Opportunities for Climate Finance in the Livestock Sector Removing Obstacles and Realizing Potential APRIL 2021 Opportunities for Climate Finance in the Livestock Sector: Removing Obstacles and Realizing Potential © 2020 International Bank for Reconstruction and Development The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpre- tations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank Group, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Contributing Authors The World Bank wishes to acknowledge the contributions of the COWI group to this work. The work was led from the World Bank Group by Pierre Gerber and Tobias Baedeker under the guidance of Julian Lampietti. Contributing authors at the World Bank Group: Jean-Dominique Bescond, Lee Cando, Jeanne Massé, Sandhya Srinivasan, and Félix Teillard. At COWI, support was provided by Christina Singh and Asger Strange Olesen, alongside Lucas Bossard, Karolina Sara Kenney, Alejandro Regatero Labadia. Acknowledgements Guidance and reviews were provided by Martien van Nieuwkoop (World Bank Group), Marc Sadler (World Bank Group), Jonathan Coony (World Bank Group), Willem G. Janssen (World Bank Group), Timm Tennigkeit (UNIQUE Forestry and Land Use) and Sergiy Zorya (World Bank Group). This publication has benefited from a wide range of further input received from industry, governmental, and non-governmental experts, in particular collected through interviews with and written comments from Tatiana Alves (Climate Policy Initiative), Richard Bowman (RuMeth International), Vikas Choudhary (World Bank Group), Kevin Cunningham (Yara International), Polly Ericksen (International Livestock Research Institute), Dieter Fischer (World Bank Group), Milena Gonzalez Vasquez (Global Environment Facility), Muhammad Ibrahim (Tropical Agricultural Research and Higher Education Center - CATIE), Zoe Knight (HSBC Centre of Sustainable Finance), Hayden Montgomery (Global Research Alliance on Agricultural Greenhouse Gases), Ruaraidh Petre (Global Roundtable on Sustainable Beef), Raphael Podselver (ProVeg), Matthew Reddy (Global Environment Facility), Carlos Saviani (Royal DSM), Robert Seaton (Brinkman Climate), Hans Shrader (World Bank Group), Fritz Schneider (Global Agenda for Sustainable Livestock), Bernhard Stormyr (Yara International), and Mark van Nieuwland (Royal DSM). The Executive Summary along with the list of Climate Finance Opportunities were shared for review and comments with 72 professionals and scholars with expertise related to Climate Finance and the animal protein sector. Comments were also received during two online interactive workshops. Results from these consultations are integrated in the present document. The report was edited by Colm Foy and Wanda Ollis. Layout and design by Sergio Andres Moreno Tellez. Table of Contents Abbreviations.......................................................................................................................................................................... 1 Executive summary...............................................................................................................................................................2 Potential for climate change mitigation in the livestock sector...........................................................3 A Role for Increased Climate Finance.....................................................................................................4 Integrating Innovative Financing into the Animal Protein Sector........................................................5 Conclusion................................................................................................................................................6 1. Introduction......................................................................................................................................................................... 8 2. Climate finance and the animal protein sector: scope and definitions..............................................................14 Climate finance ............................................................................................................................................. 15 A wide diversity of animal protein production systems and value chains............................................... 25 Mitigation pathways and the triple wins..................................................................................................... 29 Net GHG emissions reduction in livestock production...................................................................... 29 The triple wins of climate finance: dividends and incentives............................................................ 35 3. The state of climate finance in the animal protein sector ....................................................................................38 Revealing the state of climate finance flows: methodology..................................................................... 39 Main trends and potential for scaling up investments in the livestock sector........................................ 42 Private investment potential: opportunities and obstacles .............................................................. 42 Targeting GHG emissions reductions in the livestock sector............................................................ 46 Unlabeled climate finance ................................................................................................................... 56 The role of livestock GHG emission reduction in the carbon markets.............................................. 58 Potential climate finance options in the animal protein sector......................................................... 60 4. Obstacles to mobilizing climate finance: analyzing the determinants ............................................................64 Technological obstacles .............................................................................................................................. 66 Economic, financial, and regulatory obstacles .......................................................................................... 69 Economic and financial obstacles....................................................................................................... 69 Regulatory obstacles–policy and governance .................................................................................. 75 Overview of main obstacles......................................................................................................................... 79 5. Investment opportunities..............................................................................................................................................86 Foundations................................................................................................................................................... 87 Six investment opportunities ...................................................................................................................... 88 Condition credit lines on climate mitigation actions ......................................................................... 90 Encourage value-chain finance for native ecosystem protection..................................................... 93 Drive clean investment through Emissions Trading Schemes.......................................................... 96 Reward proactive policy commitments through ODA........................................................................ 99 Verify sustainable sourcing of livestock feed................................................................................... 102 Innovate in livestock climate finance through prize-based programs............................................ 103 6. Concluding remarks.....................................................................................................................................................106 References..........................................................................................................................................................................109 Appendices..........................................................................................................................................................................115 Appendix A.The mapping of direct and indirect private finance flows........................................... 116 Appendix B. List of interviewees........................................................................................................ 139 List of Boxes BOX 2.1 Definition of “livestock”, “animal protein” and their use in this report.................................................................... 15 BOX 2.2 The Role of Blended Finance Structures.................................................................................................................. 20 BOX 3.1 Addressing Obstacles to Investments in Mitigation Practices: The Innovative Model of Ecopec by Brazil Climate Lab.............................................................................................................................................................................. 44 BOX 3.2 Blended Finance in Practice: The Success of the Eco.Business Fund Structure.................................................. 49 BOX 3.3 Value-Chain Finance in Practice: The Cocoa and Forests Initiative........................................................................ 52 BOX 3.4 Incorporating Carbon Credits in Livestock Investment Programs in Practice: The Case of Livelihoods Mount Elgon Project in Kenya............................................................................................................................................................ 55 BOX 3.5 Carbon Markets in Practice: Microsoft $500,000 Carbon Credits Purchase from Australian Cattle Rancher..... 61 BOX 3.6 The Republic of Kazakhstan Program for Sustainable Livestock Development.................................................... 63 BOX A.2.1: Examples of Gold Standard Projects within the Animal Protein Sector........................................................... 120 List of Figures FIGURE 2.1 Potential Actors and Sources of Climate Finance Relevant to the Animal Protein Sector............................... 17 FIGURE 2.2 The Animal Protein Value Chain........................................................................................................................... 26 FIGURE 2.3 IFI Finance Entry Points........................................................................................................................................ 28 FIGURE 3.1 Stakeholders within the Kenyan Livelihoods Funds Project............................................................................... 48 FIGURE 4.1 Summary of Mitigation Pathways and Readiness for Implementation............................................................. 68 FIGURE 4.2 An Illustration of the Missing Middle in Finance................................................................................................. 70 FIGURE 5.1 Credit Line with Conditionality.............................................................................................................................. 91 FIGURE 5.2 Potential Blueprint Set-Up.................................................................................................................................... 94 FIGURE 5.3 Green Architecture of CAP.................................................................................................................................. 101 List of Maps MAP A.1 Recipient Countries of Climate-Related ODA Directed to the Livestock Sector.................................................. 117 MAP A.2 Livestock-Related Projects under CDM................................................................................................................. 119 List of Tables TABLE 1.1 Marginal Abatement Costs of Animal Protein–Related Mitigation Strategies................................................... 11 TABLE 2.1 Overview of Financial Instruments........................................................................................................................ 21 TABLE 2.2 Key Actions, Obstacles, and Finance Instruments of the Eight Climate Finance Levers................................... 23 TABLE 2.3 Production Contexts of Livestock Systems.......................................................................................................... 27 TABLE 3.1 Tracking of Climate Finance Flows in the Animal Protein Sector........................................................................ 40 TABLE 3.2 Categorization of Private Climate Finance Flows into the Animal Protein Sector.............................................. 41 TABLE 3.3 Private Sector Climate Finance toward Sustainable Intensification of Cattle Ranching in Latin America....... 47 TABLE 3.4 Existing Jurisdictional Initiatives........................................................................................................................... 50 TABLE 3.5 Private Investments toward Ruminant Value Chains........................................................................................... 57 TABLE 3.6 Emerging Approaches from the Mapping of Climate Finance............................................................................. 62 TABLE 4.1 Potential Obstacles Related to Mitigation Pathways and Instruments............................................................... 65 TABLE 4.2 Activities Eligible for Classification as Climate Mitigation Finance, Category 4................................................. 74 TABLE 4.3 Main Financial, Economic, Policy and Regulatory Obstacles.............................................................................. 79 TABLE 4.4 Key Obstacles Restricting Climate Finance Flow into the Animal Protein Sector.............................................. 82 TABLE 4.5 Collection of Obstacles per Pathway..................................................................................................................... 83 TABLE 5.1 Lessons from Outside the Livestock Sector and Relevant Key Obstacles.......................................................... 88 TABLE 5.2 Overview of Key Elements of Potential Financial Practices................................................................................. 89 TABLE A.1.1 Summary of ODA Flows with Principal Mitigation Objective.......................................................................... 117 TABLE A.3.1 An Inventory of Private Climate Flows.............................................................................................................. 122 TABLE A.3.2 Projects within Oikiocredit’s Portfolio Directly Related to Animal Protein Value Chains.............................. 135 TABLE A.3.1.1 Existing Jurisdictional Initiatives................................................................................................................... 136 TABLE A.3.2.1 Index-Based Livestock Insurance Schemes and Companies....................................................................... 137 Abbreviations AATIF Africa Agriculture and Trade Investment Fund KLIP Kenya Livestock Insurance Programme ASTI Agricultural Science and LDCs least developed countries Technology Indicators LDN Land Degradation Neutrality Fund CATIE Tropical Agricultural Research Fund and Higher Education Center LMIC low- and middle-income countries CDM Clean Development Mechanism MDBs multilateral development banks CER Certified Emission Reduction MFI microfinance institution CH4 methane MRV Measurement, Reporting and Verification CO2 carbon dioxide MSME micro, small, and medium enterprise CO2e carbon dioxide equivalent Mt Megaton (one million metric tons) CPI Climate Policy Initiative NDC Nationally Determined Contribution CSR Corporate Social Responsibility NDVI Normalized Differenced Vegetation Index DAC Development Assistance Committee NGO Non-governmental Organization DFI development finance institution NO3 nitrate ETS Emissions Trading Scheme ODA Official Development Assistance FAO Food and Agriculture Organization of the United Nations OECD Organisation for Economic Co- operation and Development. FCPF Forest Carbon Partnership Facility PfR Program-for-Results FDI foreign direct investment PPP public-private partnership FI financial institution R&D research and development GCF Green Climate Fund SCF Standing Committee on Finance GEF Global Environment Facility SPV special purpose vehicle GHG greenhouse gas t ton (note that, unless specified GIIN Global Impact Investing Network otherwise, ton in this report refers to a metric ton = 1,000 kilograms) GRA Global Research Alliance TAC Terms of Adjustment of Conduct GRSB Global Roundtable for Sustainable Beef UNCCD United Nations Convention to GWFP IFC’s Global Warehouse Finance Program Combat Desertification IBLI Index-Based Livestock Insurance UNEP United Nations Environment Programme IFC International Finance Corporation UNFCCC United Nations Framework IFI international financial institution Convention on Climate Change IFPRI International Food Policy Research Institute VCS Verified Carbon Standard ILRI International Livestock Research Institute VSA Verified Sourcing Areas INOCAS Innovative Oil and Carbon Solutions WWF World Wildlife Fund INRAE French National Research Institute for Agriculture, Food and Environment *All dollar ($) amounts are US dolars IPCC Intergovernmental Panel on Climate Change unless otherwise indicated. ISL Investing in Sustainable Livestock JI Joint Implementation 1 Executive Summary 2 Climate finance can play a key role in bending the arc of the livestock sector from one that threatens to produce increased emissions and environmental damages to one that reduces its emissions and makes greater contribution to sustainable development. In terms of greenhouse gas (GHG) emissions, livestock is associated with significant costs that will continue to increase if nothing changes. While the sector and its value chains are responsible for about a sixth of GHG emissions, it can be part of the solution by reducing emissions and also putting carbon back into the soil. Demand for animal protein is expected to grow with increased prosperity, especially in emerging economies. And while calls for the reduction or elimination of animal protein in the human diet are important, complementary action to transform the sector is nec- essary. Acting now will come at a significantly lower cost and help jump-start the transition. This means introducing practices that increase productivity while reducing GHG emissions from the sec- tor, and ensuring protection of the natural environment and public health. Directing climate finance to the livestock sector is an oppor- tunity to mitigate climate change, improve adaptation, and increase economic gains along the animal protein value chain. Potential for climate change mitigation in the livestock sector Adopting the right policies, such as penalizing carbon emissions and rewarding carbon sequestration, have the potential to reduce their net emissions by 89% according to recent studies. This is in line with the objective of keeping global temperature rise to 2°C. The most important mitigation opportunities in the livestock sector are: i. Increasing productivity and production efficiency offers a potential reduction in GHG emissions per unit of product of some 30%, while lowering costs to farmers and improving farm incomes through higher production and productivity. A major approach to this is by improving animal feed digestibil- ity and nutritional levels, a strategy that can produce relative reductions in GHG emissions from ruminants – specifically beef and dairy cattle – from the way they digest feed. Such an approach can increase productivity while reducing enter- ic (stomach-produced) methane (CH4). Extracting CH4 from manure for fuel can reduce the amount of methane emission by up to 80%. Matching nitrogen in animals’ feed to their re- quirements, while matching manure application to the needs of crops can result in lower nitrous oxide emissions. 3 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR ii. Reducing the amount of carbon already in the atmosphere is possible through efficient land management including the restoration of organ- ic-matter-depleted soils. Avoiding additional emissions from land use and land use change is also crucial. Practices to increase biomass accumulation and soil organic carbon levels in pasture sequester car- bon from the air and can improve the quality of grasslands grazed by ruminants, which improves their diet and reduces enteric methane pro- duction, resulting in an additional global potential mitigation effect of up to 800 Mt CO2-eq/yr. Access to finance to invest in mitigation and sequestration is a major challenge for rural communities and policy makers in low- and middle-income countries (LMICs). Finance has long been difficult to access for livestock smallholders who often do not hold collateral except for their animals and have little experi- ence of working with financial institutions. Traditional lenders see the livestock sector as over-risky, with little potential to generate significant returns; it is, therefore, of little interest to them and largely unknown territory. Using Climate Finance to expand financial inclusion to enable adoption by producers of more sustainable practices would improve livelihoods, increase resilience, and achieve a better GHG balance. A Role for Increased Climate Finance There are substantial opportunities in the livestock sector for investment by climate finance funds that could accelerate the transformation towards low-carbon and sustainable animal protein value chains. Investment interest can grow with a greater understanding of the sector, fresh approaches to fi- nancing, and innovative thinking along the value chain. However, the lack of data, common terminology, and indicators in the field of livestock and climate change hinder development of climate finance for the sector. In LMICs, productivity gains and improved livelihoods for farmers linked to mit- igation could be substantial. Hence, climate finance investment in the sector is potentially a crucial factor, leading to more investment, higher efficiency, and lower emissions per unit of product, despite an initially unwelcome trade-off in the form of increased volumes of production and of GHG, overall. Such a potential trade-off (rebound effect) may be temporary and would not equal the cost of doing nothing, which would be equivalent to increasing emissions from an expansion of the sector relying on business-as-usual production practices. Farmers and actors along the animal protein value chain, as well as the pub- lic authorities, have an opportunity to present the livestock sector as a viable destination for climate finance by clarifying where direct benefits – such as biofuels from methane extracted from manure – and indirect benefits – from good grazing management, for example – can be produced. Policy makers can enact measures to encourage investment in the sector and work with fi- nancial institutions – including the multilateral development banks – to form 4  partnerships toward blended institutional/multilateral/climate-specific invest- ment initiatives. Blended investment systems can combine local and international technical know-how with local and external financial resources to overcome knowledge gaps and reduce risk, overcoming some of the opacity that has characterized the livestock sector in LMICs due to its disparate nature. Enabling smallholders to aggregate into associations or cooperatives can allow them to communi- cate with potential investors, while policy can direct resources to raise skills levels, foster innovation and improve traceability and data collection along value chains. The essential objective is to raise awareness about bankable climate investment opportunities in the livestock sector and so direct existing financial flows into mitigating the impact of climate change and to achieve associated co-benefits. Integrating Innovative Financing into the Animal Protein Sector Reducing GHG emissions while maintaining livelihoods and reducing poverty is essential for a sector that plays an essential economic role for some 60% of 1.7 billion people and contributes up to half of agricultural GDP. This report identifies six innovative investment opportunities to drive the sector’s sustain- able transformation with climate finance. There is strong justification for the use of public finance for this transformation, including that of the multilateral development banks and international financial institutions. Public finance will help ‘prime the pump’ through early action, address market failures, and impor- tantly attract private partners. These opportunities need to be taken alongside complementary efforts to rethink the role of livestock products and proteins in sustainable diets, especially where high levels of meat consumption occur. Condition credit lines on climate mitigation actions. Lending through local financial intermediaries, presents opportunities for channeling climate finance into greening the livestock sector, while increasing farmers’ access to financial and knowledge resources with an identified ecological impact. Climate finance can define mitigation conditions against which it enables stakeholders’ access to finance through existing credit institutions, for example by de-risking invest- ments, lowering interest rates and providing technical assistance. Encourage value-chain finance for native ecosystem protection. With proper incentives, stakeholders along value chains will have the opportunity to adopt practices that, for example, do not rely on deforestation. This is particularly important for livestock value chains given the number and geographic spread of actors and production steps. Linked to strong traceability systems, climate finance can support the development of virtuous value chains. Drive clean investment through Emissions Trading Schemes. Putting a price on emissions is another tool to bring down emissions and drive investment into cleaner options in the livestock sector. Climate finance can help overcome 5 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR the obstacles in linking livestock producers to an ETS: aggregation through ex- isting or ad hoc organizations to lower transaction costs, and the development of cost-effective Measurement, Reporting and Verification systems (MRV). ETS credits sales will make more funds available for further progress in both mitigation and adaptation. Reward proactive policy commitments through ODA. Remedying the problems of weak or unenforced legislation and a lack of proactive policy commitments to foster climate action, is essential in the transition to a lower emission livestock sector. Programmatic ODA and IFI funding have the capacity to drive policy changes and create the conditions for innovation and private sector investment in climate-sensitive technologies and practices. Verify sustainable sourcing of livestock feed. Improving the feed of animals to reduce their GHG emissions can displace emissions at the level of feed production, for example by driving feed-crop expansion into forests. Verified Sourcing Area-based climate finance is an innovative solution that supports the marketing of feed that is certifiably sourced from geographical areas free of deforestation. The system offers a win-win of discouraging deforestation while enabling better quality animal feed and associated GHG mitigation benefits. Innovate in livestock climate finance through prize-based programs. Practices and technologies to reduce GHG emissions and improve the sustainability of livestock value chains remain severely under-researched, with much of the potential gains yet to be uncovered. Prize-based programs provide incentives for research and development by encouraging researchers and entrepreneurs to compete with each other to bring innovations to market. Climate finance supporting such programs can therefore realistically push the frontier of miti- gation potential in the sector in cost-effective ways. Conclusion Livestock production for animal protein is a major contributor to GHG emissions and climate change. However, there are innovative and traditional solutions to easing the pressure on the environment from livestock raising, while increasing productivity and serving an ever-growing demand for animal-protein products. Collaborating on channeling climate finance to the animal-protein sub-sector is the responsibility of multilateral finance institutions, institutional investors, policy makers, and the entire population of the value chain. There is a need to build concepts in dialogue with local stakeholders and partners toward devel- opment of the considerable opportunities for investors and potential benefits for smallholders in low- and middle-income developing countries, recognizing livestock systems as part of broader agriculture and livelihoods system. 6  7 1 Introduction 8 Addressing climate change is a global imperative; there are few, if any, glob- al activities or economic sectors that are exempt from the pressing need to adapt actions or mitigate its effects. Climate finance mechanisms can aid this process. Such financing can be local, national, or transnational. It can come from public, private, or a combination of public-private sources. The livestock sector has captured only a limited part of the climate finance flows, despite its being a sector where not only are mitigation and adaptation crucial to cli- mate health, but its maintenance is crucial to human health and livelihoods. In many parts of the world, reducing the environmental impacts of animal protein production is dependent on accessing climate finance. This report studies ex- isting experiences, as well as promising trends in impact finance, to identify the economic rationale, obstacles, and opportunities for improving the animal protein sector’s readiness to access climate finance. The livestock sector provides multiple human security benefits for all mem- bers of society at all scales of production—from backyard and small-farm holders and producers to large holdings (industrial farms) and the value chains they support—including health and nutrition, income, employment opportuni- ties, empowerment possibilities for women and youth, and contributions to the national gross domestic product (GDP). Animal products contribute to food security and constitute a rich source of proteins and micronutrients (FAO 2019a; ILRI 2019). Globally, 1.3 billion people are involved in livestock value chains, with the majority of rural livelihoods strongly dependent on animal rearing. Livestock systems carry out important socio-economic functions in low- and middle-income countries (LMICs), as the agriculture sector contin- ues to be the main source of income for rural populations, making it crucial to economic sustainability and growth in LMICs. The importance of livestock holdings to rural families, especially in LMICs, cannot be underestimated. They are capital assets that can be monetized in case of emergency (ILRI 2019) and are thus instruments to access savings and insurance. They also enable diver- sification of rural income, in particular for women and youth. But vulnerability to climate change and the need to adapt places all of these benefits at risk with the smallholder farmers most affected. Triggered by population growth, rising incomes, and urbanization, the demand for animal products has increased dramatically; global per capita consump- tion has doubled since the mid-1980s (Herrero et al. 2016). This global trend is expected to continue. While demand for animal products is growing mod- estly in Europe and North America, Africa’s demand for animal products was expected to increase by 80 percent from 2010 to 2030. At the halfway mark, that demand is not abating. In 2030, Asia—already consuming nearly twice as many animal proteins as any other region—will demand three times as many animal products as Europe (ILRI 2019). The many advantages and opportunities afforded by the livestock revolution, do, however, have a negative side. The animal protein sector is a main con- tributor to climate change, as approximately 14.5 percent of anthropogenic GHG emissions stem from the sector, mostly occurring at farm stage (enteric 9 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR methane, manure management) or in relation to input provision (feed produc- tion in particular) (Gerber et al. 2013). With the demand projections for Africa and Asia, the environmental impact of the livestock sector is likely to increase over the coming decades if production practices remain unchanged. This points to the need for sector transformation. Fortunately, several mitigation pathways exist. These include increasing the efficiency of livestock production and resource use, minimizing losses and promoting circular bioeconomy, en- hancing soil carbon sequestration, and capitalizing on nature-based solutions (FAO 2019a). A significant challenge for transforming the sector toward a sustainable, effi- cient, and low-carbon profile is the heterogeneity of production systems and the implications for productivity per herd, as well as per animal. For example, in many pastoralist communities, the role of livestock goes beyond the pro- duction of protein outputs, as animals fulfil a range of social and economic functions (one example of this is the cattle complex; see Herskovits 1926).1 Therefore, animals that do not significantly contribute to food output can be kept for other reasons, with possible trade-offs for GHG emissions, but also for animal nutrition, health, and productivity at the herd level. The diversity of livestock production systems is also reflected in respective emission profiles that can be dominated by different sources: enteric methane, land use change, manure management, feed cultivation. Yet, even within the same production system and region, emission intensities vary greatly among producers. The broad range of emission intensity suggests the enormous potential that the mitigation of production inefficiencies could have, if the best technologies and practices were adopted on a wide scale (Gerber et al. 2013). Diverse pathways exist to reduce livestock emissions ranging from adopting existing best practices, which have co-benefits for farmers’ income and food security, to more emerging interventions. These pathways can be grouped into three categories, each leading toward a low-emission transformation of livestock production systems: methods to improve productivity, better land management, and applying technological advancements. Improving productivity. Examples of methods to improve productivity include adapting animal husbandry practices such as selecting more productive breeds, herd management, and adopting approaches to enhance animal health (e.g., improving feed ration balancing and digestibility to reduce meth- ane emissions in ruminants). Better land management to maintain or increase carbon stocks and im- prove feed production has several avenues. This pathway includes avoiding deforestation, practicing grazing management methods (e.g., changing graz- ing patterns, restoring grasslands, using integrated pasture cropping, using 1 The term has been introduced by the anthropologist Melville Herskovits (1926) to describe the system of values beyond monetary worth governing native cattle ownership in large parts of East Africa. For instance, most enduring social relationships were mediated through the loan, gift, or exchange of cattle. A cattleless man could enjoy neither social position nor respect and, in Rwanda, cattle ownership was the source of political power and the prerogative of the rulers. 