Sustainable financing of Brazilian farming: the role that supply chains can play and carbon markets probably will not

Climate change raises unprecedented risks to all economic sectors, including farming, which is needed to produce food for a growing population. Financing farmers to be more sustainable and resilient is crucial to climate change mitigation and food security. This report analyzes the role of carbon markets (offsetting) and supply chains (insetting) as sustainable finance tools for agriculture.

The goal is to provide information and recommendations to the Brazilian farming sector regarding the increased risks, uncertainties, and complexity of accessing sustainable finances.

The methodology consisted of revising updated literature and news from national and international sources, attending seminars and conferences in Brazil and abroad, and meeting with players working and influencing the sector, such as government representatives. Brazil, New Zealand, Australia, the United Kingdom, France, Portugal, Indonesia, Japan and Italy (Word Food Forum at FAO in Rome) were the countries visited. The report is divided into three sections, in addition to the introduction.

The first section discusses the relationship between climate change and the farming sector: 1. Farming depends on the weather and is directly exposed to climate impacts, needing to adapt to reduce losses, as some real cases from the viticulture industry show. 2. Even if the agricultural industry is far from being the primary cause of GHG global emissions, in some countries, including in Brazil, it is after deforestation. This raises the pressure and requirements to access markets and financing. 3. Farmers that implement sustainable/regenerative practices to mitigate their emissions and increase their resilience to climate change also increase their capability to sequester carbon. Therefore, agriculture is considered one of the solutions to climate mitigation. However, mitigation and adaptation must be shaped to the geography, soil, climate, and business model. In addition, it is a complex task for farmers, who deal with economic risks, market uncertainties, and barriers, including financing, technical assistance, access to technology, and human resources.

The second section, the issue of this report, focuses on mechanisms to overcome financial barriers to transition to a more sustainable and resilient agriculture. It analyzes to what extent carbon markets can be tools to finance farming and what are other alternatives, including supply chains. The section introduces carbon market concepts and brings information from other countries where carbon programs are already available for farmers. Could carbon programs from other countries be benchmarks for Brazil and scaled up here? What is the ability of supply chains to drive behaviors? The current context in countries where farmers already have options to engage in voluntary carbon programs is that the path between them and their financial compensation is rarely clear on their costs and benefits (it is even considered a "jungle" or "chaos"). They are very context-specific, and they have yet to scale up. There are still substantial barriers, such as technical, methodological, and market with slow development and low prices, to making these financial tools accessible to farmers and scalable in a way that delivers a real, sustainable financing option to them while robust climate mitigation. In addition, they are not costless or riskless to farmers who must carefully analyze carbon contracts before signing up. 

Therefore, carbon markets will likely be limited in financing agriculture abroad and in Brazil. Insetting (companies investing in carbon reduction projects within their supply chain) is considered “doing more good rather than doing less bad” in comparison to offsetting (World Economic Forum). In the food sector, Scope 3 emissions account for more than 90% of total emissions on average, which shows the critical role supply chains can play in agriculture decarbonization. Still, policymakers and investors must understand farmers' and the sector's challenges (advocacy is necessary).

Agri-food companies must be engaged and be more transparent in measuring and publicizing the outcomes of adopting sustainable practices and toward farmers’ payments. As one example showed, promising a premium price one year, then reducing it by half the following year, or even stopping buying from farmers who are not ready, will not support farming livelihoods, one of the outcome-based principles of regenerative agriculture, especially in the case of smallholder farmers. De-risking farmers through developing and scaling up mechanisms that include financial support (if not carbon markets, others) is essential for more sustainable, resilient agriculture and food security.

That said, the main recommendations for the Brazilian farming sector are:

• Farmers must continue adapting to climate change and transitional risks (with or without carbon payments).
• Focus on better practices that can contribute to soil health and carbon sequestration to foster productivity, cost reduction, and resilience in the first place, adapting to risks.
• If you have additional vegetation on your land, analyze it carefully before clearing it (the environmental role it may play in your business, market access – such as European Union restrictions and companies not buying soybean from deforested areas in the Amazon and the Cerrados, financial incentives, etc.).
• Ask for advice from other farmers, associations, and technical assistants. Each context is different and demands solutions and practices shaped for the climate, soil, market, and type of business. Practices to be adopted depend on that.
• Evaluate and monitor your business's climate and transitional risks, plan to mitigate and reduce your vulnerabilities, and increase your resilience. The challenge is also to lose less in difficult moments.
• Be attentive to rules and market demands. Get closer to your buyers/consumers to define the next steps. In many cases, the reward will be market access.
• Refrain from trusting solutions that seem easy and demand a lot of money. Access to carbon markets is complex and can be costly and risky.  Read contracts carefully before signing.
• Choices also depend on the farm business's internal environment, whether you want to be an early adopter, take risks, etc.
• Early adopters should be rewarded and be included in the efforts of decarbonizing the sector. However, carbon markets may not be the best option because of the additionality needed to offset credits. 
• If you have the means to do your carbon balance, it will help you to have indicators to manage your business better. Depending on your buyers and legislation, it can become an obligation, along with traceability.
• Be attentive to potential opportunities, including from supply chains and financial institutions. But take your time with doing a proper analysis. 
• Scaling the carbon market and other opportunities will require resources and capacity. Cooperatives and farmers’ associations have an essential role to play concerning the capacity building of farmers to navigate this scenario of increased risks and potential opportunities, including those related to supply chains.
• Farmers’ voices have often been neglected in these transition discussions. Advocacy is critical to be at the table of negotiations to bring the perspective of agriculture as a solution and the most vulnerable sector with direct impacts on food security, including in international negotiations, legislation, and financing.
• Suppose the agriculture sector is included in the Brazilian Compliance Carbon Market. In that case, it can become an additional expense for the industry and a risk depending on its law and function. The sector needs more sustainable incentives, including reduced interest rates for adopting sustainable and resilient practices and no other costs.
• Nevertheless, everything is open at the moment and is evolving. Disruptions can occur and change the access to carbon markets in the future, making it more accessible. But the sector needs to be active and not reactive, having a place on the table of negotiations.