As regenerative agriculture gains traction, an important spotlight has been shone on farmers and their on-farm transition to regenerative practices. We’ve discussed the barriers to transition for farmers at length. The most prominent of these include cultural barriers, technical know-how, access to markets, and financial constraints. The last of these has received the most attention by far – increasingly in the media and particularly with the establishment of numerous new initiatives and financial vehicles to address the financial barriers to on-farm transition. So, what is all the relative hype around transition finance all about? Let’s take a closer look at what it is, who is doing it, and what it means for the transition to regenerative food systems.
What is “transition finance”?
At a high level, transition finance refers to financing that supports the transition by companies or entire industries from a high-carbon, resource-intensive economy to a low-carbon, sustainable economy. In general, transition finance can include various types of financial instruments, such as green bonds, sustainability-linked loans, and other financial products. These financial instruments provide incentives for companies to invest in things like renewable energy and energy efficiency, circular economy practices, sustainable supply chains, and other sustainable business practices. This type of financing is becoming increasingly important as more companies and industries are under pressure to reduce their carbon footprint and reach net zero.
In the agriculture sector specifically, transition finance refers to the use of finance tools to incentivize and enable farmers to transition from conventional extractive production systems to regenerative farming systems. The capital deployed with these tools is used to alleviate some of the financial costs and risks associated with the adoption of regenerative practices and systems.
What are the different types of transition finance?
Transition finance can come in a variety of forms from many different sources. Here is a sample:
Agriculture loans: These loans are specifically designed to finance the costs associated with organic or regenerative farming. They may be offered by banks, funds, or other financial institutions, and can be used to finance investments in things like equipment, crops and livestock, land access, operation expansion or other costs associated with transition.
Grant programs: There are various grant programs available to farmers that support the adoption of organic and regenerative practices. Grants, or philanthropic capital, may be offered by foundations, non-profits, or the government. For example, the US Department of Agriculture offers the Conservation Stewardship Program, which provides financial assistance to farmers who are implementing conservation practices on their land.
Crowdfunding: Some farmers may turn to crowdfunding to raise money to support their transition to more sustainable practices. Crowdfunding platforms allow farmers to pitch their projects to a wide audience of potential investors.
Private investment: Private investors, such as impact investors or sustainable investment funds, may provide financing to farmers who are committed to sustainable and regenerative practices.
Other forms of Government support: In some countries, governments offer financial incentives to farmers who are adopting sustainable practices. For example, the European Union’s Common Agricultural Policy provides financial support for farmers who implement environmentally friendly farming practices.
Why do we need transition finance?
The most basic answer to the question of need for transition finance is that the costs associated with transition can prove to be a hindrance to adoption. By offering financial tools to address financial burdens or barriers, we can increase the likelihood of adoption, which in turn can have individual farmer and societal benefits.
The costs associated with adoption can range from the expense of buying new crops – such as permanent crops like trees or new annual seed varieties, purchasing livestock, using soil testing and new soil health monitoring tools, new equipment, and other on-farm expenses. Another cost can come in the form of financial risk as growers move from one system to another and need to secure new markets to sell their crops into. Some growers will seek premium markets with their regenerative or organic products but may not be able to secure these in year 1 (or even 2,3 or 4) of transition. For example, the grower adding perennial tree crops to their operation may need to wait 4-5 years for a marketable crop. Finance tools can serve growers by helping to alleviate this burden during transition.
Beyond this basic need, there is also an underlying need in the traditional agriculture finance system to provide more innovative transitional finance tools that meet farmers transitioning to regenerative practices where they are, which often does not fit into the mold of what traditional financial institutions are looking for in a borrower or customer. Traditionally, agricultural capital has requirements that are aligned with the conventional commodity production systems – things like having collateral, meeting a certain risk-rating (often as defined by conventional agriculture), seasonality based on mono-cropping systems. In addition, repayment schedules with traditional lenders are often not aligned with the seasonality of diversified cropping systems or the more costly transition period that sometimes follows transition.
Who is innovating in the transition finance space?
A small but growing contingency of financial players are taking on this challenge but the opportunity for expansion in this space is large. Here are just a few of the innovative transitional vehicles leading the way:
Walden Mutual, a New England-based mutual bank that is community owned and focused on food and agriculture, is taking a traditional mutual model and using depositor savings capital to fund the emerging ecosystem of regenerative producers and food businesses. You learn more about Walden’s perspective in this interview RFSI did with founder, Charley Cummings.
Steward is a mission-driven lender partnering with regenerative farms and agriculture businesses to transform local food systems. The company started more as a crowdfunding platform for farm operations – allowing anyone to contribute via debt capital in the form of loans to individual projects – and now also has an evergreen vehicle, Steward Regenerative Capital, that has raised more than $15 million.
Potlikker Capital is a charitable integrated capital fund, governed by the farm community and created to holistically serve BIPOC (Black, Indigenous, and people of color) farmers in America who operate at the intersection of racial and climate justice.
Even the US Department of Agriculture has signaled its support of transition finance innovation with its 2022 Partnerships for Climate-Smart Commodities program which granted $3.1 billion to 141 selected projects.
There’s many others working to address the unique financial risks to regenerative transition, including but not limited to a growing list of philanthropic foundations and private equity funds.
A Note of Caution and Call for Increased Innovation
Transition finance deserves every bit of the attention it has been given in the past few years. The on-farm transition is essential to the entire food system’s movement from extractive to regenerative. But if we focus solely on financing the on-farm transition, we risk overlooking factors that are also crucial to unlocking barriers to regenerative transition on the farm and across the food system. Those entities that will be most successful will seek to integrate solutions to other barriers – such as technical assistance, supply chain and market access, and consumer education – alongside their financing options.
Mad Capital, for example, sits inside a larger Mad Agriculture ecosystem that is working diligently to provide on-farm technical assistance, market access, and storytelling. We talk about their approach in more detail in this piece from March 2023.
Propagate, an ecosystem designed to scale agroforestry, offers another example. With roots as a tech company and a mission to help operators incorporate agroforestry, the company has evolved into an ecosystem that provides farmer technical assistance, planning and development, and with the addition of Agroforestry Partners, is now also offering farmer financing. We shared more on this company in this 2022 article about their $10 million Series A fund raise.
While these examples both take on the approach of building an ecosystem of services within their operation, there is also great opportunity to weave transition finance into other types of companies and initiatives through partnerships and other business relationships. An area ripe for innovation here is food corporates seeking to address their scope 3 emissions and transition supply chains. The power of leveraging the technical know-how, technology platforms, regenerative expertise, and/or real asset investment and finance expertise of outside organizations through partnership is still not fully realized but holds potential. One example of this potential comes from a partnership between global potato manufacturer McCain Foods and Natwest, where the latter will offer financial support to McCain potato farmers.
While the how we do transition finance will continue to evolve, the importance of it in the transition of the food system as a whole cannot be understated. It will be essential to maintain an innovative approach to transition finance – one that centers on the diversity of realities facing the farmer and that addresses not just the potential financial roadblocks but the systemic barriers beyond the farm gate.
Who else is innovating in the transition finance space? Let us know by contacting us here.
Sarah Day Levesque is Managing Director at RFSI & Editor of RFSI News. She can be reached here.