10 Introduction legumes in pastures), implementing silvopastoral systems, and adopting re- duced or no-tillage practices in feed crop production. Technical solutions to emissions include several diverse interventions such as rumen modification, sound manure management, production of renewable energy, and the use of energy-efficient equipment and machinery. Compared to other sectors, where high abatement costs and capital intensity can hamper the implementation of mitigation strategies, agriculture has sub- stantial potential for effective mitigation strategies at low cost and investment needs (McKinsey & Company 2013). McKinsey’s global agriculture marginal abatement cost curve offers insights into the economic viability of different mitigation strategies within agriculture, and identifies the 15 most promising strategies, 8 of them directly related to animal proteins (Ahmed et al. 2020). Table 1.1 lists the animal-protein related strategies,2 their respective technical GHG mitigation potential, and their cost of abatement (although only private costs were included in the analyses, public costs were not considered). The ani- mal protein sector is a competitive option for cost-effective mitigation. Despite the economic viability of these strategies, implementation is limited because of persistent obstacles (see Chapter 4), particularly in LMICs where demand for animal products is projected to grow rapidly. While some of the obstacles TABLE 1.1 Marginal Abatement Costs of Animal Protein–Related Mitigation Strategies Technical GHG Estimated Cost Mitigation Strategy Mitigation Potential of Abatement by 2050 Adopt zero emissions for on-farm machinery & equipment ~537 MtCO2e ~US$−229/t CO2e Employ GHG-focused genetic selection and breeding ~506 MtCO2e ~US$0/t CO2e Improve animal health monitoring and illness prevention ~411 MtCO2e ~US$−5/t CO2e Optimize the animal feed mix ~370 MtCO2e ~US$131/t CO2e Expand the use of feed additives ~299 MtCO2e ~US$88/t CO2e Expand the use of anaerobic manure digestion ~260 MtCO2e ~US$92/t CO2e Expand the use of feed grain processing ~219 MtCO2e ~US$3/t CO2e for improved digestibility Expand the uptake of technologies that ~180 MtCO2e ~US$119/t CO2e increase livestock production efficiencies Apply nitrification inhibitors on pasture ~123 MtCO2e ~US$15/t CO2e Source: Ahmed et al. 2020. Note: MtCO2e = million metric tons of carbon dioxide equivalent; t CO2e = metric tons of carbon dioxide equivalent. 2 One additional mitigation option relates to indirect emissions on-farm from energy and transport and is included in Table 1.1, as it is relevant for the animal protein sector. 11 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR could be removed through policy by creating an enabling environment, most constraints are related to the lack of finance and technical capacity. The mitigation pathways noted in Table 1.1 have proved to be effective and cost-efficient in improving carbon balances. Moreover, most often these pathways lead to efficiency, as well as productivity gains (either as a result of increased output per animal or of reduced input use), lowered production costs, and improved overall economic performance of the farm.3 Hence, path- ways are likely to manifest additional livelihood and adaptation outcomes alongside climate change mitigation; in effect achieving three outcomes (a co-benefit). The achievement of triple outcomes forms an interesting case for sector development and investment. However, because of technical adoption obstacles, underinvestment, and a lack of political will this potential is rarely exploited (Herrero et al. 2016; ILRI 2019). Given the abundance and diversity of livestock production systems and value chains, as well as the increasing challenge that growing animal protein con- sumption represents for the environment, it is crucial to study how climate finance can be incorporated into the sector and contribute to transforming it. The knowledge and technical solutions exist, but it remains unclear what financial mechanisms and financial flows would be most appropriate to imple- ment them at a large scale. To determine how climate finance can contribute to sustainable transforma- tion of the animal protein sector, this study offers some potential strategies in chapter 2, then maps current climate finance within the sector illuminating trends and emerging approaches (chapter 3). Chapter 4 considers the techno- logical, financial, and implementation obstacles before turning to lessons from adjacent sectors to arrive at six opportunities for increasing climate finance toward the sector (chapter 5). The growing demand for animal protein prod- ucts in the global South has highlighted the increased need to transform its production systems, therefore this report focuses on climate in finance within the animal protein value chain in LMICs, concentrating on input providers and livestock production as well as aggregators, who enable remote and small- scale producers to access finance. 3 Whether mitigation pathways lead to productivity gains is included in the pathway-specific obstacle matrix, see chapter 4. 12 Introduction 13 2 Climate Finance and the Animal Protein Sector: Scope and Definitions 14 The nexus between climate finance flows and the livestock sector is not ful- ly recognized because research on the ways climate finance can be used to catalyze meaningful change toward lower emissions and sustainability in the sector at the appropriate scale is relatively scarce. To further both knowledge and understanding, this chapter clearly defines these three intertwined topics: climate finance, the animal protein sector, and GHG emission reduction in the animal protein sector. BOX 2.1 Definition of “Livestock”, “Animal Protein” and Their Use in This Report Livestock are domesticated terrestrial animals that are raised to provide a diverse array of goods (animal proteins from meat, milk, and eggs, but also hides, fibers, and feathers) and services. Livestock provide 25 percent of the dietary proteins consumed globally (FAO 2009) and the sector is largely geared toward its direct contribution to food security (proteins, but also micronutrients including vitamin A, vitamin B12, riboflavin, calcium, iron and zinc). Yet, for many farmers, especially smallholders, the other functions of livestock are of significant importance (e.g., traction, soil fertilization with manure, capital, insurance, income diversification, cultural value, landscape maintenance, etc.). The term “animal protein sector” spotlights the protein production function of the sector and, at the same time, opens to sources of protein other than livestock, such as fish, insects, and cultured meat. The use of “livestock” emphasizes the animal production stage and its interaction with the socio- ecological system in which it is embedded. The use of “animal protein” enfolds the perspective of the complete meat, dairy, and eggs value chains and the range of stakeholders that they involve, including the consumers and their dietary choices. Evaluating the mitigation potential that exists at the level of the “animal protein sector”, this report refers to the potential role of climate finance for the entire sector, although most experience and data available to date more specifically concerns the “livestock” sector. Climate finance This report follows the official definitions of Direct and Indirect climate finance as adopted by the United Nations Framework Convention on Climate Change (UNFCCC) Standing Committee on Finance (SCF). Direct climate finance is de- fined according to the operational definition of climate finance by the UNFCCC SCF as finance that “aims at reducing emissions and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative cli- mate change impacts” (UNFCCC SCF 2018). Indirect finance are finance flows that are “consistent with [but not specifically aimed at] a pathway toward low 15 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR greenhouse gas emissions and climate-resilient development,” in line with Article 2.1(c) of the Paris Agreement. These definitions explicitly include mitigation and adaptation in relation to climate change, as does this report. While adaptation and food security are already compelling arguments for investment in the animal protein sector, par- ticular emphasis is placed on mitigation. Climate finance includes local, national, and international financial flows that can stem from public, private, or blended sources and are directed toward low-carbon and climate-resilient development interventions with direct and in- direct greenhouse gas mitigation and adaptation benefits (CPI 2017; UNFCCC 2019a). The infographic in Figure 2.1 provides an overview of relevant sources, actors, and flows providing finance. As an overview, it is not intended, to indi- cate differences in the relative importance of certain actors or flows. This report distinguishes between private and public sources, based on the type of actor who is providing finance. The overlap of private and public spheres in the flow chart of Figure 2.1 shows how private actors may direct finance through public actors to the recipient and vice versa.4 Private sources include corporations as well as commercial financial insti- tutions (FIs) that are providers of primarily private debt capital and include commercial and investment banks. The term institutional investors, also con- sidered as a private source, are insurance companies, asset management firms, pension funds, foundations, and endowments. Public finance stems from national governments and regional budgets. International finance, specifically co-financing of climate-related official de- velopment assistance (ODA), is recorded by the Organisation for Economic Co-operation and Development (OECD). In addition to national and regional budgets, international financial institutions (IFIs) contribute to public sourc- es. National and multilateral climate funds also count as public sources, as does international public finance. The latter denotes the transfer abroad of national public revenue for ODA or transnational public policy purposes such as reacting to climate change. International resource mobilization requiring joint efforts, such as levying a financial transaction tax, is considered under international public finance. Carbon markets are recognized as a source of finance, providing a system that allows the trading of emission units, in the form of credits or offsets that represent emission reductions. Accordingly, credits and offsets are funding instruments related to both public and private finance sources; as both private and public actors operate on the field, this source overlaps in public and pri- vate spheres. Actors are the stakeholders who either invest money into climate action within the livestock sector or facilitate such flows. It is, however, not always possible 4 Private domestic finance is not included in this graphic as it is difficult to track because its origins are not necessarily recorded. 16 Climate Finance and the Animal Protein Sector: Scope and Definitions FIGURE 2.1 Potential Actors and Sources of Climate Finance Relevant to the Animal Protein Sector P R I V A TE P U B L IC SOURCES Corporations Commercial FIs Carbon Markets Government Budgets Institutional Investors IFIs Climate Funds Regional Budgets International Public Finance Commercial FIs Households Farmers Companies within the Value Chain Cooperatives Investor Multilateral FIs Regional FIs NGOs ACTORS Networks Asset Managers State Owned FIs Bilateral FIs Pension Funds Micro Finance National National Institutions Insurance Ministries Agencies Companies PPPs Foundations OWN FINANCE BLENDED ODA FINANCE COMMITMENTS FOREIGN DIRECT IMPACT NATIONAL PUBLIC FLOWS INVESTMENT INVESTMENT EXPENDITURES SPV FLOWS DONOR COUNTRY CORPORATE SOCIAL EMISSION REDUCTION RESPONSIBILITY OBLIGATIONS Animal Animal Health Breeding INPUTS Feed Products Stock LULUCF Energy RECIPIENTS LIVESTOCK FARMS AGGREGATION MITIGATION OUTCOME IMPACT PRODUCTIVITY ADAPTATION & EFFICIENCY GAINS RESILIENCE 17 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR to clearly separate actors and sources, on one hand, and actors and recipients on the other. For example, when farms and corporations within the value chain (for example, cooperatives, feed providers, breeders, and retailers) invest own resources to achieve climate goals, the line between actors and recipients be- comes blurred. Among the private actors, Investor networks are coalitions of shareholders from different asset management firms, public pension funds, foundations and/or venture capital firms that advocate new investment practices, corpo- rate engagement strategies, and regulatory solutions. Other important private actors are nongovernmental organizations (NGOs), asset managers, pension funds, micro finance institutions, insurance companies, and foundations. Public actors include IFIs: multilateral and bilateral FIs, as well as regional and national, state-owned FIs, and national ministries and agencies with extension networks that reach farm level. Impact investors are private-sector actors (alongside public actors and philanthropies in blended finance structures) who generate value by target- ing societal challenges and help grow underserved capital markets. Impact investments are defined by the Global Impact Investing Network (GIIN) as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return” (GIIN 2019). Impact investors are not interested in immediate returns, but have a longer-term un- derstanding of their investment,5 and thus have the potential to incentivizing behavior change. Public-private partnerships (PPPs) are characterized by long-term coopera- tion, usually between a country’s Ministry of Agriculture and private sector agri-business companies. They are often established to leverage the strengths of each actor managing risks and yielding returns from new technology or infrastructure. The flows covered in this study are often actor specific. For instance, PPPs provide flows via special purpose vehicles (SPVs),6 and corporations and FIs can invest their own finance, through foreign direct investment (FDI), through corporate social responsibility (CSR) investments or through financing of self-set commitments (for example, science-based targets). Impact investors select and finance projects that have social and/or environmental benefits, within a pre-established impact area or regional focus. Governments direct national public expenditures and country emission reduction obligations na- tionally and ODA commitments internationally (see Box 2.2 for an overview of the role of blended finance structures). 5 Interview conducted with Polly Ericksen of the International Livestock Research Institute (ILRI), November 29, 2019. 6 An SPV is a legal entity created for a specific purpose, in this context for raising capital. Most often structured as a limited liability company, SPVs amalgamate all investors into one entity. An SPV is a suitable instrument when the limited size of single projects stipulate aggregation to be effectively financed. A NAMA proposal could for instance create such a mechanism to finance NAMA projects within the livestock sector on affordable terms. 18 Climate Finance and the Animal Protein Sector: Scope and Definitions Financial instruments dedicated to Climate Finance consist of a diverse array that includes grants, concessional and non-concessional loans, equities, car- bon credits, and virtually any alternative financial mechanism oriented toward mitigation and adaptation. A selection of financial instruments that climate finance providers employ is presented in Table 2.1. A 2020 World Bank study analyzes the levers through which Climate Finance can be delivered in order to foster the transformation of a whole sector and con- tribute to economic and social development. The study identifies eight levers that have the catalytic potential needed to drive the transformation of a sector: 1. Project-Based Financing: Finance or project support to enable climate investments. 2. Financial Sector Reform: Financial sector regulations that catalyze green investment. 3. Fiscal Policy: Setting taxes and adjusting spending priorities to support climate action. 4. Sector Policies: Regulatory standards or information provision policies. 5. Trade Policy: Trade policies to encourage exchange of low-carbon and climate resilient (LCCR) products. 6. Innovation and Technology Transfer: Development of new, more effec- tive, and lower cost green technologies. 7. Carbon Markets: System to define and trade mitigation outcomes for cost efficient mitigation. 8. Climate Intelligence and Data: Knowledge and planning tools to support policy and investment decisions. 19 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR BOX 2.2 The Role of Blended Finance Structures Blended finance uses development finance in a An example of a blended finance structure is the Land strategic way for the mobilization of additional finance Degradation Neutrality (LDN) Fund established by the toward sustainable development in developing coun- United Nations Convention to Combat Desertification tries (OECD 2019a). It can serve as a de-risking tool to (UNCCD) and private asset manager Mirova. It is an catalyze private sector investment toward sustainable impact investment fund that provides long-term debt development in emerging economies. and equity financing aimed at “profit-generating sus- tainable land management (SLM) and land restoration Blended finance can be a potential tool for mobilizing projects worldwide” (UNCCD and Mirova 2019). The private flows into climate mitigation initiatives in the LDN Fund is structured to leverage private investors livestock sector by addressing the main obstacles that who might otherwise not have invested in sustainable deter private actors from investing in the sector, such land management projects. To achieve such goals, as high risks and transaction costs, and lower risk-re- the Fund has been designed as a blended finance turn profiles desired compared to other investments. approach with a layered capital structure aimed at de- According to the International Finance Corporation creasing risk for private sector investors. Figure B2.2.1 (IFC), blended finance structures must adhere to a illustrates the structure of the LDN Fund. series of principles. They should: Within this structure, different risk-return profiles are • Contribute to bridge funding gaps in development divided into junior, mezzanine, and senior tranches. finance. Public actors such as governments, development • Be designed with the objective of leveraging finance institutions (DFIs), other concessional sources, private finance. and private foundations are characterized as junior in- • Be tailored to the local context. vestors, meaning that they take a higher risk, first-loss • Effectively address existing market failures. position in the fund, shifting part of the risk away from • Promote high standards of transparency, governance, senior investors. Senior investors are private actors and environmental impact (IFC 2019). such as pension funds, commercial banks, insurance companies, corporations, and other impact investors. What exactly does it mean to “de-risk”? More than elim- The layered structure of this Fund provides senior inating risk for investors, blended finance approaches investors with more immediate returns and a lower risk offer different risk-return profiles (or the relation between profile (UNCCD and Mirova 2019). Impact investors potential returns and levels of uncertainty) that are ap- have the option of taking a higher risk profile with the propriate for each kind of investor (Convergence 2018). idea of bringing in other investors, particularly private actors to mobilize even more climate finance. Blended finance schemes Investment LDN FUND are an effective way to catalyze Private Investors private investment in sectors that are otherwise too risky (such as climate Impact Investors mitigation/adaptation in livestock). Senior Investors These structures ensure that junior DFIs Assets tranches de-risk senior tranches, in- centivizing private sector investment Junior in sustainable development. Governments Investors Other concessional sources Cash waterfall Technical Assistance Grant Donors LDN TA Facility 20 Climate Finance and the Animal Protein Sector: Scope and Definitions TABLE 2.1 Overview of Financial Instruments Instrument Characteristics Available to Grants Transfers made in cash, goods, or services for which Widespread in developed countries in no repayment is required. Grants are provided for the form of ODA, much less so in many investment support and/or policy-based support least developed countries (LDCs) Commonly used to remove obstacles through one-time expenses, such as demonstration projects or capacity building Concessional Loans Concessional loans are a subset of development Widespread in selected developing finance and are loans offered at below countries with low-risk profile (ODA) market-rate terms, such as through longer repayment times, low interest rates, or both; often used to de-risk or encourage certain investments (Bloomberg NEF 2019) Nature of concessional loans in context of livestock may be worth examining beyond reduced interest or extended tenor (e.g., waiving mortgage requirements, offering fixed interest, flexible repayment terms, etc) Receiving governments might be reluctant to accept concessional loans for unproductive sectors, for example, smallholder livestock rearing Loans Low-cost, cooperative or market Widespread in developed countries, term loans are transfers for which much less so in many LDCs repayment with interest is required For primary producers often in the case of agricultural credit (short duration) or bank loans. Flexible in cost, duration, and conditions and can be backed by collateral Mezzanine Denotes unsecured, higher-yielding loans Private and listed companies Financing that are subordinate to bank loans and above a certain threshold secured loans but rank above equity Equity, including Equity is money invested in shares in a Government sources, IFIs, and DFIs as venture capital company and gives the shareholder [a well as private and listed companies, share of the] power in the company often above a certain size threshold. All companies require equity capital; equity Important for all start-ups to secure capital investors are the first to lose their money equity. Limited availability in certain if the company is closed (“first loss position”) LDC geographies and for smallholders Can also include new variants such as quasi-equity, such as loans that can be turned into equity 21 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Instrument Characteristics Available to Guarantee Contract by a third party (guarantor) to back Financial institutions such as asset the debt of a second party (the creditor) for its managers or corporations. Issued payments to the ultimate debtholder (investor). by DFIs, insurance companies, or In other words, a guarantee is an insurance that a other medium- to large-scale actors debt issue will be paid to the ultimate debtholder Guarantees can be used to leverage financing from other sources due to risk-reducing nature Bonds, including Fixed income instrument since bonds traditionally Large companies, municipalities, Green Bonds paid a fixed interest rate (coupon) to debtholders governments, etc. Often conditional For this instrument, a green or climate variant is on more than €1 million in principal increasingly offered, often used to finance a project with primary environmental or climate objectives Own and value Internal working capital not backed by outside Private companies of all sizes chain finance, investor. Often not visible to outsider but incl. research and backed by the company’s own equities. In development (R&D) principle this also includes informal finance Particularly in Asia, but also in Africa and Latin America, there is informal financing by families, groups pooling cash and issuing loans or directly investing in businesses themselves Cap and Trade Market-based: Units are issued to entities included Widespread among industrialized under the cap by an administrator, and entities countries and regions (EU, Australia, are meant to surrender a specified quantity of New Zealand, California), but also units to offset/compensate their emissions in Kazakhstan and China; could also emerge from international markets (for example, Kyoto Protocol global cap and trade scheme) Baseline and Credit Market-based: Units are earned from a calculation Global as well as domestic, of the difference of emissions between a baseline obstacles for small-scale scenario and the project scenario, yielding credits projects and actors exist Source: Adapted from COWI, Oeko-Institute, and CIFOR 2018. 22 Climate Finance and the Animal Protein Sector: Scope and Definitions Table 2.2 illustrates how levers can be combined within the same project and can use various financial instruments as noted above. The variety of transfor- mative levers underlines the necessity of creating partnerships between public and private entities and the climate finance and animal sector communities to reach the full mitigation potential of the sector. TABLE 2.2 Key Actions, Obstacles, and Finance Instruments of the Eight Climate Finance Levers Climate Lever Main interventions Obstacles to Action Key Climate Finance Instruments Project-Based • Invest in projects • Capital constraints • Investment financing for Financing • Blended finance to • Limited capacity to de-risking and crowding manage risks deliver effectively in other funding • Manage risks and • Technical assistance for returns to enable private enabling investment finance opportunities Financial Sector • Report and manage • Public finance and • Technical assistance for Reform climate risk capital constraints improving governance, • Regulate green assets • Limited institutional and capacity, and expertise • Deploy incentives for technical capacity • Investment financing for green investment • Perceived conflict catalyzing green investment • Integrate climate risks with development into financial sector prudential regulation Fiscal Policy • Implement carbon taxes • Concerns on • Policy-based financing • Reform subsidies and taxes reducing international • Technical assistance for to incentivize climate action competitiveness and addressing knowledge distributional consequences and capacity gaps • Adjust government procurement • Capital constraints • Plan for climate impacts in fiscal planning Sector Policies • Implement regulations • Information gaps to • Policy-based financing conducive to LCCR develop policies to create incentives alternatives • Limited resources and • Technical assistance for • Enforce green institutional capacity to knowledge sharing on technology standards enforce regulation policy development • Concerns on reducing international competitiveness Trade Policy • Consider trade liberalization • Tariff revenue reduction • Trade finance for LCCR for environmental goods • Insufficient infrastructure goods and services • Apply border carbon • Technical and political • Technical assistance adjustments challenges to policy design for developing climate- • Coordinate through friendly trade policy climate clubs 23 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Climate Lever Main interventions Obstacles to Action Key Climate Finance Instruments Innovation and • Provide public funding • Limited resources • Investment financing for Tech Transfer for basic research • Uncertain, long-term, high-risk innovation • Implement tax credits for and diffuse payoffs • Technical assistance for research and development • Limited capacity early-stage innovation • Develop technology to develop broader transfer policy that targets innovation ecosystem appropriate cleantech and builds local capacity • Enforce intellectual property rights • Promote green procurement schemes Carbon Markets • Establish domestic • Concerns on • Results-based financing carbon markets reducing International for supporting market • Link markets internationally competitiveness and development distributional consequences • Technical assistance • Uncertainty around for establishing and carbon prices linking markets • Limited capacity and knowledge Climate • Develop long-term • Challenges to collect data • Technical assistance Intelligence planning tools and develop intelligence for building capacity and Data in measuring and • Provide policy risk • Limited confidence information in accuracy using climate data • Improve disaster risk- • Uncertain policy response management tools • Generate localized climate impacts and opportunities data Source: World Bank 2020 24 Climate Finance and the Animal Protein Sector: Scope and Definitions A wide diversity of animal protein production systems and value chains The main livestock species can be grouped into two categories: ruminants (cattle, buffalos, and small ruminants including sheep and goats) and mono- gastrics (pigs, chicken, and other poultry). Ruminants are characterized by their stomachs’ having four compartments where food is regurgitated (ruminated) and fermented, allowing them to digest cellulose. In rangelands and marginal lands covering up to 25 percent of the Earth’s ice-free lands (Ramankutty et al. 2008), no crops can grow; ruminants are the only way to produce food. Monogastrics have only one compartment in their stomach and mostly lack this ability to digest cellulose; therefore, their diet is often largely composed of human-edible food. Livestock production systems are defined by multidimensional components and drivers that interact to achieve a specified livestock production objective. The systems are often classified based on one vital component: the feed diet of the animals. For instance, Séré & Steinfeld (1996) classify global livestock production systems using agroclimatic conditions, farm income structure, and feed. Based on feed, they differentiate the following types of systems: landless systems (which may be monogastric or ruminant); grassland-based system (in which crop-based agriculture is minimal); and mixed systems where live- stock is combined with cropping, and which can further be split between rainfed and irrigated agriculture. More specific production systems categories have also been used. For in- stance, pastoral systems refer to ruminant grassland-based systems where mobility plays a central role, although it can cover different realities, from nomadic to semi-nomadic, transhumant, rangeland-based, etc. Landless systems in beef cattle correspond to feedlots, yet they remain dependent on grassland-based systems during the early, cow-calf phase of an animals’ life. In pig and poultry production, a gradient exists from “backyard” production systems that are mainly subsistence driven (or for local markets) and where a high share of feed comes from swill, scavenging, and locally sourced feed; to industrial systems that are fully market-oriented, with mostly purchased, non-local, and intensively produced feed. Livestock production systems defined based on feed resources correlate with the notion of farming intensity, which can be defined as increased reliance on capital and technology, or increased productivity of land (Netting, 1993) and measured with either output-oriented (production, e.g., crop yield, ani- mals / ha) or input-oriented (utilization, e.g., kg N / ha from fertilizers) metrics. Grassland-based systems are typically extensive, requiring large grassland areas to produce meat and milk outputs. Conversely, landless systems are typically described as intensive as they rely on high-yielding, commercial feed crops that are also of high nutrition quality and efficiently transformed into milk, meat (and egg) proteins. Agricultural (land) intensity also relates to 25 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR intensity of other production factors (FAO 2018). Landless systems such as feedlot, intensive dairy, or industrial monogastric production are capital-inten- sive, requiring high initial investments and cash flow. Labor-intensive systems are typically ruminant smallholder farms with low returns and a surplus of la- bor, often constrained by scarcity of both land and capital. Based on these considerations, this report follows the six livestock production systems (“contexts”) defined in the guide for Investing in Sustainable Livestock (ISL) that combine the feed and agroecological dimensions (Table 2.3). The corresponding value chains of livestock production systems are no less diverse and equally complex. With different types of stakeholders, related to input provision, aggregation (farmers’ groups, cooperatives, and traders), pro- cessing (from slaughterhouses to high-end butchers), and distribution, their complexity is evident (see Figure 2.2). In addition to targeting stakeholders directly involved in the value chain, finance can also be targeted toward the national or global enabling structures such as the policy environment and mar- ket structures, as well as extension services and finance infrastructure (FAO 2019b). FIGURE 2.2 The Animal Protein Value Chain PRODUCTION AGGREGATION PROCESSING DISTRIBUTION RUM INANT Grazing Dry – Pastoral Collection Export Grazing Temperate Slaughtering Storage Wholesale Grazing Sub-Humid Processing Transport Retail Mixed Crop-Livestock Dry Packaging Intensive Trading End-Market Mixed Crop-Livestock Humid M ONOG ASTRIC INPUTS Animal Animal Health Breeding Energy Know-How Finance Feed Products Stock 26 Climate Finance and the Animal Protein Sector: Scope and Definitions TABLE 2.3 Production Contexts of Livestock Systems Production Context Characteristics Geographies Grazing Dry • Constant/seasonal mobility of the herd Horn of Africa, Mongolia, Sahel, – Pastoral • Natural vegetation as feed and high-altitude lands (Ruminants) Grazing Temperate • Commercially orientated, extensive Argentina, Botswana, Chile, Kyrgyz (Ruminants) systems, mainly beef Republic, South Africa, Tajikistan, • Small- to large-scale private farms Uruguay, and Uzbekistan Grazing Sub-Humid • Former forest lands converted China, Latin America and the Caribbean, (Ruminants) to rangelands Sub-Saharan Africa, and Vietnam, • Production for export Mixed Crop- • Favorable climatic conditions Andean region, Ethiopia, Kenya, Livestock Systems • Land constraints for farm development South Asia, and East Asia • Traditionally subsistence, limited market-off take Mixed Crop- • Integrated systems of rice-production, Bangladesh, China, India, Indonesia, Livestock Humid livestock, aquaculture, and horticulture Malaysia, Myanmar, Thailand, and Vietnam (Monogastrics) • Commercially oriented Intensive • Large-scale industrial livestock Middle- and high-income (Monogastrics production, commercially orientated countries across the world & Ruminants) • High level of specialization, limited land use, predominantly pigs and poultry but also beef and dairy Source: World Bank and FAO 2020. Along this supply chain, IFIs have several finance entry points, as depicted in Figure 2.3. Climate finance can flow in the form of project finance, general pur- pose lending (working capital, small business lending), or capital raising, for example. Financial instruments can include new modalities such as climate conditionalities and MRV requirements resulting in livelihood and climate outcomes as well as raising the bar toward higher production standards (see “result” heading in Figure 2.3). Other ways to finance sustainable value chains constitute trade finance, which incentivizes import/export of climate-friend- ly animal proteins; corporate finance, in the form of general-purpose lending (working capital) and capital raising; and term or receivables finance, which targets downstream activities in the value chain connected to processing and distribution. 