Revisiting finance for water and agriculture

Billions of people, particularly in the world’s most arid regions, lack enough water to meet their basic needs. Climate change, in addition to unsustainable water management practices, is aggravating water scarcity. This in turn leads to more droughts, environmental degradation and sometimes severe tensions over access to water.

The Global Framework on Water Scarcity in Agriculture (WASAG), a partnership hosted by the Food and Agriculture Organization of the United Nations (FAO), recently released a report titled: “Unlocking finance for water and agriculture”. We talked to EIT Climate-KIC land use expert Daniel Zimmer, the lead author of the report, to understand the challenges of financing water solutions for agriculture.

 “Finance is about much more than money. The traditional and conventional way of funding – getting money to finance some water irrigation projects – is not systemic enough. Donors today must look at it differently. We need to adapt the funding we have and direct it towards innovative ways of doing things that take a more integrated and holistic approach.”

WASAG brings together more than 70 organisations and aims to generate cooperative action to address the challenges associated with increasing water scarcity. The report “Unlocking finance for water and agriculture” comes from its working group on financing mechanisms, which aims to identify innovative financial mechanisms for interventions dealing with water scarcity in agriculture in the context of climate change.

Looking beyond the production value

Building on their experiences, the working group created a framework to help develop projects that are eligible for blended finance support. They have highlighted three pillars that are essential to attract finance for water: value, trust, and risk.

“When I worked on the EIT Climate-KIC WINnERS project in Africa, I discovered a framework for thinking about what is the value you create and who benefits from that value. So, for instance, if you create more wells for smallholder farmers in an arid region, you create value not only for those farmers, but also for other actors in the value chain.  By funding the construction of these wells, you can also regenerate soils and landscapes. This would have value for the entire population and the whole country.”

Sharing the risks between all actors

Farmers and the entire agricultural sector are accustomed to risk, which is at the foundation of food production. Failing to cope with risk is one of the reasons why poorer smallholder farmers are trapped in poverty. For them and their families, managing risk is dealing with their lives: producing their staple food is their priority and often sole activity, which means they do not generate sufficient cash or surplus to buffer them in case of crop failure, post-harvest losses, illness, or other emergencies.

“When we were working on the WINnERS programme, we discovered that women face different risks than men, for example in getting the right seeds for the next crop. It is therefore essential that we anticipate the specific risks for all actors, especially when we implement transformative action, as the testing of new ways of doing things comes with a learning process that can impact the actors in unexpected ways. The interesting thing is that risks are shared by the entire ecosystem, which creates interrelations between all actors involved.”

Building trust to attract financial support

Building trust among stakeholders and with funders is at the core of any financial mechanism. This requires a good understanding of each actor’s interests and risks, and it might require putting in place guarantee mechanisms for investors.

“The origin of the word finance is trust, and to build it between those who invest and those who receive financial support means creating transparency and traceability, establishing contractual mechanisms, data sharing processes, and so on. We found that governments around the world should find a balance between subsidies and a de-risking mechanism because people who take risks in investing need to have some sort of guarantee. At WINnERS, we have realised that combining a guarantee mechanism and an insurance mechanism was very powerful.”

From theory to practice

The screening of several projects implemented by WASAG partners involved in this paper has demonstrated that the framework can provide guidance to various actors willing to contribute to sustainable and inclusive development.

EIT Climate-KIC uses a similar approach to identify how a portfolio of interventions can be implemented and financed, for instance, to transform wood value chains in cities or regions (see Deep Demonstration programme).

“We are working with the Glasgow City Region around implementing a portfolio of actions to transform the wood value chain. The region will look at where the transformations creates value and where it can lead to conflicts, because as we start building with wood instead of cement, we may disrupt the building sector. So, this framework is particularly useful to implement a just transformation, as these sorts of transformational actions have consequences that we need to anticipate. We have also been using this framework in the  project, an Innovation Action project funded by the European Commission, where we are working on scaling the transformation towards climate-neutral and climate-resilient farms across Europe. Right now, we are trying to understand how to upscale the systemic, locally relevant solutions that have been demonstrated on demonstrations farms, to many more farms.”

The essence of the framework is that finance is associated with the creation of a trustful ecosystem of stakeholders and value chain actors. Volume II of the report will feature case studies and illustrate the different projects implemented by the WASAG partners.

Read the full report

Contact us at media@climate-kic.org if you would like to hear more about the framework or our activities around agriculture and water.