Green Climate Fund, that are at the forefront of innovation.  The GEF, for example, took an equity stake in the Food Security Fund, a blended finance vehicle that targets lending to climate-smart aggregators across the food system.  Here we hope to learn not just about how their funds are credit enhancing blended vehicles but how they are building food systems into the larger thematic priorities of climate, nature, gender, SMEs, etc. If our food systems are corrected, we will be well on our way to realising all 17 sustainable development goals.  

• Blended and private funds on how they are addressing climate, nature, and water risks, alongside operational and revenue risks of new designs and technologies in developing countries.  Here are capital providers who are pushing boundaries on lending to climate- and nature-smart aggregators /intermediaries. The Land Degradation Neutrality Fund (LDN), for example, is increasing its ambition to both restore land and fund vertically integrated, diversified business models that go from sustainable farming to food processing, packaging and carbon credits. 

Blended finance is the financial equivalent of spinach, something that seems worthy, but is boring (Financial Times, 14 April 2023)  

Blended finance was back on the agenda of the 2023 IMF and World Bank Spring meeting.  John Kerry, the US Special Envoy on Climate announced the intention to set up a first loss tranche of financing for climate projects in poor countries with US$ 15 million from the US Department of State, US$ 35 million from USAID and US$ 50 million from philanthropic foundations.  He hopes that this will catalyse mezzanine financing from international and development finance institutions and senior debt from pure play commercial capital providers.   

Blended finance is great on paper but hugely difficult to design and execute.  For one, it takes a very long time to align interests between concessional and commercial funders.  More importantly, the reality is that development finance institutions have grown accustomed to taking senior positions, when they should be ‘making the market’ by taking mezzanine and junior tranches.  We argue that development finance institutions might indeed be crowding out private capital holders as opposed to providing what their name suggests, ‘development finance’, to bring them in. But we also acknowledge that one reason why the World Bank and other multilateral development banks prefer to be senior lenders is that they are, after all, banks.  Any indication of risky lending can compromise their valued AAA credit rating, which allows them to raise cheaper capital from financial markets.  Perhaps the reforms promised by the new World Bank president will provide some solution to this challenge?  Will further momentum be added if, or rather, when, the host of the COP 28 Climate Conference, the United Arab Emirates (UAE), announce their blended finance fund targeting climate-smart technologies? 

Will we discover something new?  

Will our stakeholder consultation on sustainable finance bring something new? On this, we will not speculate.   

In finance, innovation is often considered to be risky. No one wants to be the first to fund a new technology and push the first rounds of investment in poor countries. Instead, they want to be in the middle of the line using safe, tried- and -tested models that are usually more lucrative than the innovative ones.  All funders, concessional and commercial, want cookie-cutter standardised designs models that can be replicated quickly and as cheaply as possible.   

The economic realities and nascent capital markets in middle- and lower-income countries, however, make these expectations for safe and standardised investment models difficult to meet.  Climate change, water scarcity and nature loss will only increase the risks. Opinion leaders suggest that biotech, infotech and AI will bring solutions, and indeed they will. But we still need to shore up the fundamentals: Like all systems, our planet has boundaries.   

The Global Donor Platform for Rural Development stands ready to lead. This is a massive opportunity. With over 800 million people facing acute hunger  - and which has been on the rise for a fourth consecutive year - there is no time to lose.

Contact us with your ideas and views.   

References: 

https://www.ft.com/content/f8cb11b3-51e2-4cdb-9c92-f245cd814ec1 

https://www.devex.com/news/ajay-banga-world-bank-can-be-a-change-catalyst-more-reforms-likely-105259 

https://www.wfp.org/publications/state-food-security-and-nutrition-world-sofi-report-2022

By Oshani Perera, 9 May 2023