27 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR FIGURE 2.3 IFI Finance Entry Points TYPE OF FINANCE RESULT • Product development to INPUT PROVIDERS reduce pressure on producer income and climate DIRECT FINANCE • Project finance • Adopt more sustainable • MSME lending standards • Microfinance PRODUCERS AGGREGATORS TRADE FINANCE • Incentivize high standards • Risk mitigation for commodity trade • Letters of credit TRADERS • Syndicated loans • Transition of targeted supply chain elements CORPORATE FINANCE MANUFACTURERS • Term finance • Align banking services with changing buyer • Receivables finance requirements RETAILERS CONSUMERS Source: Adapted from CISL 2016. Note: The red box denotes the relevant recipients of climate finance directed to upstream activities; the green text boxes show the results of livelihood and climate outcomes. 28 Climate Finance and the Animal Protein Sector: Scope and Definitions Mitigation pathways and the triple wins Net GHG emissions reduction in livestock production Setting the animal protein sector on a low-carbon path requires the adoption of a life-cycle perspective to assess emissions. Such a perspective considers emissions occurring along the entirety of livestock supply chains and not just those originating from the animals or animal farm holdings. There are three main categories of sources of emissions: 1. Feed-related emissions: • N2O emissions from applied and deposited manure, applied synthet- ic fertilizer, and crop residues decomposition; • CO2 emissions from land-use change associated with the expansion of pastures into forests or feed crops into forests/grasslands; and • CO2 emissions from field operations, input production (fertilizers, pesticides), and feed processing/transport. 2. Emissions directly related to the animals: • CH4 emissions caused by enteric fermentation; and • CH4 and N2O emissions arising from manure storage and management. 3. Other sources of emissions: • CO2 emissions from energy use on-farm and arising during the con- struction of farm buildings and equipment; and • CO2 emissions occurring downstream from the processing and transport of livestock products. The emission profile of a specific livestock production system and value chain corresponds to the relative importance of the different emission sourc- es described above. The diversity of livestock production systems translates into contrasting emission profiles (Mottet et al. 2017). In grazing systems, a large share of the emissions comes from enteric fermentation due to the relatively low digestibility of grass that represents the most important feed resource, with manure deposition on pastures also accounting for emissions. Depending on the agroecological context, significant emissions can be related to land use change as well. For instance, pasture expansion into forests can occur in grazing sub-humid systems while most grazing dry systems will not have land use change emissions because rangeland is the native ecosystem. In mixed crop-livestock (smallholder) systems, the emission profile is dominat- ed by enteric fermentation (due to the use of feed material of limited quality such as crop residues) and manure management (due to the concentration of animals and lack of optimal manure management strategies). Intensive sys- tems tend to optimize efficiency and provide high quality feed materials to 29 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR animals, resulting in a lower importance of enteric methane emissions and a high share of emissions related to feed cultivation (especially if it is associated with land use change) as well as manure management. Within a given livestock production system, a common emissions profile emerges but the level of emissions (absolute or per unit of output) often var- ies drastically. This reveals considerable room for improvement even without shifting among protein sources, livestock species, or production systems. Gerber et al. (2013) estimated that a 30 percent mitigation potential could be achieved if the bulk of the producers adopted best practices already existing within the same production system. In addition to existing best practices, inno- vative technological opportunities are also emerging. Three main categories of mitigation options are detailed below. Despite a major mitigation potential, it is important to note that the ”zero-emissions cow” (or ruminant) does not exist, and that carbon neutrality may be achievable in specific systems but likely not by the global livestock sector as a whole. The mitigation outcome can be achieved through absolute emission reduction or through a reduction in emission intensity— a change in the GHG emissions per unit of output (e.g., CO2e/kg of animal proteins). The emissions of the an- imal protein sector should ideally be reduced in absolute terms, to mitigate climate change effectively and keep the rise in temperature well below 2°C, in line with the Paris Agreement. Due to the expected increase in global de- mand and the economic pressure that rural producers in LMICs face, reducing emission intensity is a first step and an important entry point, since it shows that the production of animal products is not at odds with achieving carbon balances. Reducing the emissions of each kilogram of beef or liter of milk, es- pecially in developing countries, could help support food security and reduce further degradation of natural resources while avoiding emissions, compared to a “business-as-usual” scenario where an increase in production is achieved solely from herd expansion rather than from efficiency gains. Emission intensity reduction through efficiency and productivity gains This category of mitigation options is where most best practices already exist and could result in important mitigation outcomes if widely applied. Emission intensity is expressed as GHG emissions per unit of product, in CO2e./kg of milk, meat, egg, or other animal proteins. Therefore, productivity can be increased [through applying best practices] in the form of more protein produced per animal, which has a direct effect on emission intensity reduction. This means that the same level of production occurs with greater output gains (protein) with lower absolute emissions. Best management practices target three main areas for productivity gains and emission intensity reduction: • Feed and nutrition. Poor nutrition is one of the main factors of low productivity; therefore, improving feed quality and balancing the feed ration to animals’ requirements is an important leverage for productiv- ity gains and emission intensity reduction. Using feed of higher quality and digestibility can also lead to absolute emission reductions. Feed and 30 Climate Finance and the Animal Protein Sector: Scope and Definitions nutrition improvements include improved grassland management, im- proved pastures (e.g., fertilization, use of grass and legume mix), forage mix, feed processing (e.g., chopping, urea treatment) and strategic feed supplementation. • Animal health and husbandry. Decreasing mortality, increasing fertility, and managing the herd to optimize the number of productive animals leads to improved productivity over the lifetime of the animals and at herd level. Emission intensity is decreased through higher productivity and by cutting ‘unproductive’ emissions that are associated with animals not producing any output. Optimizing animal health and husbandry prac- tices include veterinary interventions, management of reproduction (e.g., artificial insemination, sexed semen) and of the herd (e.g., optimal cull- ing rate and offtake of young animals). Improving feed and nutrition also has an important effect on animal health and reproductive performance. • Animal genetic resources. Breeding to maximize desirable traits can strongly increase productivity by improving traits such as live-weight gain, milk yield, or fertility. Adaptation traits can also be sought, to reduce mortality in challenging climate or disease contexts. Emission removals though land management Grassland worldwide covers 3.3 billion hectares and grassland soil is esti- mated to contain 343 billion tons of carbon, an amount higher than the total carbon stored in forests (FAO 2010a). The potential for soil organic carbon (SOC) sequestration in grassland depends on pedoclimatic factors as well as on grassland management, with moderate levels of fertilization and livestock density often being optimal to maintain or increase SOC stocks (Soussana et al. 2004). Approximately, 10 to 20 percent of global pastures are degraded (FAO 2010b) and it is estimated that degradation can reduce SOC stocks up to 95 percent in temperate and tropical regions (Soussana et al. 2010). A major proportion of the loss of soil carbon is released into the atmosphere as CO2, contribut- ing to GHG emissions. Conversely, restoring degraded grasslands provides a major opportunity to offset GHG emissions by putting the carbon back in the soil. Increasing soil organic matter has co-benefits for fertility, subsequent- ly allowing more plant species to grow and boosting pasture productivity. Grazing management can play an active role in grassland restoration, mainly by adapting the timing, intensity, and spatial distribution of animals to match the productivity of biomass. This can be achieved, for instance, through ro- tational grazing, fencing, introduction of species (e.g., legumes), or improved mobility of animals. This category of mitigation options of interventions related to land man- agement could offer the largest potential for absolute emissions reductions through carbon sequestration. There are, however, uncertainties in quantifying this potential, as the science regarding how climate, land use, and manage- ment interact to influence SOC changes is ongoing. Similarly, the importance 31 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR of background carbon stocks and historical land uses or management, and the reversibility of soil carbon sequestration is not fully understood (Smith et al. 2020). Cost-effective MRV approaches on soil carbon are still lacking al- though it is an area of rapid methodological developments as the world moves to greater understanding of these interactions. Carbon sequestration through grassland management and restoration should not overshadow the need to maintain existing carbon stocks. Avoiding defor- estation is critical, by preventing pasture expansion and sustainably sourcing feed (soybean in particular). All land uses and their integration should be considered including avoiding pasture conversion to cropland, promoting no-tillage cultivation, crop-livestock integration, and silvopastoralism. Technical options to reduce direct emissions This category gathers mitigation interventions ranging from already es- tablished best practices to emerging options, as classified by GRA and SAI (2015). They target two sources of emissions: manure management and en- teric fermentations. Manure management – diet has an impact on the composition of feces and urine and on emissions related to manure management. Lower feed digestibil- ity generally results in higher levels of organic matter in manure, which can be fermented and result in CH4 emissions. Matching protein intake from feed with animal requirements can be a way to limit nitrogen concentration in manure and to reduce N2O emissions. Proper manure collection and storage is an important mitigation option in systems (both low and high technological ones) where animals are concen- trated. Using best practices or adopting these mitigation measures results in significantly lowering manure management emissions in emission profiles. There are also co-benefits such as enhanced nutrients when used as fertilizer, improved hygiene, and reduction of environmental damage caused by nutri- ent run-off (e.g., eutrophication and acidification). Housing systems with hard floors (e.g., concrete, clay) combined with simple storage equipment reduce emissions compared to the absence of a storage facility. Reducing storage time but also aeration and cooler temperatures will limit or slow down the mi- crobial fermentation processes causing GHG emissions. Storage cover could reduce CH4 emissions, but it depends on the cover type (porosity, degradabil- ity) and is likely to result in higher N2O emissions when effluents are further applied on land. Capturing biogas from anaerobic processes, however, can be an effective mit- igation option with economic co-benefits. Biogas digesters can capture up to 60-80 percent of the CH4 from manure that would otherwise be emitted into the atmosphere. Mitigation potential is highest when CH4 is combusted to pro- duce electricity or heat as a replacement for fossil fuel. Biogas production can be done at various scales, from simple digestors adapted to subsistence farm- ing systems (still requiring some capital investment) to produce cooking gas, 32 Climate Finance and the Animal Protein Sector: Scope and Definitions to large-scale biogas plants that can produce renewable energy for the grid, if the corresponding infrastructure is developed. In grazing systems, manure and urine is directly deposited in pastures. Most of the manure that is collected and stored (as well as biodigester effluents) is also eventually applied back to soils. One option to mitigate the N2O emissions from these practices is to match the amount of manure deposited or applied to the nutrient requirements needed for optimal pasture or crop growth. This can be achieved by delaying application, covering a wider area, achieving a more uniform distribution, and factoring in the application of additional, syn- thetic fertilizers. Rumen modification – As enteric methane emissions represent the most sig- nificant emission source from the global livestock sector, much of the science and research in the sector focusses on methods to mitigate them. Given their significance, technological mitigation options have been the primary focus. Methane inhibitors are chemical compounds with an inhibitory effect on ru- men micro-organisms. Certain compounds have been successfully tested in vitro as well as on animals with initial trials shown to completely suppress CH4 emissions. However, uncertainties remain regarding commercial viability, im- plications for productivity, animal health, and food safety, as well as long-term efficacy due to the possible adaptation of the rumen ecosystem. Other technologies are at even earlier stages of development. Vaccines could stimulate the animal immune system to produce antibodies against metha- nogen micro-organisms. The identification of antigens to be targeted, as well as the development of effective adjuvants, is ongoing. Their potential effects on productivity must also be assessed. Another possible intervention entails transferring the rumen microbiome from low-methane to high-methane pro- ducing ruminants (differences of around 15 percent are commonly observed between individuals). The challenge of this intervention is that the effects are often temporary. Despite the emerging technical options, these are not yet ready to be fully operational and scaled up, as greater understanding is needed of the microbial ecosystem in the rumen (microbial communities taxonomy, genetics), its interaction with management and feeding practices, and on the consequences of its modification for food safety and economics. Renewable energy and energy efficiency – There is scope for mitigation in rely- ing on renewable energy and adopting energy efficient technology for livestock production, especially in more industrialized production systems and at ener- gy-intensive stages of the animal protein life cycle (transport, animal housing, processing of feed and animal products). However, energy consumption has a limited contribution to livestock emission profiles, even in intensive systems, as the emission reductions are marginal. Other sources of GHG emission reductions in the animal protein sector The mitigation options discussed above focus on the production side of the livestock sector. There is also scope for mitigation within other animal protein 33 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR value chains, as well as on the consumption side (i.e., dietary shifts between protein sources). It is difficult to quantify mitigation actions and measures along these avenues as they are problematic to evaluate and less definitive. There is a strong correlation between GDP per capita and protein consump- tion, which is mainly driven by increased consumption of proteins derived from livestock (FAO 2019a). In the lowest-income countries, the proportion of di- etary proteins coming from livestock is less than 10 percent while it reaches more than 50 percent in the highest-income countries. Meat from ruminants is by far the animal protein product with the highest emission intensity (> 200 kg CO2e/kg protein without including land use change emissions), 4 to 6 times higher than the emission intensity of dairy proteins, and 20 times higher than the emission intensity of pulses (Searchinger et al. 2019). Poultry meat and eggs are the livestock proteins with the lowest emissions per kg of protein, although their emission intensity is slightly higher than that of aquaculture (when emissions from land use change are included). Within aquaculture, the evidence base on emissions quantification and mitiga- tion options is much more limited than for livestock, but mitigation pathways have been identified (Robb et al. 2017). These include reducing emission from feed production and processing, improving the efficiency of feed conversion for fish, and improving fish health. Emerging protein sources for feed and food such as insects or synthetic meat are at the experimental stage but could have the potential to reach low emis- sion intensities. For instance, van Huis and Oonincx. (2017) report that broiler chickens are associated with 32-167 percent higher emissions intensity than mealworms based on life cycle assessment and on an edible protein basis. Housefly feed meals could decrease emissions by 61 percent compared to a soybean and fish feed meal. Few studies are available on the carbon foot- print of synthetic meat; moreover, those that are available report contrasting emission intensities (see Tuomisto et al. 2014; Matick et al. 2015). Synthetic meat is very resource and energy intensive; its carbon footprint thus depends strongly on access to decarbonized energy (Lynch and Pierrehumbert 2019) and its economic cost remains an important challenge for its development. Overall, the IPCC (2019) estimates the mitigation potential from dietary chang- es (0.7-8 GtCO2e yr-1 by 2050) to be of similar magnitude as from changes at the primary production level (2.3-9.6 GtCO2e yr-1 by 2050 from crop, livestock, and agroforestry activities). In particular, moderating the consumption of ru- minant meat is likely to be essential to close the food and emission mitigation gaps (Searchinger et al. 2019). (See the section on investment opportunities [chapter 5] for more on consumption and mitigation). However, fostering di- etary changes faces obstacles that are not explicitly addressed in the report, as diets are rooted in a complex web of drivers including local food produc- tion practices and agroecological potential, technical and financial conditions among communities, as well livelihoods and cultural patterns. 34 Climate Finance and the Animal Protein Sector: Scope and Definitions The triple wins of climate finance: dividends and incentives Climate finance as defined by the UNFCC aims at reducing emissions and enhancing sinks of greenhouse gases with the objective of reducing vulnera- bility while maintaining and increasing the resilience of human and ecological systems to negative climate change impacts. Mitigation efforts in the live- stock sector have the potential to achieve these outcomes and more. The direct mitigation outcome can be expressed in tons of CO2 of emissions re- duced or removals enhanced. Mitigation approaches essentially contribute to making systems more productive, healthy and integrated (into markets, ecosystems...), which means that they also produce indirect adaptation out- comes, such as enhanced resilience of people, production, and ecosystems. Furthermore, specific mitigation approaches can produce a wider range of positive ancillary outcomes. Emission intensity reduction through efficiency and productivity gains. Efficiency and productivity gains are directly related to emission intensity re- duction because more output and less input per output naturally coincides with lower emissions per output. The ongoing process of productivity or yield improvements can be used to make livestock systems more efficient (FAO 2019a). Productivity gains need to be considered because they represent incentives for both producers and investors, especially in low-productivity sys- tems across LMICs. From an investor’s perspective, productivity gains imply a higher return on investment. From a global sustainable development perspec- tive, and perhaps more importantly within the perspective of a rural poor or small-scale farmer/producer in a LMIC, productivity gains can have a signifi- cant impact: improving or sustaining livelihoods, enhancing gender inclusion, increasing income and access to market, increasing sources of direct nutri- tion and thus enhancing food security, providing an opportunity to improve food safety. This third mitigation outcome, enhanced socio-economic benefits through production efficiency, is both a dividend and incentive to motivate fur- ther climate finance investment. However, the three outcomes – mitigation, adaptation, and improved producers’ incomes through production efficiency – can come with trade-offs. Cattle rearing in LMICs is often a resilience strat- egy: diversifying production to sustain livelihoods, increase food sources (i.e., food security), and to create or improve ecosystem resilience. Yet, every reared animal emits GHG emissions, thus contributing to climate change, especially if not optimally managed or fed. Several of the technical options to reduce direct emissions are directly prof- itable, especially those related to energy use and production. Biogas digesters have proven to be profitable investments at various scales – from small di- gesters providing free cooking gas in remote communities not connected to the grid, to large scale biodegesters achieving economies of scale (collecting manure from large farms) and producing fuel or heat at a competitive price. Biogas digesters thus provide co-benefits for farmers’ incomes, as well as to the environment beyond climate change mitigation (potentially lower release of pathogens into the environment, eutrophication, and associated biodiversity 35 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR loss). Technical options targeting energy-use efficiency and the use of renew- able energy (at the farm, slaughterhouse, processing or transport levels) also could provide bankable investment. Emission removals though land management. Carbon sequestration is gen- erally highest in healthy agro-ecosystems, that also provide a very wide range of benefits though ecosystem services, from pest control and pollination, bio- diversity conservation, water availability and quality, resilience etc. Livestock systems can offset emissions though two main types of land management: avoiding deforestation; and sustainable grassland management. Reforesting or avoiding deforestation not only restores and protects carbon sinks be- low and above ground, it also contributes to the conservation of biodiversity hotspots. In grasslands, a large part of the sequestration potential is in the restoration of degraded land. Land restoration is a first co-benefit in itself and it is accompanied by multiple positive outcomes, as healthy grasslands are also more productive, more resilient to climate shocks and host more plant and animal species. As demand for animal protein is expected to grow, particularly in Africa and Asia, it is essential to consider desirable and undesirable outcomes of adap- tation or mitigation efforts, and to promote and demonstrate initiatives that address climate change objectives while enhancing productivity gains in live- stock systems. Acknowledging the variety of livestock production systems and the multiple functions that these provide to humans, Rivera-Ferre et al. (2016) observed several win-win strategies that effectively tackle both miti- gation and adaptation, as well as food security. Such strategies may include improving herd and grazing management, farming practices and/or pasture management. 36 Climate Finance and the Animal Protein Sector: Scope and Definitions 37 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR 3 The State of Climate Finance in the Animal Protein Sector 38 The State of Climate Finance in the Animal Protein Sector Whereas the mitigation strategies for which climate finance can be mobilized, as described in previous sections, mostly relate to upstream livestock produc- tion activities, climate finance can be directed to all activities in the animal protein value chain. Downstream actors, such as processing companies, mar- keting, retail, and wholesale enterprises have a pivotal role to play in moving the sustainability agenda forward and in providing finance alongside other re- sources and services to enable this transition. Revealing the state of climate finance flows: methodology Investigating the state of climate finance in the animal protein sector for this report entailed a multipronged approach. Both qualitative and quantitative data using primary and secondary sources were used to assess the state of climate finance in the sector. Whereas international public finance and carbon market activities can be tracked through existing databases, private finance in the land sector remains largely unmapped (COWI, Oeko-Institute, and CIFOR 2018; CPI 2019). Notably, no institution, database, or tracker holds consistent data across all regions of the world; this is particularly lacking in the meat protein sector. To address this lack, mapping the finance flows entailed an extensive literature review (published and gray literature), complemented by expert interviews. It also drew from data sources that capture public, private, and blended finance flows of existing on-the-ground projects or projects that finance activities of microfinance providers. To track public flows, the authors used the OECD database on climate-related development finance 2012–17 (OECD 2019b). Although, the mapping does not show the complete land- scape, the available information was used to distinguish the characteristics of finance flows into the sector to identify patterns and particularities. Table 3.1 summarizes the types of flow, the type of finance tracked, and the source data; Appendix B lists the interviewees and summarizes the conversations. For carbon market activities, the Clean Development Mechanism (CDM), Joint Implementation (JI), Verified Carbon Standard (VCS), and Gold Standard pro- vided a focused look at carbon crediting as a means for funding livestock mitigation projects, as these operate in LMICs (see example in Box 3.4).7 All relevant projects to this analysis were selected based on availability and mag- nitude of information within their respective databases. The extensive literature research generated information on finance flows from international institutional, personal, and commercial investors, including flows trickling down to farm-level interventions. Due to the overall absence of 7 There are several other carbon crediting programs that exist at a country level that credit livestock-related activities. They are not included as they are located in high-income countries and are outside of the scope of the regions presented in this report. These cred- iting mechanisms include the Australian Emissions Reduction Fund, the California Carbon Offset Program (United States), Climate Action Reserve (United States), Label Bas Carbone (France), and the Québec Offset Program (Canada). 39 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR TABLE 3.1 Tracking of Climate Finance Flows in the Animal Protein Sector Type of Flow (*) Type of Finance Sources Private Tracked • ImpactAssets50 database • Livestock insurance (ImpactAssets 2020) Tracked with data limitations • Investor networks such as Convergence and GIIN • Direct financing of production by international private and blended investment • FAIRR indicator – Sustainability indicator for management institutions, commercial the largest protein producers (FAIRR 2020) banks, local financial institutions, and • Sustainability reports of the largest main international philanthropies beef and dairy companies (turnover) • Company own finance toward corporate social responsibility Carbon Market Tracked • CDM Registry (UNFCCC 2019a) • International and domestic carbon market • Gold Standard Project Database activities toward the animal protein sector (The Gold Standard 2019) • JI Project Database (UNFCCC 2019b) • VCS Project Database (Verra 2015) Public Finance Tracked • Organisation for Economic Co-operation and • International public finance Development climate-related Development Finance Database 2012–2017 (OECD 2019b) Note: See Appendix A.3 for a list of considered cases. *Domestic public finance flows not tracked. uniform data sources, the deficiencies in the way it is represented, and the lack of specific sector data, several challenges were revealed. Specifically, those regarding assessing the weight of private sector flows in the broader realm of climate finance directed toward the livestock sector. Addressing the challeng- es faced in creating a comprehensive body of data and information the (e.g., generalized lack of financial data, especially in local private transactions; the near absence of record-keeping; and the importance of informal markets in LMICs), would benefit all current and potential financial actors in the animal protein sector. Mapping the flows highlighted several specificities. For example, some bank- able projects that lead to emissions reduction are implemented primarily for productivity gains, or investors prioritize food security and poverty reduction, while the mitigation component remains neglected. The Rabo Foundation, for instance, fosters crossbreeding to enhance productivity only.8 8 See a Rabobank Foundation project that encourages crossbreeding in Tanzania, available at https://www.rabobank.com/en/ raboworld/articles/crossbreeding-and-an-app-boost-tanzanian-dairy.html. 40 The State of Climate Finance in the Animal Protein Sector The analysis of the portfolios of private actors consisted of: 1. Identifying investments directed to the animal protein sector; and 2. Identifying types of outcomes that investors wish to achieve through investment. Another integral part of the methodology included portfolio analyses of interna- tional private and blended investment management institutions, commercial banks, local financial institutions, and the main international philanthropic organizations. Based on the outcomes that investors wished to achieve, the cases were clustered in three categories (summarized in Table 3.2), which pro- vide the structure of the overall analysis. TABLE 3.2 Categorization of Private Climate Finance Flows into the Animal Protein Sector Category Explanation Identified cases Direct Climate Directed toward the animal protein sector 38 Finance Advocated climate mitigation and/or adaptation outcome Indirect Climate Directed toward the animal protein sector 51 Finance Investments led to a climate outcome (adaptation or mitigation) which remains unmentioned/unidentified Potential Future Impact Investment toward the animal protein 10 Streams sector, no clear relation with climate action This is funding that could support climate outcomes, but for which insufficient information exists to determine whether it is supportive or (possibly) counter-supportive 41 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Main trends and potential for scaling up investments in the livestock sector9 Mapping direct and indirect climate finance flows toward the upstream ac- tivities of animal protein chains highlighted that there is potential for private investment, though obstacles do exist. Another result yielded the following characteristics of the current landscape: • Five approaches to finance schemes that target GHG emissions induced by the livestock sector; • Emission mitigation is often an unlabeled (i.e., an unsought or unfore- seen) co-benefit of existing investments; • The potential for carbon markets is promising yet challenging; and • Six climate finance schemes seem to be most promising for future implementation. Private investment potential: opportunities and obstacles The list of potential public and private investors—grantors, concessional cap- ital providers, equity providers, commercial lenders—suggests that private sources could represent the largest source of climate finance in the sector (see Figure 2.1). However, not all depicted private sources are effectively lever- aging climate finance toward the animal protein sector. Despite improvements in the enabling environment and market conditions in LMICs, as well as the recent expansion of private climate finance and the emergence of innovative ways to approach climate finance, private engagement remains marginal compared to the global share of climate finance. Land-use investments are an underdeveloped investment opportunity. An estimated $300–400 billion in investment is needed yearly in order to provide protection to a wide range of ecosystems, but investors are facing a lack of investable projects that provide desirable risk-adjusted returns and conservation benefits (Lang, Rodinciuc, and Humphrey 2017, p. 23). Private investors, and in particular, impact investors, could highly benefit from the likelihood of triple outcomes (as noted in chapters 1 and 2) in the ani- mal protein sector, as compared to other sectors such as renewable energy low-carbon transport. However, considering both private and public flows, it seems that this comparative advantage is not used to promote climate finance toward the sector. Stressing this comparative advantage of adaptation and livelihood outcomes, refining existing project design with explicit mitigation pathways could spark interest in broader climate action within the livestock sector. 9 Appendix A contains the data and cases that informed this chapter. 42 The State of Climate Finance in the Animal Protein Sector Investments in land use, and more specifically investments in the livestock sector, are viewed by private investors as undervalued. The private sector is not yet interested in it as an investment opportunity, for the following reasons: • The low profitability and high-risk profile perceived by investors; • The difficulty and cost of measuring the economic impact of mitigation pathways; • The low degree of technical knowledge about potential benefits associ- ated with mitigation; and • The context that total emissions of an investment case are likely to in- crease as a result of productivity gains. Only a few livestock projects can advocate the triple-outcome nature of live- stock interventions and their general bankability. Prior to attracting private sector interest, bilateral or multilateral donors, through ODA, need to take on risks and help develop and strengthen livestock value chains and develop such proof-of-concept projects.10 Sectoral development11—through capaci- ty building in the implementation and MRV of mitigation pathways; training; developing of marketing channels; extending health services; aggregating smallholders; scaling up financial services to smallholders, pastoralist com- munities, and other livestock-dependent livelihoods—is a necessary condition to further leverage (private) investment. Although a significant share of sec- toral development can be undertaken and financed by private-sector actors, ODA and development actors are key to overcoming financial and market ob- stacles, building on their experience and presence as well as networks and capacities in local settings. 10 Interview conducted with Polly Ericksen of the ILRI on November 29, 2019. 11 Interview conducted with Fritz Schneider of the Global Agenda for Sustainable Livestock and Polly Ericksen of the ILRI on November 22, 2019 and November 29, 2019, respectively. 43 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR BOX 3.1 Addressing Obstacles to Investments in Mitigation Practices: The Innovative Model of Ecopec by Brazil Climate Lab OBJECTIVE OF THE PROGRAM TARGET BENEFICIARIES FINANCIAL INSTRUMENTS OBSTACLES ADDRESSED Limiting deforestation caused Brazilian cattle ranchers Equity or long-term Lack of access to finance at by cattle ranchers in Brazil loan combined with reasonable rate, technical technical assistance capacities and creation of a deforestation-free beef market In 2017 the Brazil Climate Lab launched the pilot Partnership Agreement” between the New Company phase of Ecopec, an innovative financial mechanism and the cattle rancher. intending to address deforestation caused by cattle The New Company then delivers between 10 and 85 ranchers in Brazil. The initiative aims to provide percent of upfront capital and necessary ongoing ranchers with the necessary financial and technical funding for 10 years, along with continuous technical support to comply with the Brazil Forest Code. assistance. Rather than land titles, traceable livestock A diagnostic phase identified four main concerns that serves as guarantees to secure loans, using the latest need to be addressed simultaneously to ensure the monitoring technology to trace animal ownership. success of such a program: The New Company serves as an aggregator to 1. Ranchers have long-term financing needs, negotiate better prices for inputs—such as feed and previously not met by financial products offered; offtake agreements—with processing companies and 2. Ranchers do not have the collateral necessary retailers. for banks to offer them economically sustainable Over the ten years, the net profit is shared between interest rates; the New Company and the rancher proportionally to 3. Ranchers often lack the technical capacities to the initial investment provided by each party. The New implement intensification practices successfully; Company uses these dividends to pay the investors’ and part of the program. 4. The beef processing market is highly concentrated, The program uses several sources of funding. Grants and ranchers lack the bargaining power to from private foundations are dedicated to technical negotiate higher prices for deforestation-free beef. assistance and due diligence expenses. Concessional To address these obstacles, the Brazil Climate Lab finance and first-loss capital serve to co-finance and created The New Climate Smart Cattle Ranching guarantee the long-term pipeline of projects. Equity Company (“The New Company”) to provide ranchers funds from impact investors, such as Naturvest, with their long term needs to implement intensification enable the New Company to negotiate input prices and practices successfully. The goal is to increase their conditions and develop a market for deforestation-free land productivity, thereby reducing GHG emissions beef. from degraded pastures and deforestation related to This financial instrument directly addresses the four beef production. concerns identified in the diagnostic phase. The The program works as follow: Nature Conservancy implemented the program across Cattle ranchers willing to be part of the program go 43 farms over 40,000 hectares. The results show through a thorough screening to ensure they can that ranchers increased their productivity, became undertake such investment. The New Company then compliant with the Forest Code, and supplied better surveys the land and assess, with the ranchers, the quality beef at better prices for meatpackers. Research financial and technical needs and best strategy to demonstrates that over 100 ranchers in the region are comply with the Forest Code, while maximizing their willing to adopt sustainable practices in exchange for future revenues. This action plan is detailed in a “Rural better access to credit. Source: Brazil Climate Lab 44 The State of Climate Finance in the Animal Protein Sector FIGURE B3.1.1 Ecopec Mechanism Agg reg CSCR NEWCO ate Tec dp hn ur Pro ic c INVESTORS The Climate Smart Cattle pe al ha rty sin as Ranching instrument d sis gs iag t aggregates fee-for-service erv an GRANTORS no $ ce ices contracts with ranchers, stic increasing the leverage an s individual rancher has with CONCESSIONAL Return service providers and buyers CAPITAL PROVIDER while supporting better rancher productivity. In return $ RANCHER EQUITY Return for a share of profits resulting PROVIDER from improved productivity, $ RANCHER the NewCo provides loans, technical assistance, sales $ RANCHER COMERCIAL Return assessments, and negotiating LENDER terms with end buyers. RANCHER $ $ PREFERRED VENDORS AND PARTNERS Agreements between the CSCR NewCo and preferred vendors leverages the aggregated purchasing power of multiple ranchers and ensures buyers for consistent, high quality beef delivery. 45 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Targeting GHG emissions reductions in the livestock sector The mapping of climate mitigation finance flows to the animal protein sector revealed five common finance approaches to tackle emissions reduction. 1. Blended finance: approaches that are mobilized by private sector investors, which includes some form of ODA or philanthropic investment. These are focused on sustainable intensification of cattle ranching, including silvopastoral systems and avoiding or mitigating deforestation, (Latin America model). 2. Jurisdictional finance: approaches for schemes that support sustainable sourcing of animal protein-related commodities. 3. Self-financing: approaches used by downstream actors that self-finance climate action within their value chains; these were most often inspired by business opportunities or by sustainability concerns. 4. Livestock insurance: approaches related to risk finance, such as index-based insurance, which decrease the vulnerability of livestock farmers from the negative impacts of climate change and increase long-term resilience. 5. Carbon market: finance for methane avoidance schemes financed by the carbon market. Blended finance The increasing number of blended finance structures—many of which are targeted as impact investments— (see Table 3.3) addressing sustainable in- tensification of cattle ranching in Latin America suggest that such structures can achieve economic viability (see Box 3.2). Climate-related ODA is an aspect of blended finance, though in this study, the focus is on the private sector as the main instigator, investor, or partner.12 Table 3.3 provides examples of private sector led blended climate finance proj- ects. Most are in Brazil and are part of a dedicated climate fund. Mitigation pathways revolve(d) around avoiding deforestation practices, which often involve livestock systems. Such projects deliver both mitigation and adapta- tion outcomes, while also contributing to the improvement of communities’ livelihoods. 12 Focusing on Latin America international public finance flows, this research found that the flows are substantial, with 20.3 percent of climate-related ODA within the livestock sector ($21.5 million in grants) allocated to silvopastoral systems in Colombia and another $4.4 million (in grants) to avoid deforestation from cattle ranching in Latin America (in Bolivia, Brazil, and Colombia). 46 The State of Climate Finance in the Animal Protein Sector TABLE 3.3 Private Sector Climate Finance toward Sustainable Intensification of Cattle Ranching in Latin America Case Description & Mitigation Outcomes Pathways Novo Campo Project under Althelia Mitigation: Avoided GHG emissions from deforestation, Program, Brazil Climate Fund soil carbon sequestration from grazing management Avoided deforestation through Adaptation: Ecosystem resilience due to intact ecosystems sustainable intensification, Livelihood: Increased rural incomes and productivity gains grazing management INOCAS, Brazil Project under Althelia Mitigation: Avoided GHG emissions from deforestation, Climate Fund carbon sequestration from trees in silvopastoral systems Avoided deforestation due to Adaptation: Ecosystem resilience due offering alternative income to enhanced micro-climate sources, silvopastoral systems Livelihood: Increased rural incomes through income diversification Satellite-based Project under eco.business fund, Mitigation: Avoided GHG emissions from deforestation, forest monitoring local partner Lafise Bancentro soil carbon sequestration from grazing management project, Grazing management, Adaptation: Ecosystem resilience due to intact ecosystems Nicaragua avoided deforestation Livelihood: Increased rural incomes and productivity gains through sustainable intensification of livestock Climate Smart Project by Naturevest and the Mitigation: Avoided GHG emissions from deforestation, Cattle Ranching, Nature Conservancy, endorsed carbon sequestration from trees in silvopastoral systems Brazil by Climate Finance Lab Adaptation: Ecosystem resilience due Avoided deforestation due to to enhanced microclimate sustainable intensification of Livelihood: Increased rural incomes and productivity gains livestock, silvopastoral systems Integrated Crop- Project implemented Mitigation: Avoided GHG emissions from deforestation, Livestock-Forest by Rabobank, WWF carbon sequestration from trees in silvopastoral systems Systems, Brazil Brazil, and UNEP Adaptation: Ecosystem resilience due (and Indonesia) Silvopastoral systems to enhanced microclimate Livelihood: Increased rural incomes and productivity gains Note: Links to the programs are available in Appendix Table A.3.1 An Inventory of Private Climate Flows. GHG = greenhouse gas; INOCAS = Innovative Oil and Carbon Solutions; UNEP = United Nations Environment Programme; WWF = World Wildlife Fund. The Livelihood Funds project in Kenya provides another example of a private sector led blended funding approach. The impact investment fund pools eq- uity investment from private sector companies to provide upfront finance for project developers (such as NGOs or socially responsible companies) to build more resilient rural communities and ecosystems. The return on investment is achieved through carbon credits, grants from the government resulting from successful preservation of the watershed, and the fee that the partner dairy company pays for the increase in milk quality and quantity. The project is sum- marized in Figure 3.1. 47 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR FIGURE 3.1 Stakeholders within the Kenyan Livelihoods Funds Project S TA K E S OUR SOLUTION LOCAL FARMERS Need to increase revenue & improve livelihoods BUILD DAIRY COMPANY PRODUCE MORE INCREASE MILK PRESERVE THE PUBLIC-PRIVATE Needs to increase its milk & BETTER PRODUCTION ECOSYSTEM COALITION supply & decrease volatility of milk production • Connect farmers, Livelihoods 3F provides Improved crops The planted trees absorb NGO, dairy company, upfront financing to NGO provide fooder for CO2 increase soil fertility Goverment and for project implementation: cows. They are and reduce soil erosion. GOVERNMENT carbon credit buyers • Soil management better fed and Sufficient fodder & water Needs to halt reduction of produce more milk. for cows prevent water levels at local • Design a large-scale (agroforestry→combined project at landscape planting of trees and uncontrolled grazing. watersheds level to create mutual crops) value for all parties • Farm management (fodder CARBON CREDIT BUYERS production & milking) Need to obtain high-quality carbon credits to offset their •Milk collection (quality & emissions storage) Source: Based on Livelihoods Funds 2016, https://www.livelihoods.eu/l3f/. Jurisdictional finance Jurisdictional programs are developed at the local level. They are blended finance approaches focusing on sustainability initiatives that bring togeth- er key stakeholders (public, private, civil society) to align their commitments and jointly realize sustainability objectives within the same jurisdiction. This approach emerged from the realization that public-private partnerships are required to scale positive results for responsible production and conservation. For local governments, jurisdictional approaches entail the prospect of sus- tainable and low-carbon development for their region, along with increased investments, revenues, and economic activity. Globally, the socio-environmen- tal impact achieved will be recognized by putting jurisdictions on the radar of international stakeholders. Actors throughout the value chain benefit from jurisdictional programs. Producers can obtain better market conditions as a result of the commitment from downstream actors, and potentially they can receive additional technical assistance and access to finance. Traders com- pliant with evolving environmental expectations of buyers and consumers can maintain good relations with both, as well as with the local authorities. Finally, as retail and wholesale actors are most proximate to the consumer, they are motivated to communicate sustainability efforts as marketing tools. For brands, therefore, jurisdictional programs also have marketing value. Table 3.4 provides an overview of existing jurisdictional initiatives with pro- grams related to the animal protein sector. To date, the focus has been on reducing deforestation and forest degradation, which are important in the context of feed production. Other mitigation pathways deserve consideration, however, particularly those regarding grazing systems and animal rearing, which, could be included alongside deforestation projects. Adjusting objec- tives moderately to include other aspects of the livestock sector mitigation targets would illuminate an array of mitigation pathways that can be applied in 48 combination with deforestation initiatives. The State of Climate Finance in the Animal Protein Sector BOX 3.2 Blended Finance in Practice: The Success of the Eco.Business Fund Structure OBJECTIVE OF THE PROGRAM TARGET BENEFICIARIES FINANCIAL INSTRUMENTS OBSTACLES ADDRESSED Addressing conservation Producers or value- Dedicated funds using Obstacles addressed: of natural resources in chain aggregators blended-finance de- Investors’ risk perception, agriculture value chains risking mechanisms and technological obstacles, technical assistance value-chain integration Eco.Business Fund created an innovative financial Fund by offering technical assistance to the Fund structure to address climate issues, such as beneficiaries, allowing for a first layer of de-risking deforestation, along with co-benefits, such as job of the Fund’s investments. The second layer of de- creation. The Fund promotes sustainable practices risking consists of contributions invested in the Fund to tackle biodiversity losses and conservation of by public investors and donors that will serve as the natural resources by adopting better practices in Latin first loss mechanism to protect private institutional America, the Caribbean, and Sub-Saharan Africa. The investors’ capital. Fund focuses on agriculture and agri-processing, To address deforestation induced by cattle ranching in fisheries and aquaculture, forestry, and tourism. Nicaragua and Panama, the eco.business Development Eco.business fund adapted blended finance Facility provided support to financial institutions to mechanisms through the use of two facilities: eco. adopt new technologies such as drones and satellite business Fund and eco.business Development imagery to monitor forest protections and assess Facility. The Fund finances activities either by environmental risks during financial decision processes. directly supporting the development of sustainable In 2019, this program enabled financial institutions in businesses or by using value-chain intermediaries. Nicaragua and Panama to collect information from Intermediaries can be either financial institutions 175 ranches. With the information gathered, ranchers committed to providing green finance to a pool of received adapted training to avoid forest losses and businesses or actors seeking to increase a value implement sustainable practices to preserve existing chain’s sustainability. An example of a value-chain ecosystems and reforest depleted areas. intermediary would be a commodity buyer whose Since 2014, the eco.business Fund has contributed goal would be to improve the upstream supply-chain’s to developing 271,000 hectares of farmland under sustainability by providing financial capacities to sustainable management and provided support to partner producers to improve their practices. Eco. 380,000 jobs. business Development Facility will complement the FIGURE B3.2.1 Eco.business Fund Blended Finance Mechanism. Source: eco.business Fund (URL: eco- business.fund) Direct Investments Funding Investor Financial Institutions Dedicated Financing Target Groups Sponsoring Real-Sector Intermediaries Donors Technical Assistance 49 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR TABLE 3.4 Existing Jurisdictional Initiatives Initiative Description Pilots/Jurisdictions IFSL • BioCarbon Fund’s Initiative for Sustainable Forest • Colombia, Orinoquía region Landscapes (https://www.biocarbonfund-isfl.org/) • Ethiopia, Oromia Region • Multilateral fund supported by governments • Indonesia, Jambi Province and managed by the World Bank • Mexico, State of Nuevo León Verified Sourcing • Initiated by IDH (https://www.idhsustainabletrade. • Brazil, Mato Grosso Areas (VSA) com/landscapes/verified-sourcing-areas/) in 2018 • Providing a platform for committed buyers to connect to coalitions of stakeholders in sourcing areas (facilitates information & communication) • Coalitions consist of farmers, producers, government and civil society who have jointly agreed on a compact • Committed buyers can support compacts, monitor progress, and deliver on their sustainability commitments • Next steps are development of VSA business case and guidance material, Setting up MRV system and VSA platform Landscape • Initiated in 2016 by the WWF (https:// • Georgia, Adjara mountains Finance Lab www.landscapefinancelab.org/) • Paraguay, Upper Parana • Incubator for sustainable landscapes programs Atlantic Forests • Build learning, capacity. and impact measurement via an online platform • Four-step incubation process: Discover (ideas for commercial potential, impact at scale, governance, and support structure); Structure (team, partners, technical resources, and sourcing funds business case and concept note); Develop (full-fledged proposal); Fund (coaching for investor and donor cases) Note: IDH = The Sustainable Trade Initiative; IFSL = Initiative for Sustainable Forest Landscapes; VSA = Verified Sourcing Area; WWF = World Wildlife Fund. The initiatives highlighted in Table 3.4 each focus on different enablers. The Landscape Finance Lab places strong emphasis on the investment and fi- nancing aspect of program development. The VSA model aims to provide a platform for effective communication and facilitates stakeholder engagement. The Initiative for Sustainable Forest Landscapes (IFSL) model seeks to com- bine the landscape approach with paying for results, including an improvement of the carbon balance alongside non-carbon benefits. 50 The State of Climate Finance in the Animal Protein Sector Self-finance Motivation may be a significant factor for instigating private sector self-fi- nance of downstream actors in the value chain. As the entire animal protein sector is increasingly scrutinized as unsustainable, the role of value chain ac- tors—from slaughterhouses, dairy processors, etc., all the way downstream to retailers—has become more visible. Thus, although in the minority, some val- ue-chain actors are starting to realize the importance of sustainable business operations. By initiating projects, value-chain actors strive to become part of the solution instead of being part of the problem (see Box 3.3). Several examples of self-finance approaches stand out. Global producers, dis- tributors, and food franchises are motivated to encourage sustainability while providing funds for mitigation projects. The Brazilian processing company, Marfrig, installed a Sustainable Transition Bond of $500 million the objective of which is to stop all deforestation caused by its suppliers in the Amazon region (Freitas, 2019). While it is not a common financing instrument in the livestock sector, Marfrig shows how this kind of financing can be profitable for private sector actors, thus incentivizing other actors to issue future transition bonds. Walmart is another example of a company that has launched an initiative to help eradicate deforestation. It developed a Beef Monitoring System in Brazil, which tracks the origin of the meat to ensure that suppliers are not involved in illegal deforestation from activities along their value chains (Walmart 2018). As one of the largest, if not the largest beef-purchasing company in the world, McDonalds has also entered the realm of climate self-finance. It developed partnerships with the Brazil chapter of a global NGO, Proforest, and a Brazilian agribusiness company, Agrotool, to improve the tracking of beef suppliers and their impact on deforestation (McDonald’s, n.d.). Their goal is to eliminate de- forestation from their supply chains. As an alternative to land-based mitigation pathways, companies also invest in mitigation opportunities related to animal health and nutrition. DSM, a global science company in the nutrition, health, and sustainable living sphere, actively directs its own finance toward livestock R&D. It has spent ten years developing the feed additive, Bovaer®, which “reduces enteric methane emission in ru- minants by approximately 30%” (DSM Website undated). Along with lowering emissions, it has the potential to incentivize sourcing as it will contribute to the emissions reduction targets of companies that may source from farms that utilize the product.13 The international fertilizer producer Yara International presents another example of providing value chain finance and advice to po- tential clients of their products.14 13 Interview conducted with Mark van Nieuwland and Carlos Saviani of DSM, January 7, 2020. 14 Interview conducted with Bernhard Stormyr and Kevin Cunningham of Yara International, January 16, 2020. 51 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR BOX 3.3 Value-Chain Finance in Practice: The Cocoa and Forests Initiative OBJECTIVE OF THE PROGRAM TARGET BENEFICIARIES FINANCIAL INSTRUMENTS OBSTACLES ADDRESSED End deforestation due The whole cocoa Payments for environmental Supply-chain integration, to cocoa production in value chain services, technical assistance finance dedicated to Ghana and Côte d’Ivoire. smallholder farmers, policy framework The Cocoa and Forests Initiative, introduced by To achieve these goals, the program focused on four the cocoa industry in Ghana and Côte d’Ivoire is a components: successful example of stakeholder engagement • Driving alignment of the stakeholders; along the value chain to halt deforestation, providing • Integrating smallholder supports; relevant insights for the animal protein sector. In • Mobilizing finance; and 2017, the governments of Ghana and Côte d’Ivoire • Enhancing an enabling environment. signed an agreement with the world’s major cocoa and chocolate companies to halt deforestation and The programs aligned the interests of governments, support restoration and protection of forest within the large corporations, and smallholder producers. cocoa value chain. The World Cocoa Foundation, the Innovative financial mechanisms ensured that Sustainable Trade Initiative, and the Prince of Wales’s financial burdens for implementation were not International Sustainability Unit partnered with the placed on producers and farmers. A payment for governments of Ghana and Côte d’Ivoire to form this environmental services (PES) program was developed public-private partnership. in partnership with the national Côte d’Ivoire REDD+ program through which farmers receive incentive The initiative is committed to achieving several major payments to protect and reforest degraded areas. goals: After one year, 1,340 farmers had signed on to be • Protection of existing forests and restoration of part of PES program. The design of an integrated degraded forests; support package for smallholder producers ensured • Promote sustainable cocoa production and im- that they were receiving the necessary technical and prove farmers’ livelihoods; and financial assistance to adopt climate-smart practices. • Community engagement and social inclusion, The project used blended finance to lower the risks focusing on women and youth. and attract private investors. It also developed a strong monitoring system using satellite imagery and The partner companies delivered their initial strengthened the governance of forests. implementation plan in 2019 providing details on how the private sector will commit to the agreement The initiative aims to stop cocoa-related deforestation signed in 2017. Each company provided an action plan by 2022. As of 2020, the initiative has trained 1 million until 2022 based on their role in the value-chain, their farmers in good agriculture practices, mapped 1 priorities, and their sustainability goals. million farms and dedicating new technologies to the monitoring of forests, and distributed 4 multi-purpose trees to farmers to promote agroforestry. Livestock insurance-based finance Index-based insurance or indexed weather-based insurance, a relative newcomer in the climate finance world, is an important instrument for imme- diate disaster risk reduction and for reducing farmers’ vulnerability to climatic events, building long-term resilience. It also has the potential to incorporate remunerations or premiums for mitigation pathways. Participating farmers who perceive the benefits from an insurance scheme might be willing to en- gage in activities linked to mitigation outcomes if incentivized accordingly. 52 The State of Climate Finance in the Animal Protein Sector Index-based insurance was identified by several interviewees as a promising way to contribute to solving climate change problems, if combined with mit- igation conditionalities.15 Some experts stated that index-based insurance is an innovative way of incentivizing behavior change, by linking it to mitigation pathways. Farmers can become part of the scheme only if they promise to engage in more sustainable rangeland management. The most common form of index-based insurance is crop or agriculture based rather than livestock based, but it can act as an indicator of expansion pos- sibilities. Latin America has many crop insurance schemes, but little or no Index-Based Livestock Insurance (IBLI) offerings. An IBLI has been piloted in Mongolia, however. The Kashf Foundation in Pakistan provides loans for ani- mal insurance for livestock theft or death due to illness. In general, any region that is particularly vulnerable to increased risk of climate disaster (for example, flood, drought, disease) has the potential to adopt an IBLI. In the early 2000s, frequent patterns of extreme weather in Mongolia caused concern from herders who were subject to major losses in their livestock. With World Bank support, the Government of Mongolia initiated a project in 2006 to provide IBLI to Mongolian herders, who make up 33 percent of the country’s workforce. Five insurance companies participated, and in 2008, $340,000 was paid out to herders from which only a small portion came from the government (CDKN 2013). Since 2012, IBLI has been readily available across the country (Bertram-Huemmer and Kraehnert 2017). Lessons from the project highlight that success depends on the need for high-quality data, education, and train- ing. In addition, keeping insurance affordable is vital to the long-term viability of any potential IBLI program to ensure that it is affordable for smallholders. The availability of IBLI in Africa is rather low, with the most stable access in Kenya and Ethiopia. Most other countries with IBLI have pilot programs or pro- grams based on grants. Currently, all IBLI uses satellite imagery to measure vegetation density and level of pasture to analyze the deviation in forage availability from a given baseline in a given region. The common index used for this is the Normalized Differenced Vegetation Index (NDVI), which can predict livestock mortality rates. When the NDVI drops below a particular threshold, then policyholders will be given a pay-out. The International Livestock Research Institute (ILRI), as a leading research organization, has spearheaded and acted as a support for numerous private and public institutions in implementing index-based pay- ment schemes in Kenya and Ethiopia. Carbon market Carbon markets and carbon taxes remain the only global mechanisms that attempt to valuate climate mitigation action. However, prices in compliance markets are too low to effectively trigger lower carbon balances. Countries 15 Interviews conducted with Vikas Choudhary at the World Bank Agriculture Global Practice on November 25, 2019, and Polly Ericksen of the International Livestock Research Institute (ILRI) on November 29, 2019. 53 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR would need to set a carbon price of $40–$80/t CO2e in 2020, then $50–$100/t CO2e in 2030 to be effective (High-Level Commission on Carbon Prices 2017). In 2018, the 1,568 transactions recorded in the carbon market totaled only 90.7 MtCO2e. Most credits have been generated within forestry and land use (50.7 MtCO2e for, on average, $3.2 per ton) as well as renewable energy (23.8 MtCO2e for, on average, $1.7 per ton), both relevant to the animal protein sector (Donofrio et al., 2019). The mapping of carbon market activities revealed a general absence of project types other than manure management. Methane recovery from animal ma- nure has proven to be a popular project type because it has cost-efficient MRV methodologies. One factor that favors methane recovery over other project types is that methane has a higher global warming potential than carbon diox- ide, resulting in a higher number of credits. The most frequently seen projects are methane capture from manure, as these projects represent an incremental investment onto an already existing system. Bioenergy projects that require high investment in technology have little to no uptake under the CDM or other mechanisms despite the potential of carbon credits to close financing gaps. Manure management is a relevant mitigation pathway for GHG mitigation and circular economy. The production of manure-based biogas is a way to turn livestock emissions into solutions for other industries—such as production of fertilizer, generation of electricity, and provision of fuel for cooling or cooking. The Kenya Biogas Program registered under the Gold Standard provides do- mestic biodigesters for livestock-holding households to reduce dependence on stoves with heavy smoke and pollution from firewood. The slurry from the biodigester can be used as organic fertilizer in crops, potentially increasing rural incomes. To combat the cost of biogas technology, there are credit part- nerships set up with financial institutions to aid families in the purchase of the biodigesters. The program has resulted in a 333,500 MtCO2e reduction. The cost per offset in the program is $19 with all possible offsets already sold out, indicating a functioning transfer of funds to the project level. Yet, measurable adaptation benefits of the program have not been evaluated as the project income generated from selling carbon offset credits is said to benefit users in the form of training, after-sales support, and other useful services. 54 The State of Climate Finance in the Animal Protein Sector BOX 3.4 Incorporating Carbon Credits in Livestock Investment Programs in Practice: The Case of Livelihoods Mount Elgon Project in Kenya OBJECTIVE OF THE PROGRAM TARGET BENEFICIARIES FINANCIAL INSTRUMENTS OBSTACLES ADDRESSED Decreasing the GHG intensity Smallholder dairy producers Value-chain finance, Cost efficient MRV of dairy production in the carbon credits, and methodology, technical Mount Elgon region in Kenya technical assistance obstacles, creating an enabling environment Unsustainable land-use and agriculture practices have institutions and NGOs to reduce its risks and ensure contributed to the loss of biodiversity and soil erosion programs are adapted to beneficiaries. The fund in the Mount Elgon region and the watershed of Lake provides upfront payment to implementing partners Victoria in Kenya. These practices affect farmers’ and, in exchange, receives high quality certified revenues as crop yield and milk production per animal carbon credits when the environmental results are are low, and farmers do not have viable connections to met. Twelve large companies are investing in the markets. fund (Danone, Schneider Electric, Crédit Agricole S.A., Michelin, Hermès, SAP, Groupe Caisse des Dépôts, La In 2016 Livelihoods Funds, in partnership with Vi Poste, Firmenich, Voyageurs du Monde, Mars Inc., and Agroforestry and Brookside Africa, initiated a 10-year Veolia). Through investment in the fund operations, project that aims to implement sustainable agriculture they can offset their activities using carbon credit practices in the Mount Elgon region to preserve the mechanisms. watershed and avoid soil erosion, improve production and livelihoods, and sequester 1 million tons of CO2 In Mount Elgon’s case, Livelihood provides the throughout the project. upfront capital for the project’s implementation and operations. Brookside will co-invest and commit to buy As a multi-pronged project with several related the whole milk production for ten years. Vi Agroforestry components delivered to 30,000 smallholder dairy is in charge of the implementation and monitoring of farmers the objectives are many, with aims to: the project. • Increase milk production per animal from 3 to 6-9 Carbon sequestration is tracked through the liters per day; increase in cow efficiency and crop productivity due • Implement fodder production in dairy farms to to the adoption of Sustainable Agricultural Land improve the access and quality of feed year-round, Management practices. Farmers themselves fill in a • Enhance breeding through high-quality artificial simple farm activity monitoring form every season. insemination; This data is then computed by Vi Agroforestry and • Stabilize farmers’ incomes with a guaranteed buyer Unique Land Use and Forestry. The quantity of carbon (Brookside Dairy for the whole milk production for sequestrated is used as an indicator of the results ten years). delivered by the project. This first of its kind carbon Notably, these livelihood objectives are implemented measurement, approved by the Gold Standard, has alongside climate mitigation objectives, including been specially designed for the Livelihoods Mount nutrient management such as mulching and Elgon project. composting, soil, and water conservation such as The project provides additional co-benefits to the retention ditches; agronomic practices such as dairy farmers. The project aims to strengthen existing crop rotation and intercropping; and agroforestry by cooperatives and empower women by giving them an growing trees alongside crops and livestock. active decision-making role in the dairy value chain. To achieve these objectives, the project uses an Through Brookside’s involvement, the project creates innovative finance mechanism. Livelihood funds is long-term connections of smallholder farmers to the specialized in large-scale investments in Africa, Asia, dairy market. and Latin America, where it partners with local public 55 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Unlabeled climate finance The mapping of private climate finance flows revealed that although some investments and grants from both private investors and ODA have a direct impact on GHG emissions, these results are often not measured. This hap- pens for two reasons: monitoring other outcomes such as poverty alleviation or food security is more straightforward and does not require complicated methodology; and tracking the effects of a project in emission reduction is costly and requires additional funding, or it could undermine the profitability of the project. As a result, some projects will not be labelled as climate-related in- vestments, although they clearly have a direct impact on emission reductions. However, these projects could be an interesting point of entry for climate finance to have an impact on the animal protein sector. For example, the outcomes of many companies’ CSR investments have had indirect climate benefits suggesting untapped potential for climate investments. Some of the largest beef and dairy companies self-finance a wide range of business practices, dealing with sustainability and yet not explicitly present- ing activities as climate related. However, they could get involved in financing mitigation pathways. For example, New Hope Liuhe Co. Ltd., a Chinese company among the top ten feed producers in the world, targets poverty reduction through its CSR strat- egy. The company provides animal feed to smallholder farmers, coupled with training toward increasing the efficiency of the production. These activities can have an impact on the emission intensity of the livestock, but so far only outcomes related to poverty alleviation are considered. Additionally, Nestlé promotes sustainable rural production of dairy by purchasing at the local level. The company also provides training to promote better understanding of the transport and infrastructure networks. With support from Nestlé, a process- ing factory in Moga, India has grown its production from 2,000 to 300,000 tons of milk and has introduced tree planting programs. Other than income support for smallholders, this initiative is able to mitigate GHG emissions in- directly through carbon capture in tree planting and a more rational transport of production. The mapping of the climate finance flows in the animal protein sector showed that impact investing is the second key investor for which environmental out- come are not systematically measured. Impact investment asset managers are crucial private actors in the livestock climate finance architecture because they can take on the higher risks in live- stock ventures and can identify and access smaller-scale projects compared to other private actors.16 The mapping of private finance flows further revealed that investment in agriculture and forestry are strongly related sectors with a similar risk profile to livestock. Out of the 74 impact investment funds listed 16 Interview conducted with Zoe Knight of the World Economic Forum and the HSBC Centre of Sustainable Finance on December 17, 2019. 56 The State of Climate Finance in the Animal Protein Sector under ImpactAssets50, 18 are labeled “agriculture” and 14 labeled “natural re- sources”17— mobilizing actors who already operate within agriculture or rural micro finance can expand their portfolios toward sustainable livestock. Table 3.5 contains some examples of impact investment in ruminant pro- duction systems, at small and medium scales in Sub-Saharan Africa. The mitigation component for these cases is not explicitly communicated. All in- vestors reportedly sought a wider sustainable development objective. These examples highlight the feasibility of such production systems as investment opportunities. Most of the listed investments include technical assistance, opening the opportunity to include mitigation pathways related to animal husbandry. TABLE 3.5 Private Investments toward Ruminant Value Chains Funding Source Recipient Description Location and Value Chain Bill and SAHEL Consulting $14,999,972 grant to enhance the productivity Smallholder Melinda Gates Agriculture & of smallholder dairy farmers, particularly dairy farming Foundation Nutrition Ltd. amplifying the economic empowerment of in Nigeria (philanthropy) (private equity firm) women and improving nutrition, by helping to strengthen public-private partnerships Rabo Mruazi Heifer The breeding unit aims to increase per animal Smallholder Foundation Breeding Unit productivity the dairy sector in Tanga region by dairy breeding and Achmea Fostering (value producing heifers. Mruazi has the ambition of and farming (philanthropy) chain company) developing its farm into a regional center for in Tanzania fodder production, training, and innovation UFF Eastern Cape Establishment of two irrigation farms to be Sheep, cattle, African Agri Boerbok used as pasture lands and four farms for sheep, angora Investments cattle, angora, and, in particular, boerbok goats. production in (blended This investment will create a large livestock South Africa finance) enterprise in the area based on superior animal genetics, sustainable feed production, an inclusive management strategy, and optimal resource usage SilverStreet Cattle Ranching 502 hectares of pivot irrigation for pastures and silage Cattle ranching Capital (impact production, a feedlot serving 6,000 cattle per annum, in Zambia investor) and has completed planting 70 hectares of pecans, which is set to increase in the coming years. To raise productivity and income in the area, Silverlands Ranching established an extension service and built several cattle dipping stations in the community area. Providing access to dips has reduced calve mortality and cattle disease and increased smallholder cattle farmers’ incomes 17 Five impact investments funds are labeled as both sustainable agriculture and natural resources. 57 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Projects related to poultry value chains have also been identified (the com- plete list is available within Appendix A.3), whereby mitigation pathways are linked to local sourcing of feed and the replacement of emission-intensive pro- teins in diets. Some PPPs at the most local level did not include a mitigation component because they prioritized the most urgent needs of local population such as food security, poverty alleviation, health improvement, and livelihoods creation in poor communities. The inclusion of a mitigation component in PPPs is dependent on “marketability”. Furthermore, the costs associated with MRV, leveraging further private flows, level of private sector engagement, size, transaction costs, real and perceived risks, and perception of profitability from climate mitigation affect considerations. Microfinance institutions investing in real assets—such as ownership of farmland, forest, cattle, and others—could be a relevant vehicle for climate fi- nance toward animal protein value chains. Initiatives such as KIVA, Livestock Wealth, SV Capital, and other crowdsourcing initiatives,18 allow investors to buy shares or ownership of cattle, providing local smallholders with an alter- native source of income and an incentive to adopt sustainable farm practices to increase the quality, health, and environmental impact of the cattle. Investor net- works have a huge potential to scale up sustainable opportunities in livestock19 through networking with various investors. Other approaches to scale up sus- tainable livestock initiatives include co-investing and creating new private equity funds. ImpactAssets is an investor network that provides data on other impact investors and other private actors. It is also an impact investment fund manager, offering different short- and long-term investment vehicles, focusing on local communities and other actors undertaking grazing management interventions. The role of livestock GHG emission reduction in the carbon markets Carbon markets remain the only global mechanism—be it voluntary or com- pliance-based—that attempts to valuate climate mitigation action. Despite unclear policy signals and related low carbon prices, projects and methodolo- gies are still being developed, some of which are related to the animal protein sector. There is a general heterogeneity of opinions due to policy uncertainty and limited scope in the agriculture, forestry, and other land use (AFOLU) arena. Expectations on the role of carbon markets vary as a result of different experi- ences. Some project developers had negative experiences with the CDM, leading to a decline in future interest. Such experiences were often connected to high transaction costs inherent to methodology/project development or MRV. Most livestock projects in the carbon market are limited to manure manage- ment (see section 3.2.2). Opportunities for crediting schemes are limited and 18 Crowdfarming combines crowdfunding or sourcing and farming, as it denotes a model where a number of investors share risks and own shares in a farming venture or in real assets such as livestock. 19 Interview conducted with Ruaraidh Petre of the Global Roundtable for Sustainable Beef on November 28, 2019. 58 The State of Climate Finance in the Animal Protein Sector thus unable to spark inspiration, while project descriptions are vague and seldom show mitigation pathways. For the private sector to comprehend the nature of triple outcomes and replicate successful strategies, project devel- opers need to state explicitly how outcomes can be achieved. The unconcise description of mitigation pathways in the OECD Development Assistance Committee reporting and other communication platforms hinders the repli- cation of successful models and discourages research in publicly available databases. The majority of CDM projects fall under the UNFCCC methodology AMS-III.D Methane recovery in animal manure management systems,20 which currently has around 130 registered projects. There are other methodologies related to livestock, but they contain few or no registered projects. UNFCCC’s AMS-III.BK: Strategic feed supplementation in the smallholder dairy sector to increase produc- tivity methodology,21 completed in 2014 had only one project, due to the price crash of certified emission reduction (CER) that occurred around the same time. In developing this methodology, a primary concern that surfaced was the lack of bankability for projects and high investment costs. The Dairy Feed Uganda Project, which started in 1999 and went through several iterations be- fore reaching CDM, had upfront costs of around $2 million associated with feasibility studies, feeding trials, and methodology development. After the proj- ect was ready to generate credits in 2014, the price of CERs was roughly €0.35 (down from €20 in 2008). With such high initial costs and even with a €30,000 credit a year potential, the economic viability of the project was extremely low, hence it was never implemented.22 Project types in the CDM and Gold Standard vary although replicability is pos- sible through available methodologies. There is a huge offset potential for feed supplements, but the investment financing for these types of projects can be difficult to justify in a carbon market that has low and unsteady prices.23 However, there is evidence that the highest uptake for the CDM, the VCS, and the JI is in manure management due to high credit potential at low initial cost. A swine manure system project in Brazil had an initial investment of $672,000 with 78,000 expected CERs/year, while a biogas project in Armenia from poul- try manure treatment had an initial investment of $2,530,000 and expected 62,800 CERs/year (OECD 2007). This latter example shows a key setback in carbon markets for financing livestock projects because there are numerous mitigation pathways that could result in tangible emission reductions but are unable to operate under the carbon market as the carbon price is too low. The absence of nearly all mitigation pathways in carbon crediting outside of ma- nure management is a key observation as it highlights a gap in funding flows. 20 A methodology defines the parameters and operations required for calculating the mitigation outcome of a project during its life- time—that is, methodologies for baseline setting and monitoring. For this methodology, see https://cdm.unfccc.int/methodologies/ DB/H9DVSB24O7GEZQYLYNWUX23YS6G4RC, 21 For the AMS-III.BK methodology, see https://cdm.unfccc.int/methodologies/DB/XI8MS5YYSGRSISWLADHND28QPJN6YA. 22 Interview with Richard Bowman of RuMeth International Ltd. on November 29, 2019. 23 Interview with Richard Bowman of RuMeth International Ltd. on November 29, 2019. 59 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR One of the central conclusions of this study is the need to have additional funding and mechanisms in place that can assure investors of the bankability of projects. Filling the void of potential projects that require technological in- vestments can be one way in which to see uptake in carbon markets. Another recent mitigation pathway in the carbon market is soil carbon se- questration through sustainable grazing systems (see example in Box 3.5). The Australian Carbon Farming Initiative, part of the Australian Emission Reductions Fund, developed a methodology to generate first credits. The French National Research Institute for Agriculture, Food and Environment (INRAE) developed a whole-of-farm approach for the French Label Bas Carbone (Low Carbon Certification). Soil carbon sequestration has already en- tered the methodology for sustainable agriculture land management (SALM) under the VCS. Although carbon markets are vital to the promotion of climate finance, their future post-2020 is uncertain due to pending decisions on Article 6 of the Paris Agreement. Article 6 includes three mechanisms for voluntary cooperation; two of these are market-based. Article 6.2 allows for bilater- al and plurilateral cooperation among countries, and Article 6.4 establishes a Sustainable Development Mechanism, perceived to be the successor of the CDM. Discussions on operationalization of markets at COP25 (the 25th Conference of the Parties to the UNFCCC) in 2019 remained inconclusive due to differences between countries on issues such as adjusting transfer of mitigation outcomes and whether CDM credits should be eligible for transfer. While proponents see opportunities for new and innovative forms of voluntary cooperation and in the flexibility of Article 6.2, some critics express concern that Article 6 may hinder increased ambition. Regardless, a high carbon price achieved through ambitious environmental regulation is a basic requirement in making carbon markets a viable proposition for the sector. Potential climate finance options in the animal protein sector As discussed previously (See section 3.2.2), the review of climate finance flows and existing initiatives in the animal protein sector identified several approach- es for financing adaption and mitigation schemes. The scope for innovative financing approaches, whether supplemental to initial schemes or stand- alone endeavors, is evidenced by the creativity already apparent. Similarly, the diversity among the adaption and mitigation initiatives highlighted herein, speak to the many possibilities for intervention along the animal protein value chain. Solving the financial preference conundrum of investors—mitigation/ adaptation pathway, scale of intervention, position of the recipient and tar- get beneficiary on the value chain, preferred delivery model, etc.—may solve the conundrum of what financial approach is possible, or even be the most advantageous. For example, jurisdictional finance approaches have gained 60 The State of Climate Finance in the Animal Protein Sector BOX 3.5 Carbon Markets in Practice: Microsoft $500,000 Carbon Credits Purchase from Australian Cattle Rancher OBJECTIVE OF THE PROGRAM TARGET BENEFICIARIES FINANCIAL INSTRUMENTS OBSTACLES ADDRESSED Sequestration of soil organic Wilmot Cattle Carbon credits Adapting carbon credits carbon using regenerative Company, Australia to the livestock sector, grazing systems for grass- MRV methodology. fed beef production From 2017 to 2020, the Wilmott Cattle Co. sequestered The carbon credits were verified by Regen Network and more than 40,000 metric tons of CO2 equivalent are the first transaction of its “CarbonPlus” scheme. through managed grazing practices. The company Besides carbon sequestration, such carbon credits was able to sell these carbon credits to Microsoft for also comply with other environmental co-benefit more than $500,000. objectives such as animal welfare, and ecosystem and soil health. Regen Network significantly reduced Wilmot Cattle Company, in New South Wales, Australia, the costs related to MRV by using remote sensing with the adjoining ranch, Woodburn, manage over to measure and monitor the soil organic carbon, a 4,000 hectares combining breeding, trading, and pioneer technological achievement in the field of grazing operations applying regenerative, ecologically grassland MRV methodology. sustainable management practices. This purchase was part of Microsoft’s objective to The company’s approach for carbon soil sequestration reduce its carbon footprint with goals to be carbon includes time-controlled rotational grazing and high- negative by 2030, after which the company aims to rate stocking in smaller lots. These practices improve eliminate carbon emitted since it was created in 1975 the ground cover, the volumes of biomass, and the by 2050. ground water-holding capacity. Moreover, they have made it more resilient, as the land’s organic carbon Carbon credit schemes, such as this, offer an actual rates increased from 2.5 percent in 2017, to 4.5 payment for environmental services to cattle ranchers percent in 2021, with intent to reach 6 percent by 2023. willing to improve their practices through nature- based solutions and leverage other sectors’ ecological commitment. Source: Wilmott Cattle Company via Beef Central recent popularity, especially for the commodities soy and beef. Replication of approaches to other commodities or value chain actors may be one way to advance the agenda. Whether it is energy, transport, livestock, or any other agribusiness sector, over 70 percent of climate finance provided or enabled by multilateral development banks (MDBs) in 2018 was in the form of investment loans. Over the years, new instruments have been scaled up; these include bonds, guarantees, lines of credit, and results-based financing. However, all these instruments individ- ually represent less than six percent of climate finance provided or enabled by MDBs in 2018. The implication is that traditional loans will remains a core instrument in the short term. Despite this reality, there are possibilities for fi- nancing alongside traditional loans or stand-alone financial approaches. Table 3.6 groups these according to the mapping results. 61 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR TABLE 3.6 Emerging Approaches from the Mapping of Climate Finance Emerging Approach Funding Source/Flow Recipient Mitigation Pathway 1. Concessional or • ODA grants • Local project level farms • Avoided deforestation blended finance for • MDBs and communities through sustainable sustainable cattle ranching • Financial intermediaries intensification and • Impact investment in Latin America with rural outreach grazing management vehicles; two-layered approach: A first layer • Silvopastoral systems of an initial base/ and avoided deforestation risk cushion of public through alternative investors and donors income sources and a second layer/ financial cloud of private institutional investors 2. Value-chain actors • Corporations • Upstream value chain • Avoided deforestation self-financing action to • Own finance, FDI actors, including through sustainable reduce deforestation producers intensification and grazing management 3. In supply chain • Corporations • Local producers that • Animal health & nutrition/ credit provision tied to • Own finance, FDI purchase products feed additives capacity building with and services • Grazing management the case of feed additive and fertilizer producers marketing their products 4. Livestock insurance • Insurance scheme • Insurance companies as • Animal health & nutrition/ programs to reduce financed by governments financial intermediaries feed additives vulnerability and increase budgets, international • Grazing management long-term resilience public finance, • Silvopastoral systems insurance fees 5. Emission reduction • Carbon market • Project owners • Manure management projects in emerging • Supplementary funding potentially through economies financed sources possible, for financial intermediaries by carbon crediting example, own finance or project finance 6. Climate mainstreaming • Private impact investors • Local project level farms • Animal health & nutrition/ conditionalities and communities feed additives into financing of • Financial service • Grazing management production systems providers for rural • Silvopastoral systems producers (MFIs) Note: FDI = foreign direct investment; MDBs = multilateral development banks; MFIs = microfinance institutions; ODA = official development assistance. 62 The State of Climate Finance in the Animal Protein Sector BOX 3.6 The Republic of Kazakhstan Program for Sustainable Livestock Development OBJECTIVE OF THE PROGRAM TARGET BENEFICIARIES FINANCIAL INSTRUMENTS OBSTACLES ADDRESSED Development of an Beef sector Program for Results High costs of servicing environmentally sustainable, spatially widespread inclusive, and competitive beef smallholders; weak or production in Kazakhstan. counterproductive policy frameworks for animal protein and climate change; competition with traditional financing operating without GHG conditionalities and lack of MRV system. In July 2020, the World Bank approved a $500 The project includes a component to adapt strategies million loan for the Sustainable Livestock to support climate-smart livestock systems to reduce Development Program to support the development of carbon emissions, such as those implemented or in environmentally sustainable, inclusive, and competitive trial phase elsewhere. This focus is also in line with beef production in Kazakhstan. The Program responds Kazakhstan’s Nationally Determined Contribution to several national high-level priorities, including: (NDC) toward the Paris Agreement, that sets an contribute to the diversification of Kazakhstan’s economy-wide target of 15-25 percent reduction in exports away from minerals and oil; boost small and greenhouse gas emissions by 2030 compared to 1990. medium business growth; create opportunities for The estimated net mitigation potential of the program socio-economic development in rural areas; increase is 5.6 million tons CO2e over the 5 years, despite a 2.5- agriculture productivity; foster environmentally friendly fold growth in beef output. Three mitigation pathways production; and improve the use of Kazakhstan’s vast are combined to achieve this ambitious objective: pasture and grassland resource potential. 1. Increased productivity and decreased GHG The Program will target GHG emissions reduction emissions per unit of product through improved and environmental sustainability by promoting better livestock management practices (feed environmental outcomes of the State Program, management and winter feeding, genetics and improving farm advisory systems, and by instituting animal health improvements, offtake and fattening monitoring mechanisms for GHG emissions. In strategies). particular, the program will support a progressive 2. Increased soil carbon sequestration through repurposing of public expenditure dedicated to improved grazing management practices beef production for green growth and sustainability (adaptative grazing, restoration of degraded lands). improvements. This will involve the introduction 3. Adoption of energy-efficient equipment for cooling of environmental performance requirements for and production of renewable energy (solar and producers wanting to access public support, and wind) to reduce and displace fossil fuel energy a greater share of public support dedicated to consumption. supporting the adoption of GHG emission reduction practices. In line with the World Bank “Program for The program will also improve the national Results instrument”, progress on these indicators will environmental information system. be a condition for the disbursement of the related part of the loan. 63 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR 4 Obstacles to Mobilizing Climate Finance: Analyzing the Determinants 64 Obstacles to Mobilizing Climate Finance:Analyzing the Determinants Understanding how best to catalyze public and private investment is a pri- ority requirement to mobilize climate finance for the animal protein sector. Obstacles are often determined by the implementation setting—that is, in the geography into which the climate finance is to be channeled. Analyzing the determinants (the geography) that present obstacles to climate finance details the connections along the animal protein value chain—between actors, instruments, and mitigation pathways—revealing the breadth of the sector and the multiple diverse mitigation and finance pathways. For each de- terminant, there are obstacles; knowing of their presence and understanding the reasons underlying them is crucial to mobilizing climate finance in the sector. The obstacle analysis provides a detailed overview of most of the connections between actors, instruments, and mitigation pathways along livestock value chains and considers several types of obstacles encountered when applying climate finance to the sector (Table 4.1). The nature of obstacle analysis is global and general, and it captures findings and inputs from literature and interviews with sector actors, lenders, and ex- perts. The obstacles are not specific to the emerging approach identified in the climate finance mapping and trend analysis in chapter 3. TABLE 4.1 Potential Obstacles Related to Mitigation Pathways and Instruments Type of Obstacle Example Technological Technological and methodological constraints Obstacles related to climate mitigation pathways within the livestock sector. This category includes the constraints that come from MRV requirements Financial & All economic, financial, policy-related, regulatory, Regulatory and governance constraints in the sector that Obstacles may hinder readiness to access climate finance Implementation The intrinsic socio-cultural, capacity-related, Obstacles and collective action obstacles unique to livestock-related communities Note: MRV = measurement, reporting, and verification. 65 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Technological obstacles Technological obstacles include all potential methodological and technolo- gy-related challenges or constraints associated with each mitigation pathway. These problems may originate from the readiness level of a certain technology or be associated with the field implementation of a technology. Obstacles may also relate to potential environmental impacts of a mitigation pathway, as well as the process of measurement, reporting, and verification (MRV) associated with each mitigation pathway. Livestock-related environmental impacts are challenging to measure in a de- tailed and consistent way. Not only do the MRV procedures differ with each impact pathway, but the potential impact depends on other project- and geog- raphy-related variables such as management systems, dietary patterns, and other economic activities in the landscape. These differences make standard- ized baseline setting complex and require a level of data collection that private actors may not be willing to undertake. The high variability of emissions by breed, feed characteristics, and region, means it is often not accurate to use national averages (e.g., in the context of feed additives use, see Sirohi and Michaelowa, 2008). To measure the mitigation impact of a project effective- ly, livestock operations must address multiple sources of GHG emissions. Beyond enteric fermentation, manure, dung, and urine deposit emissions, data on emissions also stem from feed production, grassland and soil degradation, land use change and bioenergy production. For countries that increasingly aim to measure GHG mitigation from the livestock sector for either NDCs, carbon markets or within Nationally Appropriate Mitigation Actions (NAMAs), there is no consistent sector-wide approach to MRV but a multitude of system- and location-specific approaches. This inconsistency not only complicates com- parison and baseline setting, but also drives up costs. Uncertainties, complex biogenic processes, and the diversity of production systems render precise MRV challenging for livestock-related environmental impacts and mitigation pathways. Manure management, for example, com- prises multiple sources of GHG emissions including methane emissions24 from waste treatment and storage, venting and collection, effluent ponds, and incomplete combustion; each of these sources has a specific effect. Nitrous ox- ide emissions might also counterbalance the reduction of methane emissions. Large uncertainties are associated with the measurement of soil carbon stock changes associated with activities along agricultural value chains. Measuring soil carbon sequestration can be done in a multitude of ways, and there is no consensus on a method that would strike the right balance between reli- ability and cost-effectiveness. Most methods are costly to implement, which is a obstacle in itself. The development of a comprehensive MRV system for GHG emissions is sometimes not feasible at the project level or for the project 24 Interview conducted with Hayden Montgomery of the Global Research Alliance (GRA) on Agricultural Greenhouse Gases, New- Zealand on December 10, 2019. 66 Obstacles to Mobilizing Climate Finance:Analyzing the Determinants owner, and in many developed countries the public sector has partially driven and funded the development of default factors and measurement protocols. Such research will be needed even more for LMICs, where years of research and progress on testing and refinement of methods and emission factors will be needed to establish a reliable system. Until then, the Food and Agriculture Organization of the United Nations (FAO) guidelines on measuring soil carbon stocks and stock changes specifically in livestock production systems can guide work and system design (FAO 2019c). Other research projects funded by the World Bank are looking into MRV development for emission reduction from livestock intensification at the forest-pasture interface. A conceptual frame- work is being produced to review methods and describe the analytical core of the MRV system, covering direct livestock emissions, SOC sequestration, indirect land-use change and reduced deforestation. This conceptual frame- work could complement recommendations produced in this report and offer an opportunity to develop a full MRV system. The implementation of MRV systems may require investment in technology or infrastructure that is out of reach for smallholders, micro, small, and medium enterprises (MSMEs), and local communities. Knowledge, access, and contin- uous operating costs also represent a challenge. One example can be seen in Brazil, where the main beef producers in the Amazon region are implementing GPS tracking technology with the objective of fully sourcing cattle from sus- tainable rangelands or areas free of illegal deforestation. However, the cost of implementing this kind of technology makes it available only to the biggest producers and puts it out of reach for the many smallholder ranchers in the region.25 In California’s Carbon Offset Program, cost obstacles are the main explanation for the small number of livestock projects, despite a dedicated Livestock Protocol. Most manure management, treatment, and storage-relat- ed mitigation pathways can be adopted only in indoor enclosures and have significant infrastructure requirements. This obstacle is connected to broader ethical considerations around these systems—that is, to whether smallholders in poor communities should bear the costs of MRV and technology deploy- ment despite the problem’s largely originating from the Global North.26 Optimized feeding strategies, such as feed ration balancing or the use of feed additives and nutritional supplements, despite being one of the most promising mitigation pathways in terms of marketability, still require further technologi- cal testing and long-term-effect research to assess its mitigation potential.27 In any case, the mitigation potential of optimizing feeding strategies will most likely not match the current level of emissions from deforestation as a consequence of producing soy and other protein feed crops, leading to the observation that feeding strategies and traceability and sustainability of feed must be assessed together. 25 Interview conducted with Ruaraidh Petre of the Global Roundtable for Sustainable Beef on November 28, 2019. 26 Interview conducted with Fritz Schneider of the Global Agenda for Sustainable Livestock on November 22, 2019. 27 Interview conducted with Ruaraidh Petre of the Global Roundtable for Sustainable Beef. on November 28, 2019. 67 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Among the observed technological obstacles of feed additives is that their effectiveness in decreasing methane emissions can be reduced in the long term because the rumen microbial ecosystem adapts to the additives. Certain specific feed additives, such as molasses-urea blocks, can even be toxic to live- stock and ineffective in decreasing methane emissions, revealing the need for proper technological testing before implementation. This represents another obstacle, since only companies with sufficient capital to conduct research and testing over an extended period can bring feed additives onto the market; the process is both time and capital intensive. Many of the mitigation pathways relating to management practices have become accepted as best practice and result in significant impact. Some pathways, however, depend on technologies that are in different phases of implementation readiness (Figure 4.1). Technologies to enable climate-smart manure management are already applicable, but at substantial cost and not always capable of resolving the trade-off between methane reduction and nitrous oxide emissions. Pathways that are dependent on technologies in ge- netics and breeding and rumen modification are not yet commercially viable. Some technologies, however, are close to commercialization; an example is the use of methane inhibitors for ruminant feedlots developed by the Dutch company DSM.28 The company is currently seeking market registration for a launch in 2023. FIGURE 4.1 Summary of Mitigation Pathways and Readiness for Implementation FEED & Improving NUTRITION forage quality GENETICS & Feed BREEDING Selecting of low- supplements Precision Dietary Finding new traits CH4 producing feeding improvements for GHG emissions ruminants & substitutes Improved RUMEN performance on Transferring the low-quality feed Efficient & MODIFICATION microbiome of low- robust animals CH4 producing ruminants Inhibitors Increasing Prevention, Vaccines to reduce control, & ANIMAL HEALTH CH4 production in productive lifetime of eradication of the rumen diseases animals Collection Increase disease Temperature & & storage MANURE MGMT resistance Storage Manure aeration of manure facility Cover deposition & application Capturing biogas from Carbon anaerobic processes GRASSLAND sequestration Grazing Pasture MGMT practices mgmt TECHNOLOGY PROOF OF PILOT BEST READINESS DISCOVERY CONCEPT STUDY PRACTICE Source: Adapted from interview with Montgomery, October 2019 (See appendix B). Note: CH4 = methane; GHG = greenhouse gases. 28 Interview conducted with Hayden Montgomery of the Global Research Alliance (GRA) on Agricultural Greenhouse Gases, New- Zealand, on December 10, 2019. 68 Obstacles to Mobilizing Climate Finance:Analyzing the Determinants Economic, financial, and regulatory obstacles Financial and regulatory obstacles refer to the different kinds of economic, finan- cial, policy-related, regulatory, and governance constraints that may hinder the readiness of the sector to access climate finance. Economic and financial obstacles Economic obstacles include the intrinsic characteristics of livestock-related activities that may affect their economic performance, productivity, or invest- ment feasibility: their bankability. The characteristics can act as a constraint to accessing climate finance or may make the sector appear less attractive to investors. These obstacles are relevant at the smallholder level but appear across all parts of the value chain and across every size of institution. The missing middle refers to a gap in access to certain types of finance in many producer geographies in LMICs. While many farmers and MSMEs can access climate-relevant finance through their cooperatives or via rural banks, or even through microfinance, many are too small to be able to access climate finance in the form of venture capital, foreign direct investment (FDI), or private equity. The size distribution of farms in the recipient geography is an important indica- tor of the feasibility of different levels of climate finance. Especially for farmers located in remote areas, access to commercial lending is difficult (Mtimet and Dube 2018). The limitations of farms’ production structures and processes act as an important restraint to scaling up livestock-related mitigation initiatives because they limit access to finance, in general, climate and traditional alike. A second layer of the missing middle challenge is that the more innovative— and thus the more risk-taking investors (of both types of finance)—tend not to find their way to remote areas because of the difficult combination of high risk and remoteness. This can be combated in part by aggregated lending to communities or groups of livestock farmers. However, this type of lending is uncommon (Figure 4.2). With lower population densities and wide distances between smallholders, the access costs alone can create increased risks for potential lenders. Climate risks are also important for commercial lenders in regions that may be more likely to experience natural disasters, with the increased likelihood of defaults and overdue payments. This type of financial obstacle can, in part, be tackled through index-based insurance programs (see section 3.3). Other economic obstacles relate to the demand side—that is, obstacles that are more connect- ed to the interaction of these actors with domestic and international markets and investors. The dispersion of smallholder farms over a vast space, weak domestic markets for livestock-related products, lack of or poor condition of marketing chan- nels, and other problems related to health and sanitary monitoring increase the transaction costs of livestock products from smallholders in developing 69 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR FIGURE 4.2 An Illustration of the Missing Middle in Finance CAPITAL NEED VENTURE CAPITAL PRIVATE EQUITY BANKS US$1 million MISSING MIDDLE RURAL FINANCIAL GAP US$10,000 US$O URBAN RURAL Source: Adapted from Mtimet and Dube 2018. countries. Such smallholder systems do not provide a viable business case for the commercial investor and also make for a difficult business case for an im- pact investor or climate finance institution. This situation effectively rules out most types of finance except loans and ODA, but it can also be an argument for greater use of PPPs. Contract farming is one way to combat this obstacle in that it creates inter- dependency and commitment between producer and processor. Often this commitment can create a formal link between actors that allow for long-term planning and provides assurance for investors. Under certain conditions, this arrangement can also be conducive for FDI by processors or other down- stream actors. Nestlé, for example, reaches small dairy producers in India through intermediary agents with whom they have a formal contract. In addi- tion, the Verified Sourcing Area (VSA) model can help to scale up responsible production by maintaining the competitiveness and pricing of sustainable commodities. Although they do not constitute sources of climate finance, per se, contracting and value chain integration can strengthen the business case of producers and make groups of farmers more attractive to investors. Financial obstacles refers to the concurrence of problems that smallholders, MSMEs, and other stakeholders along livestock value chains face when apply- ing for loans, credit, or other financial support (demand side); or the limitations that financial institutions face when funding them (supply side) (World Bank 70 Obstacles to Mobilizing Climate Finance:Analyzing the Determinants 2016). It is important to point out that many of these obstacles are specific to smallholders, with much less effect on larger institutions along the value chain such as retail giants and major distributors. Demand side obstacles include: • A weak and vulnerable income base and difficulty accessing collateral: This is a major obstacle, especially for smallholders in rural areas or for pastoralist communities, where livestock is the main economic activity and source of income, but where land titles and registration are weak or missing. Individuals may encounter difficulties accessing collater- al to get funding because they lack any recognizable valuable assets. Livestock can be used in some cases, but this can also place too much pressure on the farmer’s sole source of income because of the lack of diversification of the farmers’ economic activity. Implementing other sources of income—for example, integrated pasture cropping, silvopas- toral systems, or on-farm production of fodder, among others—can help to address this. Adapting or changing long-held traditional production systems in geographies with weak or insecure land tenure is, however, a slow and delicate matter and cannot deliver speedy access to climate finance. • There is a disconnect between traditional funding instruments and livestock sector characteristics: Some financial instruments are not tailored to the specific needs and constraints of local smallholders and MSMEs. Credit instruments can have detrimental effects on rural famers. For example, Mtimet and Dube (2018) analyze the effects of rural financial services on livestock production in Ethiopia and show that using credit instru- ments has a negative impact on poor households’ assets, since it can lead or force poor households into selling their livestock to pay back their loans, ultimately driving those households further into poverty. These instruments can be replaced through subsidies, concessional finance, guarantees, or additional support for accessing credit. • Risk aversion reduces producer willingness to invest in production inputs: Farmers are more willing to invest in protection against adverse con- ditions via insurance with low upfront down payments, than they are in technology that might result in higher day-to-day efficiency but would demand upfront payment, possibly training, more workers, and a more complicated business. For livestock, this attitude results in the selling off of cattle prior to an impending drought, which reduces the long-term profitability of herds (Hansen et al. 2019). One common characteristic of livestock-related smallholder and MSME ac- tivities is limited financial skills—poor bookkeeping, late or missing loan repayments, and other inconsistencies in reported value and revenue—which makes them less bankable. Such issues can often be addressed by relatively simple technical assistance or accounting training in programs that can be extended to include an environmental perspective to give them some limit- ed capacity to measure the environmental impact of their economic activity. 71 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR These obstacles limit the willingness of lenders to provide livestock-based ac- tivities with traditional finance. The supply side main obstacles to agricultural and livestock lending are in- adequate enabling environments, lack of intermediate financial infrastructure, the intermediaries’ limited capacity or willingness to manage the risk related to livestock activities, and high transaction costs. The supply side specifically refers to the financial intermediaries that act as a source of funding for the smallholders, MSMEs, and other stakeholders (the demand side). In addition to these obstacles, value-chain actors mention that there is an apparent wide- spread misunderstanding that the main investable mitigation actions in the livestock sectors concern protein alternatives (i.e., the reduction or elimination of meat protein consumption) and not the livestock producers themselves. • Given the high transaction costs associated with the livestock sector, com- mercial lenders also exhibit a lack of interest, particularly in developing the information and capacity-building element. The low banking readiness of many smallholders and small-herd farmers drives up additional prepa- ratory and information costs for any investor. Those farmers applying for loans do not have the technical knowledge and capacity to meet the requirements that intermediaries expect in order to assess loan re- quests with climate elements or services, which is another example of the “missing middle” mentioned earlier. • Especially among commercial lenders and private-sector actors, there seems to be a general perception that financing livestock-related activities in rural areas is not profitable and lacks the appropriate scale to engender wider interest, since such investments generate lower returns than other activities. The cash flow of smallholder and small herd dairy and meat livestock systems is unattractive compared to their levels of risk and transaction costs. First, the size of the income stream is closely tied to access to aggregators and dairy facilities/slaughterhouses, as well as to markets beyond the local. These factors are all outside the control of the investor and resolving them cannot easily form part of the invest- ment. Secondly, the reliability and frequency of the income streams of the two main livestock-farming systems are inadequate for investors. For dairy farmers, the income stream is constant, but small, while in the beef cattle market the timing of slaughter related to demand is crucial and careful planning is needed, which requires market understanding. Farmers may have intrinsic understanding of local markets but know little of demands or trends in more distant markets, making planning difficult. In any case, the frequent low troughs in the income stream are difficult for a non-bankable farmer to match to fixed installments or div- idends, which calls for short term or more flexible financial instruments or for aggregation mechanisms. • Increased risk-related costs and a greater perception of risk by lenders— due to physical obstacles, such as spatial dispersion among farmers and low population density—hinder risk assessment and monitoring. Spatial 72 Obstacles to Mobilizing Climate Finance:Analyzing the Determinants dispersion makes risk assessment and infrastructure development more costly, translating into higher investment risks and lower return on investment. Accessing widely dispersed rural farms for the assessment, development, and MRV of livestock-related projects requires an exten- sive network of specialists and close contact with farm owners, making financing these initiatives more costly and longer term. To attenuate this problem, public climate finance is key to catalyzing private sector investment, since it can take on risks that the private market will not. Blended finance mechanisms can also combat these obstacles through public grants, low interest loans, or guarantees to smallholders involved in private funding mechanisms, thereby reducing the risk exposure for the private investor (this has been the case for pilot programs for weath- er-based insurance). • There is a lack of a homogeneous framework for funding regardless of ge- ography. Lending may be cheaper than other forms of finance in some countries and, therefore, may be a more desirable option. Another ex- ample is that developing specialized lending products for rural areas is more costly than developing them in more densely populated areas, raising per-loan costs. Culturally, regions will differ, and a reliable finan- cial framework should be adapted to cater to different contexts. One example of this is in index-based payments in Ethiopia, where there was concern over uptake because of Muslim livestock producers within the population who may see insurance as a form of gambling, which is for- bidden by Sharia Law. • The importance of the informal sector, combined with the absence or weak- ness of domestic capital markets in developing countries, acts as a obstacle to private-sector finance by increasing uncertainty. In a study of the beef value chain in Ghana, it was observed that informal contractual relation- ships dominate the sale of cattle. Hence, there is a lack of standardized measuring scales, of health and veterinary examination services, and of transaction bookkeeping, for example. This poor market infrastructure can act as a major obstacle to private investment in developing coun- tries (Mtimet and Dube 2018). An important finding behind both the demand side and the supply side of cli- mate financing for the meat protein sector is that the issue of low bankability of smallholders or small-herd farmers in rural areas is not directly related to climate finance alone, but to all types of finance. This finding, however, can be turned into an opportunity if policy makers, institutional investors, and other high-level actors work systematically to connect these farmers to regional and global finance. While in many other sectors—for example, in energy, industry, and land use—climate finance must compete with traditional finance, which has fewer constraints and higher returns; in the livestock sector climate fi- nance has the potential to define the norm and get a head start. Finally, a cross-cutting obstacle concerns terminology and thus reporting of results and disbursement. Climate finance is largely driven by MFIs. The 73 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR World Bank, along with other MDBs and IFIs, have agreed a taxonomy of proj- ect types that are eligible to be counted as climate mitigation and adaptation projects. Within this harmonized MDB category system, eligible livestock cate- gories only fall into a single category (see Table 4.2). TABLE 4.2 Activities Eligible for Classification as Climate Mitigation Finance, Category 4 Category 4. Agriculture, aquaculture, forestry, and land use Subcategory Eligible Activities 4.1. Agriculture Reduction in energy use in traction (such as efficient tillage), irrigation, and other agricultural processes Agricultural projects that improve existing carbon pools (such as rangeland management; collection and use of bagasse, rice husks, or other agricultural waste; reduced tillage techniques that increase carbon content of soil; rehabilitation of degraded lands; peatland restoration, and so on) Reduction of non-CO2 GHG emissions from agricultural practices and technologies (for example, paddy rice production, reduction in fertilizer use) Resource efficiency in agricultural processes and supply chains 4.2. Afforestation Afforestation (plantations) and agroforestry on non-forested land and reforestation Reforestation on previously forested land and biosphere Sustainable forest management activities that increase carbon conservation stocks or reduce the impact of forestry activities Biosphere conservation and restoration projects (including payments for ecosystem services) seeking to reduce emissions from the deforestation or degradation of ecosystems 4.3. Livestock Livestock projects that reduce methane or other GHG emissions (for example, manure management with biodigesters, and improved feeding practices to reduce methane emissions) 4.4 Biofuels Production of biofuels, including biodiesel and bioethanol (only if net emission reductions can be demonstrated) 4.5. Aquaculture Reduction in energy use or resource efficiency in aquaculture Source: AfDB, ADB, EBRD, EIB, IDB, ISDB, and World Bank 2019. Note: GHG = greenhouse gas. This taxonomy would require expansion to include new and innovative live- stock project types. To do so, any new project type would need to demonstrate quantifiable and demonstrable GHG reductions, and then other MDBs and IFIs would need to agree jointly to expand this list of eligible project types. It is worth stressing that the taxonomy above only relates to climate mitigation finance. 74 Obstacles to Mobilizing Climate Finance:Analyzing the Determinants Regulatory obstacles–policy and governance These relate to those variables that can negatively affect the capacity of the sector to access climate finance for institutional or regulatory reasons. For example, missing policies or negative policies, political factors or decisions that lead to instability, and a lack of support to farmers and MSMEs are all obstacles to raising the capacity to access climate finance. Policy and governance obstacles include variables that may hinder the sector in two ways: making business along the value chain less productive and more costly, and lack of national frameworks and strategies to support sustainable development of the livestock sector. Data obstacles (or, in this case, the lack of data) are related to the low avail- ability of bankable projects; these include climate mitigation projects in the livestock sector that: • have a clear, consistent, and reliable presentation of data regarding the amount and destination of monetary flows (public and/or private); • demonstrate economic, environmental, and social outcomes of the proj- ect in all project areas; • demonstrate the climate impact of the project (both the impact of the activity and the benefits of the activity, like carbon sequestration, for ex- ample); and • provide systematic and detailed information on investors (who has par- ticipated and how much?). A broader availability of this kind of information would leverage an organized private sector in the form of impact investment funds, bonds, value chain fi- nance, or private mitigation/adaptation finance. A key element needed to leverage private sector involvement is the establishment of robust and reliable MRV systems. One key issue that is observed across regions is the impossibility at a national level of providing accurate and reliable data on herd sizes, which is essential information for private investment, as evidenced from experiences in Uruguay and the Dominican Republic.29 Lack of data and census information on bovine farms is a basic requirement for scaling up projects. Dedicating grants and technical assistance to filling this analysis gap would make a substantial im- pact in attracting and mobilizing more private investment money. The lack of data partly stems from cross-sectoral policies that are not being integrated or not being coordinated in the livestock sector. In certain contexts, farmers do not trust the public authorities and suspect they will face increased tax charges and regulation if they share their production data. The lack of pol- icies also means that no agencies or institutions are dedicated to providing 29 The projects are the Climate-Smart Livestock Production and Land Restoration in the Uruguayan Rangelands and Promoting Climate- Smart Livestock Management in the Dominican Republic projects. 75 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR official data, inventories, and information for stakeholders.30 While many coun- tries have sectoral strategies and/or alignments with supranational strategies (such as the Paris Agreement, for example), there is still a lack of coordina- tion and information-sharing between the ministries of environment and the ministries of agriculture. The stakeholder consultation process revealed that environmental goals may not have been tied with agricultural goals. Another policy-related obstacle arises from the coordination between national governments and ministries and other multilateral organizations or nongov- ernmental organizations (NGOs) funding the projects. There is no common platform on climate change, deforestation, or biodiversity loss that drives ac- tion within the livestock sector. Despite the tremendous progress that has been achieved on sustainable sourcing of forest risk commodities, the global animal protein sector is arguably the least advanced. Roundtables are usually the plat- forms driving this agenda. However, the Global Roundtable on Sustainable Beef (GRSB) is relatively recent31 and has limited influence (Veit and Sarsfield 2017). In South America, national roundtables are emerging in Argentina, Brazil, and Paraguay. Once they are stronger, more mature and have enough representa- tion, roundtables can potentially play an important role (IDH 2020). In many cases, such as the Global Environment Facility (GEF), project funding is tied to certain activities or target areas (in this case, climate mitigation). Therefore, projects related to climate mitigation in the livestock sector can ac- cess only a specific type of finance (in the case of the GEF, they were all grant resources). This specificity can limit the potential outreach or target of the project (in the case of the Uruguay project, it would target only 60 smallholder farms out of the more than 1,000 Uruguayan smallholders, because coor- dination and information sharing between actors and institutions constrain outreach). A possible limitation to action and projects funded by multilateral organiza- tions and NGOs is the interest (or lack thereof), at a national level, to developing mitigation projects within livestock. The many obstacles and low profitability (perceived and actual) within the livestock sector, compared to mitigation in other sectors such as renewable energy, means that projects in the sector are often overlooked or not prioritized. For example, the GEF, despite leverag- ing a very substantial amount of funding for climate mitigation projects,32 is developing only a few projects in the livestock sector, because projects are supposed to be country driven and livestock, as a sector, has not been pri- oritized by the countries themselves. Other policy and governance obstacles include the following: 30 Interview conducted with Melina Gonzalez Vasquez of the Global Environment Facility and Ruaraidh Petre of the Global Roundtable for Sustainable Beef on November 26, 2019. 31 In March 2021. 32 The seventh GEF replenishment, including funds for mitigation, for the period 2018-2022 was US$4.1 billion; the sixth replenishment (2014-2018) was $4.43 billion and the fifth replenishment (2010-2014) amounted to $4.34 billion. 76 Obstacles to Mobilizing Climate Finance:Analyzing the Determinants • Some financing instruments could force up global food prices, resulting in negative impacts on food security. • Focusing policies on methane emission overall can discount areas where animal manure is used as fuel and enteric methane is the only significant emission source. Timing between emission reductions and financial reward can also be a policy obstacle. • Lack of multisectoral strategies at a national level; a lack of policy or policy issues that encourages business at a national, regional, and local level; and poor coordination between different government ministries and agencies, and between government bodies and private sector asso- ciations, all constitute obstacles. Implementation obstacles are the intrinsic sociocultural, capacity-related, and collective-action obstacles unique to livestock value chains and related stakeholders. Many traditional livestock-based farming systems, both small- holder systems and larger-scale ones, are closely attached to a livestock farmer culture and business operation where cattle raising is either exten- sive or pastoralist and where returns are cash paid immediately at the dairy, slaughterhouse, or trader’s gate. Changing long-held practices and mindsets is a cross-cutting cultural obstacle. In pastoralist, as well as other livestock production-related communities, capacity obstacles can be related to furthering knowledge and skillsets. Advances in methods, technologies, and inputs—feed additives, husbandry, animal breeding, manure management, for example—do not trickle down to the in-situ traditional farming methods; farmers have limited capacity and no knowledge of how to implement the new practices. Even if affordable technol- ogies or best-practices are in use in peri-urban settings, there may not be a communications vehicle for remote rural livestock producers to access evolv- ing methods, technologies, and inputs. Capacity obstacles also refer to a lack of the entrepreneurial and business skills smallholder farmers may need in order to make more efficient use of resources and investment; or they can re- fer to the lack of appropriately sized infrastructure, which limits the amount of economic activity (and therefore output) of smallholder farmers and MSMEs. Furthermore, infrastructure constraints limit the capacity of smallholders to have larger herd sizes, access own feed and water resources, storage capaci- ties, availability of stock, and other items that can lead to economies of scale. One obstacle related to technical and management interventions, as well as increased livestock productivity interventions, is that there is a potential “re- bound effect” when carrying out these activities. This means that the increased productivity achieved by the implementation of the mitigation practices, new technologies or techniques may result in higher attractiveness and incentive to expand livestock production activities, which, in turn, leads to an increase of absolute GHG emissions. In terms of results-based payments, this means that a financial mechanism that works with an intensity baseline (i.e., emissions 77 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR per unit of product) can reward a project even though the project effectively led to an increase in absolute emissions. A key element that deters private sector investment in climate mitigation projects in the livestock sector is that many of these projects, especially in LMICs, require a great deal of training (normally based on a peer-to-peer learn- ing and co-innovation approach); capacity building; smallholder aggregation; and parallel development of extension services to increase the necessary quality, profitability, and scale. These processes are usually long term, and this long-term continuous investment (in many cases combined with regulatory instability) is a substantial obstacle to private investment. Moreover, the live- stock sector in developing countries is characterized by other constraints that limit the development of the sector: disease prevalence (for example, foot and mouth disease in Mongolia),33 lack of production skills, and insufficient or lack- ing access to health and veterinary services. One obstacle, often overlooked, may be the limited capacity of private and public actors to assess effectively what is needed to finance climate mitiga- tion in the livestock sector because it is a relatively unexplored side of climate finance. At a local level, the capacity of local intermediaries to assess, imple- ment, and monitor livestock activities related to mitigation pathways is limited and usually focused on other areas of action such as reducing inequality and poverty, and enhancing food security. These obstacles can be addressed by strengthening the cooperation and knowledge sharing between stakeholders and promoting practices that enhance reductions of GHG emissions while increasing productivity and quality of output. This could be done through ca- pacity building and extension services, by private and/or public sector entities. Sociocultural norms can also create “inherent” obstacles. arising from cul- tural perspectives and views regarding the livestock sector. There are many examples of obstacles created vis a vis the weight of sociocultural norms from negative views on nomadic grazing, including tensions with sedentary produc- ers, to perceptions toward land use and livestock’s productivity and potential. Livestock ownership is a cultural signifier of wealth and status in some societ- ies, which creates its own subset of obstacles, such as those faced by women or marginalized groups. In societies where legal access to land title is denied to women or legal rights of ownership (including to livestock) do not exist, gender-specific programs, grants, or microfinance schemes within the meat protein sector that target empowerment or livelihood enhancement for wom- en encounter barriers. Inherent obstacles can deter potential investors (public and private) and challenge policy makers when creating policies and programs that are to benefit the whole sector. Livestock rearing in certain areas is not simply for market production. For ex- ample, a study included in the International Conference on Livestock Value Chain Finance and Access to Credit (Mtimet and Dube 2018) revealed that 33 Interview conducted with Fritz Schneider of the Global Agenda for Sustainable Livestock on November 22, 2019. 78 Obstacles to Mobilizing Climate Finance:Analyzing the Determinants smallholder farmers may rear for household consumption and traditional or religious ceremonies. Focusing on the market participation of Zambian smallholder goat farmers, it noted that farmers also rear goats for household consumption or ceremonies such as paying the bride price (Mtimet and Dube 2018). Investment obstacles may arise when adaptation or mitigation propos- als include herd husbandry and management practices that are antithetical to the traditional ones, such as the early offtake of animals in the herd to improve meat production efficiency. • Although collective action in cooperative or communal farms and grass- lands has many advantages, it can actually become an obstacle to securing finance. Complicated group dynamics can affect decision mak- ing determinations, which can be particularly hindersome in determining beneficiaries of finance; resolving management-related conflicts, such as those decisions about common goods, grazing approaches, shared grasslands; and where to use limited resources. Overview of main obstacles Table 4.3 provides an overview of main financial, economic, policy and regulato- ry obstacles, categorized by demand side, supply side, and policy frameworks, and indicates the affected stakeholders and regions. TABLE 4.3 Main Financial, Economic, Policy and Regulatory Obstacles Main Financial, Affected Geographical Economic, Policy, and stakeholders relevance Regulatory Obstacles Finance Demand Side (Farmer and Proximate Supply Chain) The missing middle Smallholder farmers and supply chain MSMEs Sub-Saharan Africa, Southwest (obstacle 1) Asia, Central Asia, Andes Climate risks (obstacle 2) All types of farmers, but smallholders All without insurance and any farmer in regions of pronounced climate change may be most vulnerable Insufficient financial Farmers and supply chain MSMEs Sub-Saharan Africa infrastructure and limited Farmers in areas without agro-banks banking services (obstacle 3) or cooperatives and with weak market development, such as SSA 79 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Main Financial, Affected Geographical Economic, Policy, and stakeholders relevance Regulatory Obstacles High transaction costs due Farmers and supply chain MSMEs Sub-Saharan Africa, to dispersed farmers and Especially in mountain areas, flood plains, Andes, Central Asia difficult access (obstacle 4) and forest-farming system in marginal regions, such as the Andes region, parts of Central Africa, and the Sahel region Limited or difficult market Subsistence farmers Sub-Saharan Africa, Andes access (obstacle 5) Farmers in LMICs and regions subject to unrest and instability Farmers not connected to regional or international supply chains Low supply chain Farmers who service dominant local aggregators, Marginal parts of all regions integration (obstacle6) where limited cooperation prohibits market pricing based on differentiated production or quality Farmers in regions with weak supply chains or low connectivity to global markets Weak income base Smallholder farmers Sub-Saharan Africa, leaves no security for Andes, Southwest Asia, investors (obstacle 7) but found in all regions Finance Supply Side Underdeveloped taxonomy, Any donor or institutional investor Specific to animal weak definitions, and subject to internal reporting on climate protein sector inconsistent reporting mitigation or other benefits (obstacle 8) Prohibitive transaction Rural and remote areas with low banking service In all regions, but mostly cost levels for dispersed Sub-Saharan Africa, smallholder producers Andes, Southwest Asia (obstacle 9) Competition with For all farmers and supply chain actors traditional In all regions cheaper informal or non- finance, will often be more attractive as it is climate (“traditional”) offered with fewer constraints and/or lower cost finance (obstacle 10) General perception among Concerns no single group or actor Widespread lenders that financing livestock-related activities in rural areas is not profitable (obstacle 11) General perception among Concerns no single group or actor Many commercial lenders that livestock offers actors in all regions little climate mitigation potential (obstacle 12) 80 Obstacles to Mobilizing Climate Finance:Analyzing the Determinants Main Financial, Affected Geographical Economic, Policy, and stakeholders relevance Regulatory Obstacles Policy Frameworks Uncertain, unclear, or Constrain ability of investors to develop and Investors directly, but counterproductive regulation evaluate business cases and understand indirectly those not being introduces uncontrollable trends and risks in the sector able to access finance risks (obstacle 13) May become a constraint in application or permitting processes Insufficient data on Constrain ability of investors to develop and Investors sector, actors, economic evaluate business cases and understand development, or business trends and risks in the sector activity (statistics) (obstacle 14) Lack of national strategic Complicated to assess and Individual countries frameworks or policies or understand national legislation across regions regulation (obstacle 15) Creates uncertainty around risks and possible support May become a obstacle in application or permitting processes Absence of active platform on Makes it difficult to raise attention Individual countries climate change, deforestation, and awareness by project developers across regions or biodiversity loss as driver and NGOs/Farmer organizations of action (obstacle 16) Little pressure on legislators to change any of the above policy framework constraints Note: The number of each obstacle is referenced in Table 3.4. LMICs = low- and middle-income countries; MSMEs = micro, small, and medium enterprises. 81 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Seven key obstacles specific to climate finance flows to the animal protein sector emerge from this analysis (Table 4.4). TABLE 4.4 Key Obstacles Restricting Climate Finance Flow into the Animal Protein Sector Key Obstacle 1. High costs of servicing smallholders that are often spatially widespread 2. Absent, weak, or counterproductive policy frameworks for animal protein and climate change, in combination with the absence of a sense of climate action urgency among some supply chain actors 3. Weak or disconnected pricing signals along animal protein value chains 4. Animal protein sector perceived as highly controversial, with weak business case for investment and lower-balance potential 5. Competition with traditional financing operating without GHG conditionalities or terms 6. Lack of shared data and approaches for MRV makes conditional finance (result-based payments) difficult 7. Lack of data and statistics complicates due diligence, making assessment of possible investment opportunities unreliable and difficult to compare Another way to assess obstacles is to look at the constraints existing for each of the main technical mitigation pathways. This is summarized in Table 4.5. 82 Obstacles to Mobilizing Climate Finance:Analyzing the Determinants TABLE 4.5 Collection of Obstacles per Pathway Mitigation Technological Obstacles Financial/Regulatory Obstacles Implementation Obstacles Pathway Animal • Information on feed • Seasonality or cash flow • Perceived lack of financial Feeding & quality and balanced issues prevent investment return from addressing Health feed rations is lacking in beef and dairy cattle production diseases leads • Access to improved feed to low willingness to pay materials or to simple for veterinary services feed transformation among farmers technologies is lacking • If not accompanied by • Insufficient access to advisory other mitigation pathways, and veterinary services intensification of livestock may lead to a growth in animal populations and thus to increased GHG emissions • There is a lack of data on feed sources and flows • Health challenges vary widely by region and species, there is no one-fits-all solution Avoided • There is difficulty in • As the mitigation outcome • Alternative livelihood Deforestation accessing and controlling comes from avoided strategies are lacking for land conversion frontiers emissions rather than communities living at the in remote areas emission reduction, its forest/pasture interface. quantification is inherently • Sustainable sourcing of difficult, dissuading most feed requires high levels of commercial investors traceability and coordination along complex supply chains Feed • The effects of feed additives • Investor interest is low • Access to this technology Additives to decrease methane because of scale and by rural farms requires an emissions are often reduced transaction costs, as long extensive network and close in the long term because of as tested additives are not contact with farm owners the adaptation of the rumen available on the market • This approach is not microbial ecosystem • Productivity gains from applicable to grazing systems, • Some additives can be toxic feed additives are lacking, thus is limited to confinement to livestock or ineffective, resulting in a net continuous favoring large-scale revealing the need for proper cost of supplying the operators and contributing testing before implementation additive to animals to animal-welfare concerns 83 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Mitigation Technological Obstacles Financial/Regulatory Obstacles Implementation Obstacles Pathway Genetic • There is a lack of knowledge • There is a lack of targeted • There is often a trade-off Selection & and access to specific breeds investment by major between breed productivity Breeding stakeholders in the and their resilience/adaptation animal genetic space to local conditions • Rural and smallholder • For achieving their full communities may be production potential, out of reach of private improved breeds need sector breeding-based specific conditions and initiatives because of the implementation of a the lack of consistent set of specific practices ways to report value • Biotechnology (CRISPR/Cas9) faces societal resistance and regulatory obstacles Grazing • A lack of baseline field data • Little perceived benefits • There is a lack of knowledge Management due to the costs associated of grazing management regarding sustainable grazing with collecting, processing practices among investors management techniques; and storing soil samples (and possibly in local best practices vary locally • Diversity of methods and communities, as well) • Attribution and coordination lack of consensus to assess • Access to rural farms for issues can occur when grazing SOC stocks and changes MRV requires an extensive occurs in communal pastures • When grasslands are network and close • Spatial distribution of intensified or new grass contact with scientists grazing pressure on a large species are introduced, and with farm owners scale requires significant biodiversity issues are • Smallholders can be excluded infrastructure investments derived from habitat change due to transaction costs (roads, access to water) and introducing foreign associated with MRV seeds/crops (invasive species, modifications of the grassland ecosystem) 84 Obstacles to Mobilizing Climate Finance:Analyzing the Determinants Mitigation Technological Obstacles Financial/Regulatory Obstacles Implementation Obstacles Pathway Manure • Methane and nitrous oxide • There is difficulty in • There is a lack of Management emissions are influenced accessing finance to build knowledge regarding by many parameters, new infrastructure for manure management including feed composition, manure management • Most manure management-, manure management and • The contribution of manure treatment-, and storage- microclimate, making baseline management to methane related pathways can be setting relatively complex emissions is relatively adopted only in situations • Nitrogen emissions may be limited compared to enteric where animals are housed displaced from one manure fermentation. Programs or kept in paddocks management step to the other focusing on methane emission (for example, from storage reduction will predominantly to application on crops), address the latter rather than suppressed • Emissions may also be displaced from one gas to another (for example, from N2O associated to aerobic storage to CH4 associated with anaerobic storage) Silvopastoral • MRV constraints in effectively • The perceived mitigation • Need for technical assistance Systems monitoring the carbon potential is low and slow to support producers sequestration potential of • Silvopastoral systems often as they redesign their silvopastoral systems – a occur near the deforestation production systems rather specific system front and can act as a buffer, • If not accompanied by with carbon sequestration or as a pioneering stage in the other mitigation pathways, occurring both below- moving deforestation front intensification may lead to ground (grassland soil) if the regulatory framework a growth in pasture areas and above ground (trees) does not prevent it and thus to increased GHG emissions • Issues with beneficiary identification in the case of shared land resources Whole • Need to draw on several • Costs are associated with • Issues with stakeholder Supply Chain MRV systems to monitor implementing MRV systems coordination and beneficiary Approach GHG emissions and along the supply chain identification as mitigation carbon sequestration effects are re/distributed along the supply chain along the supply chain • Requires coordinating action • Risk of emissions along the supply chain, displacement (leakage) if involving multiple stakeholders coordination is not sufficient or if MRV systems are not adequately articulated • Note: GHG = greenhouse gas; MRV = measurement, reporting, and verification. 85 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR 5 Investment Opportunities 86 Investment Opportunities Climate finance clearly has a role to play in helping to reform the livestock sec- tor in ways that reduce its impact on the environment and on climate change. There are many ways in which climate finance can intervene but it is useful to focus on specific actions - or investment opportunities - that can be particu- larly practicable and effective, with returns both for actors in the sector and for those investors in the public and private sectors that choose to become involved in the animal protein value chain. Foundations The successful leveraging of additional finance flows to reshape animal pro- tein value chains will depend on the ability of the sector to exploit opportunities and overcome obstacles. This could entail: better communication on mitiga- tion pathways to convince investors of the mitigation potential – the evolution of livestock markets in LMICs toward higher-profitability; the scaling-up of low- er-risk strategies; the increased integration of livestock value chains to foster better price setting and transmission of price signals; and the leveraging of new financial flows through blended finance structures and PPPs. In other words, it depends on making investors look at animal protein value chains in LMICs as viable business opportunities with climate mitigation potential. Many of the obstacles identified in this report are not exclusive to the animal protein sector’s readiness to access climate finance. Lessons learned from developing and applying climate finance approaches in other sectors are thus extremely relevant to the design of investment opportunities for animal protein value chains (Table 5.1). A key part of a convincing business case for directing climate finance toward the livestock sector is the incorporation of, and adaptation to, the local circum- stances of economic structures, markets, culture, and production systems in the business proposal, namely, the enabling environment. 87 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR TABLE 5.1 Lessons from Outside the Livestock Sector and Relevant Key Obstacles Learning Key Obstacle Addressed Project aggregation helps address MDB high High costs of servicing smallholders that appraisal costs and other due diligence are often spatially widespread Policy-based loans at the national level can Absent, weak, unclear, or counterproductive unlock most forms of climate finance legislation or policy framework without a common platform for supply chain actors Increasing transparency and higher climate Weak or disconnected pricing signal in the market standards reduces investor risk perception To reduce risk, adapt existing infrastructure to climate Livestock farmers are perceived as high risk, with weak mitigation; and use simple approaches and instruments to business cases and low GHG mitigation potential develop more tailor-made approaches after the pilot phase Investment loans and credit lines can be linked Traditional financing approaches supply the missing to mitigation standards and technologies; middle without GHG conditionalities or terms project aggregation through local financial intermediaries will help link GHG conditions to lending practices Increasing transparency and elaborating categories Lack of clear and concise taxonomy and low reduce investor uncertainty and perceived risk transparency make results measurement and conditional finance difficult Increasing transparency and standardizing Lack of data and statistics makes due diligence difficult investment standards reduces data needs while increasing available data; Project aggregation and standardization helps reduce data needs for due diligence Note: GHG = greenhouse gas; MDB = multilateral development bank. Six investment opportunities This section proposes six investment opportunities that combine finan- cial practices and mitigation pathways that could be developed and tested to showcase climate finance mainstreaming into the animal protein sector. These opportunities can be used to demonstrate feasibility in future initiatives (Table 5.2). The challenge is to develop innovative technical and climate financing practices that not only reach and serve clients in animal protein value chains, but that also address obstacles, achieve significant mitigation goals, are financially viable, and can mobilize climate finance – often competing with traditional finance. 88 Investment Opportunities TABLE 5.2 Overview of Key Elements of Potential Financial Practices Financial Practice Funding Source/Flow Potential transformative Recipient levers 1. Sector-specific credit • MDBs/IFIs ideally as • Sector policies • Local project level farms line with climate mezzanine or risk bearing • Financial sector reform and communities conditionalities capital blended with: • Local FIs and • Climate intelligence • Local rural banks and data second tier banks • Local green banks • Financial intermediaries and strategic with a good rural outreach investment funds • Microfinance • IFIs or similar • Government credit lines • Philanthropic funds 2. Value chain finance • Corporations • Project-based policy • Upstream value chain promoting native • Own finance, FDI • Fiscal policy actors, including ecosystem protection producers • Local green banks • Innovation and and strategic tech transfers investment funds • Consumer crowdfunding or blockchain smart contracting • Philanthropic funds 3. Animal protein • Carbon market finance • Carbon markets • Project owners (farmers) sector participation from private operators • Climate intelligence potentially through in emissions or government and data financial intermediaries trading schemes • Supplementary funding such as offset sources possible, for providers and traders example, own finance • Funding stream depends or project finance, on market design, for such as an innovation example, who owns fund supplied by the resulting credits share of proceeds or allowance auctioning 4 Programmatic support • ODA grants from donor • Project-based policy • Budgets of authorities for policy changes countries MDBs • Fiscal policy or policy areas • IFIs owning legislation • Trade policy • Innovation and tech transfers 89 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Financial Practice Funding Source/Flow Potential transformative Recipient levers 5. Sourcing deforestation- • Grants, precommercial • Fiscal policy • Local VSA specific free feed from Verified loans, or concessional • Financial sector reform special purpose vehicles Sourcing Areas (VSAs) loans by MDBs operated and controlled • Sector policies • Technical assistance by relevant actors • Climate intelligence and know-how by and data supply chain operators and local authorities • Own finance of relevant offtakers, traders, or supply chain actors 6. Prize-based climate • Private impact investors • Innovation and • Local project level farms finance programs for • Microfinance tech transfers and communities technical innovation • Climate intelligence • Financial service • Competition managers (e.g., AgResults) and data providers for rural producers (MFIs) • Philanthropic funds Note: FDI = foreign direct investment; FIs = financial institutions; IFIs = international financial institutions; MDBs = multilateral development banks; MFIs = microfinance institutions; ODA = official development assistance; VSA = Verified Sourcing Area. Condition credit lines on climate mitigation actions Efficiency gains by low-productivity cattle, sheep and goat producers in mixed crop-livestock systems offer a promising avenue for sustainability gains. They enable concomitant reduction of GHG emission intensity and improve- ment of financial returns, as well as other benefits, such as food safety and natural resource use efficiency. Achieving these efficiency gains requires the adoption of practices such as feed ration balancing, year-round feed and wa- ter management, animal health and reproductivity management, and nutrient and organic matter recycling. Especially among smallholder farmers, lack of skills in finance and markets, as well as knowledge gaps limits access to fi- nance to reduce GHG emission intensity. Climate finance can help address these constraints. Climate finance can contribute to improving smallholders’ access to financial and knowledge resources that will enable the adoption of practices that generate mitigation outcomes. This may take the form of concessional loans, de-risking investments, provision of technical assistance, or a combination of those. Climate mitigation finance embedded in commercial financial products—such as credit lines conditional on mitigation actions/outcomes accompanied by technical assistance delivered through a value-chain approach—can be a pow- erful tool for simultaneously tackling multiple adoption obstacles. This would increase farmers’ access to credit while providing the technical assistance 90 Investment Opportunities necessary to build farmer capacity such as expertise in farm management and animal husbandry technologies and practices with climate change mitiga- tion potential. It would also lead to multiple and significant co-benefits using a packaged approach (increased productivity, record keeping, quality control, sanitary standards, traceability) and advance farmers’ integration into com- mercial aggregated value chains. In one potential general arrangement (Figure 5.1.), a Climate Finance institu- tion provides a credit line to one or several local banks. This credit line has a concessional component such as a low-interest rate, a longer term, or a grace period. The local bank can use the credit line to provide loans to specified ben- eficiaries (producer organizations, dairy processors, farmers). This credit line is only used for a specific type of loan for defined activities that will limit the GHG intensity of a given livestock production smallholding while ensuring ad- ditional co-benefits. Several mechanisms can contribute to de-risking the credit offered to benefi- ciaries. The local banks access favorable credit conditions from the Climate Finance institution, which lessens their refinancing risk. Technical assis- tance will be required to reduce risk, such as farmers’ training, or to lower FIGURE 5.1 Credit Line with Conditionality. MRV rt Mi Fina o tig ep ati nce nR onR and orga tio ep nize tiga ort Mi Credit Line Loan with Local CF Institution Local Banks conditionality Donors Recipients s Creates an ining l tra enabling hn ica aniz e environment Tec nd org nce a Fina Creates an Technical Government enabling environment Assistance Source: Authors’ conceptualization. 91 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR the disbursement costs, such as sourcing of beneficiaries and help with due diligence. The initiative would closely partner with the government to create an enabling environment for the beneficiaries to succeed in their project. Monitoring and evaluation are organized between the beneficiaries and the Climate Finance institution to report the mitigation results. To be successful, such an initiative would count on several types of financ- ing. With access to a low-cost credit line, private banks can offer concessional loans to farmers conditional to implementing some environmental practices. Technical assistance may be financed by ODA grants, rather than the private element, to ensure the profitability of the project. The combination of ODA and favorable institutional credit lines would allow some leverage of private invest- ments from local banks. Areas, such as Sub-Saharan Africa, characterized by increasing demand for milk and meat products, relatively low productivity, and rising access to mar- kets and financial products for producers, would offer the best conditions for this type of investment opportunity. It may contribute to enable sustainable in- tensification to meet expected growth in demand for dairy and meat products, at lower emission cost than business as usual growth. This approach addresses two main obstacles to efficiency gains in smallhold- er ruminant-based systems: a shortage of financing infrastructure that can bridge international finance institutions’ access to such farmers; and a weak and vulnerable income base together with irregular cash flows and inadequate collateral that often prevent access to finance. The investment approach also effectively removes some of the obstacles to climate finance flow in the animal protein sector: by involving local financial in- stitutions, it resolves potential issues of competition between climate finance and traditional financing. The involvement of local financial institutions and producers’ organizations also allows a reduction in the costs of servicing nu- merous and widespread smallholders. Aggregation and Technical Assistance. In order to leverage access to financial instruments, stakeholders need to encourage and facilitate smallholder ag- gregations into cooperative systems or as participants in PPPs to enhance efficiency, increase market power, and raise economic output. The role of local and regional aggregators and post-farm processors is key because they can also provide smallholders with advisory services and link them to input and service providers, serving as a catalyst for the introduction of new technolo- gies in rural areas and in smallholder pastoralist communities. The role of ODA is central to any offer of technical assistance required for the preparation and implementation of the project. This will limit the risk for the lenders and ensure the environmental conditionality of the credit scheme. Financial design. Such financing mechanisms should offer flexible installments, make use of simple infrastructure for aggregation, and could use indexed 92 Investment Opportunities approaches linked to local downstream industry performance, prices, and markets. This requires specific designs adapted to local needs and conditions. Alignment with the institutional and policy framework. The conditional credit line approach will only be successful if formulation takes account of the prevailing policy and regulatory environment. It may be the case that negative policies or those that do not facilitate this approach will have to be modified or aban- doned altogether and replaced by regulations and standards directed toward low-carbon and climate resilient transformation of the sector. Data and monitoring. It is important to close data gaps regarding baseline emissions. Specific MRV systems can be adapted from existing versions or modified to suit the requirements of this approach. Encourage value-chain finance for native ecosystem protection Latin America continues to have the highest area of deforestation in absolute terms. Forest clearance is most often driven by animal protein value chains, be it conversion to farmlands for feed production or expansion of pasture for grazing. Deforestation especially threatens the Brazilian Amazon and Cerrado; the Gran Chaco shared by Argentina, Bolivia, Brazil, and Paraguay; and the Atlantic forest in Paraguay. The expansion of the cattle product market in South America beyond southern Brazil and central and northeastern Argentina started mainly in the late 1990s, in part due to increased demand from China. The governments of the countries within Latin America and the Caribbean have begun and expanded upon initiatives to combat deforestation led partial- ly by consumer demand for sustainable beef. Halting deforestation in Latin America requires the adoption of different prac- tices by cattle ranchers, beef aggregators and processors, and regulators in equal measure. One relevant policy approach is through the NAMA plans. For example, the Resource Efficiency Program for Brazil’s Beef Supply Chain NAMA forms part of the NDC to restore 15 million hectares of forest by 2030 and to reduce national emissions by 37 percent below 2005 levels by 2025 (NAMA Facility).34 A specific financial obstacle related to the mitigation pathway of avoiding de- forestation is the challenge of pricing the protection of an asset and integrating this price into products consumed at the end of a complex global value chain far from the asset. The asset is tropical forests, but the product range poten- tially causing deforestation (or degradation) is wide, with products originating from livestock production only part of the responsible agents. Compared to many of the other forest risk commodities,35 livestock products have very low certification rates, making it even more difficult for buyers (processors, 34 See https://www.nama-facility.org/projects/brazil-resource-efficiency-program-for-brazils-beef-supply-chain/ 35 See, for example, the CDP website’s information on forests at https://www.cdp.net/en/forests and Pendrill et al. 2019. 93 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR retailers, and end-users) to transfer market preferences and price signals up- stream to farmers (IDH 2020). The economic intervention needed to avoid deforestation must change incentives for landowners and farmers so that pro- ductivity improvements without expansion of rangeland are preferred and more attractive. From a farmer’s point of view, access to finance to enable the uptake of new technologies, improve practices, or achieve productivity gains is crucial. In addition, increasing transparency and accountability across the entire val- ue chain can help to strengthen low-carbon efforts on a global scale. Demand from consumers for low carbon beef will encourage producers to join agree- ments or associations that promote collaboration toward sustainable beef. The whole beef value chain needs to be engaged in limiting the GHG emissions induced by the sector. A possible structure to allow this to happen would use a debt or equity instrument or a mix of both (Figure 5.2) for the potential use of carbon finance through crediting schemes, such as VCS or Gold Standard. FIGURE 5.2 Potential Blueprint Set-Up Pool of private investors Pool of donors Beef processing company Carbon Markets Sponsoring Funding Additional payment based on outcomes Auditor Climate Fund Structure Coordinate and Structure services Local NGO Beef processing company Deliver Services: Technical assistance, and access to long-term finance Target group: Paraguayan Cattle Ranchers Source: COWI, 2020. 94 Investment Opportunities The involvement of the main beef processors is essential, and the potential investment should leverage their apparent willingness to limit deforestation. These stakeholders can act as aggregators and financial intermediaries who can also provide value chain finance to upstream partners/producers (see the cocoa sector example, Box 3.3). In 2009, Brazil’s largest meatpacking compa- nies (Marfrig, Minerva, JBS, and Bertin), which are also part of the larger Global Roundtable on Sustainable Beef, agreed to stop purchasing meat grown on lands that were deforested after October 2009 by signing the G4 zero-defor- estation agreement (Gibbs et al. 2015). The G4 agreement goes further than the Termo de Ajuste de Conduta (Term of Adjustment of Conduct agreement) (TAC), which only prohibits buying meat from ranchers involved in “illegal de- forestation” as specified by the forest code. A pool of donors would finance the technical assistance required to make this structure viable. Their allies in a pool of investors will serve to fund the sec- tor’s intensification to generate additional revenues. Both financing activities will be coordinated and structured by a central Climate Fund structure. The Climate Fund will invest in processing companies to finance the transforma- tion of the sector. The processing companies will have the responsibility to incentivize cattle ranchers to improve their production processes and reduce their production’s GHG intensity. Several mechanisms can be used, such as price incentives, technical assistance, and financing capacities. The structure provides flexibility in how these mechanisms can be used and combined to offer sufficient incentive to cattle ranchers to improve their practices. Such an arrangement could enable a regional fund to help the transition of beef production in other South and Central American countries. An initial case could serve as a pilot project under this funding arrangement. Based on the success and learning from the pilot, a mechanism could be built to enable ex- tension to other situations. A regional fund dedicated to animal protein value chains would leverage the impact of scale, particularly concerning the defor- estation-beef production nexus. Relying on value chain coordination and engagement, the approach directly addresses two of the obstacles identified above: the involvement of many smallholders that are often spatially widespread but all participating in the val- ue chain, and the transmission of pricing signals along the chain. The value chain approach, and the mobilization of private capital is also po- tentially an effective way to improve consumers’ perception of the sector’s commitment to GHG emission reduction and environmental sustainability goals, in general. Traceability. A reliable traceability system is the cornerstone of this investment opportunity, in particular, to be able to trace cattle that have potentially been sourced from illegally deforested areas. However, tracking schemes—from birth to the sale of cattle to slaughterhouses—are rarely consistently imple- mented in the region. In addition, it is difficult to track the emissions related to feed production. Uruguay’s Animal Identification and Registration System 95 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR (SEIIC) is a notable exception and has indeed enabled the country to access high-end markets with environmental requirements. Advances in remote sensing, information technology, and approaches such as block-chain or cross-analysis of statistical databases offer avenues to de- velop such traceability systems. Once they are operational, climate-smart and deforestation-free practices can be imposed through value-chain contracts— between breeder-rancher-slaughterhouse-processors—that ensure effective monitoring of livestock, including their emissions. Financial incentives (a high- er price for deforestation-free beef) and technical assistance will be required to foster the adoption of such practices, along with a robust legal framework (with inspectors) to enforce adherence. Global traders or retailers that control parts or all of the value chain are among the best-positioned actors to incentivize such development and enable value chains to demand price premiums. Stakeholder alignment. Related to the above, an important aspect when de- veloping such investment opportunity will be the identification of points of convergence and common interest among stakeholders in the value chain. This will involve building trust through the sharing of information, margins and risks along the value chain, and the identification of practical areas of collaboration. Deforestation regulation. To be effective this approach must be aligned with na- tional policy frameworks and national climate commitments that will provide the overall regulatory framework and support infrastructure to the transition- ing of the beef value chain. These include measures that halt deforestation (e.g., forest codes, land registry, remote and on-site surveillance and policing), and support to sustainable intensification (R&D, extension and advisory ser- vices, subsidy programs). Drive clean investment through Emissions Trading Schemes Rationale and justification Emissions trading schemes (ETS) constitute a rapidly developing market-based approach to controlling GHG emissions. They operate at various scales; the largest schemes currently operating are the European Union Emission Trading Scheme, the California scheme, and the New Zealand Emissions Trading Scheme. In essence, a central authority allocates a limited number of GHG emission permits, and emitters are required to hold permits in amounts equal to their emissions. Polluters who want to increase their emissions must buy permits – or credits – from others willing to sell them.36 The revenues from the sale of carbon credits provide financial incentives to invest in and implement low-carbon emission practices or carbon sequestration activities. 36 https://parlinfo.aph.gov.au/parlInfo/download/library/prspub/2501441/upload_binary/2501441.pdf 96 Investment Opportunities While ETS have been successfully developing worldwide for many sectors (clean energy and transportation), the agriculture sector has been mostly ex- cluded. Agriculture, and livestock, in particular, represents a marginal part of existing schemes because carbon crediting can be perceived as an insufficient incentive for implementing carbon reductions, and the agriculture sector has resisted ETS from fear of adverse effects on food security and rural livelihoods. However, new technologies, such as remote sensing and satellite imagery, can lower the MRV cost and make ETS more applicable to the livestock sec- tor. Mitigation and sequestration practices also attract more interest from livestock producers because of their perceived long-term profitability, while carbon credits could provide additional financial support for their implemen- tation. Hence, in 2019, the New Zealand Interim Climate Change Committee proposed integrating the agriculture sector into the New Zealand ETS by 2025. This would put a price on livestock and fertilizer emissions requiring farmers to pay for them. Investment opportunity As more ETS operators consider the agricultural sector for full inclusion (thus placing the sector under the overall ETS GHG emission cap), or as a simple provider of credits (outside the cap), there is an opportunity for the livestock sector to generate credits that can then be marketed as part of an offset of the trading system. Emissions eligible for trading could follow the IPCC categories of manure man- agement and enteric fermentation. Well-established practices exist for their mitigation. Manure management is already included in the methodology of the CDM on methane recovery in animal manure management systems. Regenerative agriculture has also proved to be a valuable carbon sequestra- tion option and could be included in ETS. Soil organic carbon has been tested and proved profitable for livestock producers, both for the quantity of carbon credits generated and for additional benefits in the long term (see Box 3.5). An essential element of any ETS is the MRV system and its protocols, allow- ance allocation principles, registry systems, and a governance system of laws and statutes to regulate all of these. There are significant financial consid- erations for an ETS and its expansion because it requires regulated entities to implement new technologies, which may be costly. Implementation costs of methane capture technology, for example, could be prohibitive for small- holders. In many of the LMICs in question, the livestock sector is dominated by smallholders. In the pilot phase of the Kazakhstani ETS, support from the World Bank could be crucial in achieving success and uptake. Once a market is established and a scheme is self-enforcing, support can be eased, eventually operating independently. However, reliance on a consistent carbon price can prevent a successful ETS. On a policy level, an ETS may cause overlap with mechanisms already in place to mitigate emissions, such as subsidies. For example, subsidies or payments 97 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR delivered to farmers for environmentally friendly practices could cause a de- crease in their emissions, thus creating allowances under the cap for firms in other sectors to increase their emissions. Taking this as a type of leakage must be considered when analyzing the viability for a new or expanded scheme to operate in a given geography. Countries that may already have low mitigation efforts on a policy level could be strong candidates for a well-functioning ETS that integrates livestock value chains (OECD 2011). Integrating the livestock sector into any ETS could provide additional incen- tives to livestock farmers to implement mitigation strategies and further improve the livestock sector’s climate benefits. Obstacles addressed Integrating the livestock sector into an ETS would address several bottlenecks that currently limit climate finance flows. The rigor of the GHG accounting would send a clear signal of the mitigation potential of the sector. It would also contribute to mainstream MRV methodologies and allocate the required research to lower their costs. Carbon crediting provides additional incentives to implement mitigation strat- egies in the livestock sector and can reduce the perceived lack of financial attractivity of such projects. Depending on the per-ton carbon price, carbon crediting can contribute to making some costly mitigation practices profitable. It is also a way to involve the private sector in financing the transition of the livestock sector toward more environmentally sustainable practices. Finally, developing an ETS at the national level will provide the stimulus needed to generalize and scale up low-emission livestock production practices. Next steps-business development Implementing a national ETS for the animal protein sector should draw les- sons from successful carbon crediting schemes, such as those found in the clean energy sector. When developing an ETS, it will be essential to evaluate the sector’s mitigation and sequestration potential and determine realistic caps and baselines. A busi- ness case should be developed to assess the carbon credit prices required for the set of mitigation and sequestration strategies to be implemented, includ- ing an assessment of potential implication for food output and food prices. It is also essential that the credits generated in the livestock sector match the level of certainty of those generated and spent in other sectors under the ETS. There is, for example, a need to address the (im)permanence of carbon stocks in soils and biomass, compared to the immediate and irreversible release of carbon dioxide from fossil fuel consumption. Cost-efficient MRV methodologies remain crucial for the success and rele- vance of integrating the livestock sector into an ETS. The use of new data acquisition and management technologies will be essential to reach this goal. 98 Investment Opportunities Reward proactive policy commitments through ODA Rationale and justification Many of the facilitators that can improve the financial and technical feasibility of investments in a sustainable and low-GHG-emission livestock sector are under the influence of governments and operate within the policy, institutional, and regulatory context established by the public authorities. Hence, enabling the transformation of animal protein value chains and enhancing the viability of climate finance opportunities requires strategic work with governments, re- search institutions, and industry organizations through policy-based lending or grants. Some examples of enabling policies in the livestock sector include Mongolia’s National Livestock Program, which sets limits on the number of animals based on the carrying capacity of the grasslands. In Nepal, the Forest Policy regu- lates livestock access to forested land based on fodder production estimates, to improve forest management and increase fodder production by community efforts (Alves-Pinto et al. 2015). Some countries have also set up policy frame- works and strategies to promote efficiency gains and market linkages along the value chain, such as Burkina Faso’s 2010–2015 National Sustainable Development Policy for Livestock, and Ethiopia’s and Rwanda’s Livestock Master Plans (Enahoro et al. 2019). Potential investment opportunity Repurposing national livestock policies and associated subsidies toward greater sustainability and climate benefits can be a crucial part of a country’s climate-change agenda. Governments can provide the necessary incentives for producers to adapt their practices. Such programs can be part of sectoral strategic plans, NDC road maps, NAMAs, or broader national development planning. Through such programs, governments can redirect public support to pro- ducers, build capacities, improve access to resources and information, and establish governance structures and MRV systems while providing coordinat- ed, synergistic and systemic responses to climate change and more efficient investments in the sector. Working at the government level prevents the dupli- cation and fragmentation of action on climate change. When new and innovative means to finance mitigation and adaptation activ- ities are being rolled out, they need to be done in parallel with changes to the national enabling environment that are required to scale-up climate activities in the livestock sector: combining policy-based levers with fiscal and trade policy instruments will transform the animal protein sector at the country level. The World Bank’s Program for Results (PforR) and Development Policy Operations (DPO), as well as budget support provided by the EU under the Global Public Goods and Challenges thematic program, are instruments that can support this kind of approach. See Box 3.6 on Kazakhstan. 99 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Obstacles addressed Policy-based climate finance directly addresses one of the obstacles identi- fied previously in this report: the weak or counterproductive policy frameworks for the animal protein sector and climate change, in combination with the ab- sence of a sense of climate action urgency among some supply chain actors. Providing a clear policy vision and implementation pathways is an important signal of political commitment toward climate change actions. It will lay the groundwork for additional private investment flows. It also provides an opportunity to address some of the other obstacles more effectively; in particular, the cost of servicing smallholders that are often spa- tially widespread, and the lack of shared data and information. Next steps Repurposing policy frameworks involves a number of interdependent stages, as with any policy formulation process: climate-related problem identification, policy agenda setting, policy formulation analysis and consultation, policy adoption, and policy implementation and evaluation. The preparation of pol- icy-based lending may involve all of these stages or be limited to identifying and refining objectives for support within existing national programs. Developing such programs can leverage lessons learned in the implementa- tion of similar initiatives. The EU programmatic approach to tackling climate change is one example that can be used to define the architecture of policy changes at the country level (Figure 5.3). The EU has defined a new structure to facilitate the integration of climate objectives into its post-2020 Common Agricultural Policy (CAP). The green architecture of the new CAP sets some specific mitigation and adaptation objectives and makes environmental conditionality mandatory for farmers. Regulations ensure a mandatory minimum level of environmental protection through obligations related to climate issues, such as the maintenance of a portion of permanent grassland or a ban on burning arable stubble. In return, the CAP strategic plan offers support options, such as rewards for the the in- troduction and maintenance of wet agriculture and assisting the transition of water-dependent farming systems toward water-efficient systems. Member states are invited to prepare CAP strategic plans after their analysis of the potential of several climate strategies. These strategic CAP plans are required to set quantifiable objectives in line with the green architecture estab- lished by the EU. The European Commission then approves the CAP plan and implements MRV strategies. Such program architectures can be replicable in the livestock sector in LMICs and can play an essential role in the sector’s transition toward low-emission practices. 100 Investment Opportunities FIGURE 5.3 Green Architecture of CAP Source: European Commission 101 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR Verify sustainable sourcing of livestock feed Rationale and justification Livestock production systems, especially those where farms rely on ex- ternal feed, produce several types of emissions: both direct (on-farm) and indirect (off-farm, associated with the production of feed and other inputs). Investments into improvements in one part of the system might lead to leak- age, including an increase in GHG emissions, impacts on biodiversity, and livelihoods elsewhere in the local, regional, or global agricultural production system. In particular, improving animal productivity through feeding efficiency can drive up the demand for internationally traded feedstuffs, such as soybean and palm kernel cakes, that are cultivated in deforested areas. Potential investment opportunity The key to addressing these interactions is to extend the scope of the system or geographical area that can benefit from the financing. This is the principle behind Verified Sourcing Area (VSA) initiatives. A VSA is a confined jurisdiction in which all farmers, processors, stakeholders, authorities, and relevant busi- nesses are included in a verification system. With a VSA approach, the goal is to validate mitigation results (or other outcomes) achieved by the system, to justify eligibility for financing. Through this mechanism, any interested party (buyers, traders, or other actors) can access information on the region of origin of feed, as well as the impact and progress of related sustainability measures, thus providing a better understanding of impacts along the feed value chains. This approach is limited to value chain integration and finance: points where consumer-side companies or downstream processors invest in processing or aggregation facilities and target farm-level investments. The VSA mechanism also acts as a connector between multiple stakehold- ers within a region to promote collaboration on setting targets and objectives leading toward sustainability. Beyond deforestation, the VSA system also fo- cuses on labor and land tenure, as well as livelihoods, involving not only the production environment but also demand along the supply chain. Climate fi- nance instruments, such as concessional loans, can support a sector-based approach. Grants should be deployed to foster the development of climate intelligence and data adapted to the VSA. Obstacles addressed This opportunity mainly addresses methodological and implementation ob- stacles. On the methodological side, the combination of public and private data collection at the VSA level, including through digital technologies, can be a way to overcome obstacles associated to the lack of information to support MRV mechanisms. On the implementation side, stakeholder coordination at the local level is embedded in the development of VSAs. 102 Investment Opportunities Next steps – business development Digital technologies have a strong potential to support the development of VSAs and the inclusion of smallholder farmers by reducing the cost and in- equity in access to information markets. Other considerations for creating and maintaining an effective VSA model include: building in targeted support for skill development, ensuring a clear role for the public sector in minimizing entry obstacles to the VSA systems, as well as maintaining good data gover- nance; these can all be additional benefits. Major overlaps exist between the business development of a VSA set up in part to attract investment and the value chain finance of low-carbon beef. In particular, operationalization at the VSA level (on data collection or stakeholder coordination, for example) needs to be combined with traceability downstream in the value chain (see Section 5.2.2). The conditions for climate finance for VSAs are twofold: a legal entity serving as aggregator and candidate for investment must be present; and indicators and indices must be available and able to monitor improvements in GHG emis- sions (and other impacts). The opportunity for a climate financing approach to this setup will depend on secure land tenure, a functioning governmental system, and a jurisdiction with available data. VSAs represent a very promis- ing mechanism for shifting global agricultural production toward sustainable practices, especially in LMICs and where agricultural and livestock production is tied to environmental risks such as deforestation, soil erosion, and water pollution, among others. Innovate in livestock climate finance through prize-based programs Rationale and justification The research and development (R&D) into new technologies, products, and practices is essential to advancing mitigation pathways, both in accessing technical potential for mitigation and enhancing the cost-effectiveness of mit- igation in the livestock sector (see Figure 4.1). Research undertaken in the livestock sector of selected African countries shows that GHG emissions intensity and other environmental externalities are lower when public investments in agricultural R&D are higher (Spada et al. 2019). Data from the Agricultural Science and Technology Indicators (ASTI), however, shows that agricultural research in Africa suffers from underinvest- ment; total regional investments in agriculture actually declined between 2014 and 2016 (Carden et al. 2019). Where risks are high and commercial viability seems remote, R&D into new technologies is generally publicly funded (TEC 2017). Innovation to reduce GHG emission reductions through better animal feed and improved health, or to lower emissions from farm machinery and equipment could offer 103 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR considerable opportunities but it depends on engagement from private sector manufacturers. Attracting private sector R&D to research into the identifica- tion of technical developments that would result in mitigation in the livestock sector depends on increasing the prospects for decent returns on such invest- ments in the short to medium term. Where market leaders have been working on pilots and prototype equipment, there have been no commercial launches of new products or practices (Ahmed et al. 2020). Investment opportunity Investing in R&D would increase research efforts into mitigation pathways for the livestock sector. It could be done through prize competitions, which en- courage innovation and technology transfer, overcome obstacles to bringing technology to market, and contribute to catalyzing change in the sector. Philanthropists and governments have used prizes to produce societal benefits through innovation, engagement, and implementation of improved practices. A promising approach is Program-for-Results (PfR) in R&D, encouraging the private sector to harness the power of the market to promote the adoption of technologies with a high-yield development impact. The advantages of PfR prizes are: height- ened awareness along the value chain of global problems; results-based funding where prizes are won only after pre-defined results are achieved (partial failure does not, necessarily, mean full loss of funding); and process-agnosticism – funders of the initiative do not need to predict or prescribe the actions to produce the desired result because prizes are awarded based on achievements not on how they were obtained (AgResults, 2020a; 2020b, see also https://agresults.org/learning/56- takeaways-from-seven-years-of-using-prize-competitions-to-transform-markets/ file). Prize competitions outshine traditional ODA grants to R&D for several reasons: • They are results-based. • They encourage competition between innovators and manufacturers/ and/or innovators. • Only one company may win the prize, but several new products can be launched as a result of the competition. • They have a strong marketing and communication value, due to open, competitive, and media-friendly attributes. • By stirring competition, PfR prize competitions profit from market dy- namics to promote the adoption of innovative mitigation technologies in a highly leveraged and results-focused way (McKinsey & Company 2009). In addition to the prize-competition mechanism, at the demonstration stage, venture capital funding can accelerate climate-related R&D activities (TEC 2017). 104 Investment Opportunities Obstacles addressed This investment opportunity primarily leverages new technologies and inno- vation to address technological and methodological obstacles on mitigation pathways, but also to lower the cost of mitigation for value chain stakeholders, as well as to increase the availability and reduce the cost of data for MRV. Some of the specific obstacles addressed include lack of technological readi- ness for mitigation; absence of models and approaches for the quantification of mitigation potential; unavailability of cost-efficient MRV systems, and relat- ed data acquisition procedures; and lack of traceability systems. Next steps – business development Prize competitions can be a means of overcoming technology-unreadiness or market obstacles in a confined geography. The prize could be implemented by relevant institutions or organizations, in cooperation with agriculture, science, and technology networks, and financed by donor agencies or philanthropies. International development organizations with on-the-ground implementation experience could support this opportunity by providing a market for developed products. Prize competitions may involve the entire value chain and act as a market mechanism through competition between actors. 105 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR 6 Concluding remarks 106 Concluding remarks The animal protein sector is critical to livelihoods and food security. However, it also contributes 14.5 percent of global anthropogenic GHG emissions through enteric fermentation, feed production, manure management, fossil fuel con- sumption, and land use change. Climate change impacts the sector directly through animal mortality and low- er productivity, and indirectly through feed and pasture productivity, disease patterns and changes to water and feed resources, which then impacts liveli- hoods and food security. Yet, there is a vacuum in integrating climate finance to the sector or seizing additional opportunities in animal protein investments that can lead to envi- ronmental, economic, and social benefits. Indeed, the livestock sector offers large and bankable mitigation options. Transforming the sector toward a low-carbon and climate resilient devel- opment path may take time, but it is possible if sustainable practices are adopted—ideally with a value-chain approach. Fortunately, cost-effective and quick-win practices—such as improving manure management, feeding and animal health—are available. Moreover, they can result in triple outcomes: mitigation through reduced emission intensity; adaptation through resource use efficiency and nutrition improvements; and increased incomes or higher returns on investment through productivity and efficiency gains. Longer term shifts also exist – such as land management, breed improvement and herd management – that can deliver large scale reduction of net emissions togeth- er with further progress on resilience and economic outcomes. Climate finance can trigger a faster transformation toward low-carbon devel- opment, in this emission-intensive sector, and with larger emission reductions. It can enable the adoption of known best practices as well as encourage in- novation and research, with additional environmental and economic benefits. This report explored investment opportunities and addressed financial mech- anisms and levers that can be used toward achieving climate goals. It argued that simple financial practices can be implemented in current business mod- els and demonstrated how climate change can be mainstreamed through both traditional finance mechanisms within the existing infrastructure. The IPCC’s Fifth Assessment Report (2014) stated that intersections of cli- mate change with livestock systems are crucial, yet understudied research areas. This report stimulates further research and initiates dialogue among experts and practitioners about the mitigation potential of the sector and the climate finance and relevant investments needed to realize such potential. It is part of a wider global reflection on the transformative potential of climate finance. In the development of the report, consultations with a variety of ex- perts and stakeholders took place, bringing together a group of interested and engaged communities in the climate finance and animal protein sectors. Measurement, reporting, and verification (MRV) capacities remain an obsta- cle for directing finance toward the mitigation of GHG emissions produced by 107 OPPORTUNITIES FOR CLIMATE FINANCE TO THE LIVESTOCK SECTOR the animal protein sector. However, several tracking and monitoring systems adapted to the sector exist and are scalable, and rapid developments in the area of digital technologies are a source of new opportunities. The World Bank, together with its partners, is currently addressing this gap and exploring the development of financial instruments adapted to the protein sector. This report is also the point of departure in the World Bank’s development of blueprints or designs for emission reduction projects within the animal protein sector. Advised by a community of experts, the World Bank is currently devel- oping workplans for two pilot projects involving climate finance flows whose aim is to initiate a sectoral transformation. The first pilot project is being pre- pared for the Kenyan dairy sector, developing a concessional credit line with environmental conditionality. The second pilot project will address the protec- tion of a native eco-system in Latin America through the development of a value chain finance mechanism. A lot more needs to be discussed in the climate change and animal protein sectors—overcoming challenges, testing opportunities, advocating technolo- gy, exploring potential or scaling up solutions, and encouraging innovation—to generate the GHG emissions reductions that can be produced by the sector. The development of impact investing and blended finance in the last decade offers a new type of financial mechanism that can be adapted to the livestock sector and offer solutions for existing obstacles. In addition to the growing demand to commit to climate neutrality, there is an equally growing engage- ment of private companies and investors to address climate change. 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Concluding remarks Appendices 115 APPENDIX APP END IX A The Mapping of Direct and Indirect Private Finance Flows A.1 The Mapping of Climate-Related ODA Flows Directed to the Animal Protein Sector Climate-related official development assistance (ODA) flows between 2012 and 2017 with relation to livestock are mapped to provide a picture of inter- national public finance flows. The Organisation for Economic Co-operation and Development (OECD) climate-related ODA database captures bilateral and multilateral climate finance flows on the project level. Between 2012 and 2017, US$185.8 billion were dedicated to climate-related development projects world- wide, with only 0.57 percent (US$1,055,105,646) related to the livestock sector. Over the years, livestock-related ODA finance increased, from US$145 million in 2012 to over US$250 million in both 2016 and 2017. All of the mapped projects make use of grants, except for one adaptation project that France financed via a debt instrument, targeting the Senegalese agriculture and livestock sector. Food security dominates the narrative of the mitigation projects in the project descriptions of all climate-related ODA within the livestock sector, with 37.5 percent of the flows containing the term in their descriptions. The donor countries with the highest share of livestock-related ODA in their portfolio are Canada (6.0 percent), Belgium (4.7 percent), and Denmark (3.0 percent). Map A.1 shows total climate-related ODA flows, revealing that most ODA climate-related funds are directed toward the Ethiopian livestock sector. In relative terms, Zimbabwe (25.4 percent), Paraguay (14.6 percent), and Chad (14.2 percent) have the highest shares of livestock-related projects in their portfolios. The geographical distribution stands in great contrast with the size of countries’ livestock sectors and their contribution to climate change. In line with the importance of livestock activities for smallholder farmers in the Global South (WEF 2019), there is a clear focus on adaptation objectives and 95.1 percent of the funds are spent with either a principal or a signifi- cant adaptation objective. Some 42.5 percent of the ODA finance between 2012 and 2017 had an underlying mitigation objective and 6.0 percent had a principal mitigation objective. Table A.1 shows the identified mitigation path- ways. Silvopastoral systems in Colombia received most ODA mitigation flows, followed by improved feeding and avoided deforestation projects in Brazil, Indonesia, and Bolivia, among others. The majority of flows do not specify the mitigation pathway in their description, and the descriptions of two flows im- ply de facto a principal adaptation objective. 116 APPENDIX MAP A.1. Recipient Countries of Climate-Related ODA Directed to the Livestock Sector Source: Based on OECD 2019b. Note: US dollars assume 2016 as the base year. TABLE A.1.1 Summary of ODA Flows with Principal Mitigation Objective Mitigation Pathway ODA (US$, Recipients (ODA in US$, thousands) thousands) Avoided deforestation 6,223.55 Brazil (1,978.92), Indonesia (1,635.46), Bolivia (1,330.75), related to animal proteins Colombia (1,097.75), Kenya (27.73), unspecified (152.94) Breeding 31.30 Kenya (31.30) Grazing management 99.79 Mongolia (99.79) Manure management 754.02 Indonesia (754.02) Silvopastoral systems 21,861.65 Colombia (21,499.95), Cuba (271.83), Malawi (89.87) Improved feeding 10,384.81 Burkina Faso (2,740.86), South of Sahara (regional, 313.26), Malawi (181.74), Kenya (96.12), Ethiopia (26.87), unspecified (7,025.96) Whole-farm approach 226.44 Brazil (101.15), Nicaragua (71.88), Cabo Verde (50.71), Burkina Faso (2.71) Adaptation focus 767.16 — Not specified 23,130.59 — Source: OECD 2019b. Note: ODA = official development assistance; — = not available. 117 APPENDIX A.2 The Mapping of Carbon Market Activities Currently, there are 454 livestock-related projects registered under the Clean Development Mechanism (CDM), mostly related to manure management. When mapping these projects and relating them to their certified emission reductions (CERs), it becomes clear that a number of projects are registered in the CDM database, yet without generating credits. Looking at the host coun- tries, the geographical distribution of livestock-related projects is in line with the general trend of only a few countries hosting the majority of CDM projects. As of 2013, China, India, and Brazil accounted for about 82 percent of all CDM projects (Map A.2) (UNFCCC 2013). The majority of CDM projects fall under the United Nations Framework Convention on Climate Change (UNFCC) methodology AMS-III.D Methane re- covery in animal manure management systems, which currently has some 130 registered projects. There are several other methodologies relating to livestock, but they contain few or no registered projects. Among these meth- odologies is AMS-III.BK: Strategic feed supplementation in the smallholder dairy sector to increase productivity; this was completed in 2014 had only one project, in part due to the CER price crash that occurred around the same time. In the development of this methodology, one of the main concerns with CDM that emerged was the lack of bankability for projects with high investment costs. The Dairy Feed Uganda Project, which started in 1999 and went through several iterations before reaching CDM, had upfront costs of US$2 million as- sociated with feasibility studies, feeding trials, and methodology development. After the project was ready to generate credits in 2014, the price of CERs was roughly €0.35 (down from €20 in 2008). With such high initial costs and even with a 30,000 CER credit a year potential, the economic viability of the project was extremely low, and it was never implemented. The Gold Standard is a voluntary mechanism through which private capital reaches certified projects, including multiple pathways for mitigation out- side manure management. The Gold Standard—unlike the CDM, the VCS, or the Joint Implementation (JI)—coordinates multiple projects that go beyond manure management to silvopastoral systems and increased livestock and pasture productivity, as well as a whole-farm approach targeting indirect emis- sions. By providing a platform for direct investment and setting an internal price based on project quality, the projects within the Gold Standard are not subject to a fluctuating carbon price as is the case in the CDM and the JI. The cost per ton for GS projects varies on average between US$2 and US$11, depending on abundance of project type and additional benefits delivered, as well as a multitude of other factors that influence the quality of emission reductions. 118 APPENDIX MAP A.2. Livestock-Related Projects under CDM CDM Projects within the livestock sector and geenrated CERs Data source: UNFCCC 2019a. 119 APPENDIX BOX A.2.1 Examples of Gold Standard Projects within the Animal Protein Sector The Biomass Based Steam Generation Plant at income generated from selling carbon offset credits Chanakya Dairy Products Limited, a project in India, simply states that the project users gain training, after- aims to utilize rice husk within the region to generate sales support, and other useful services. One thing to steam to be used by the milk plant. This project note is the vague mention of “other services,” indicating highlights the ability for Gold Standard to support a a lack of transparency for where money ends up. private sector flow of finance while promoting the use The ACP Sustainable Forest Cover Establishment of undervalued waste within the region. This project Project aims to promote reforestation and biodiversity example, though involving a dairy plant, does not seek conservation as well as to protect rural livelihoods and to generate energy from its dairy suppliers, but rather silvopastoral systems in Panama. The project covers sources biomass-based steam from local sources, a wide range of ecosystem services, among which is highlighting the additional capacity for dairy farms to the restoration of degraded land and push-back of an seek mitigation methods outside of traditional manure invasive grass species, as well as income generation management. for local farmers. The project will also help to protect The Kenya Biogas Program provides domestic the main watersheds that provide water within the biodigesters for households that have livestock to region. Although this project targets numerous reduce dependence on stoves with heavy smoke and services outside of mitigation in the livestock sector, pollution from firewood. The slurry from the biodigester it brings the additional indirect benefits that can be can also be used on crops as organic fertilizer, engendered within livestock mitigation pathways to potentially increasing rural incomes. To counter the the forefront. Livestock play a minor role in this type cost of biogas technology, there are credit partnerships of project, but other key benefits make this type of set up with financial institutions to aid families in funding necessary in the consideration of climate the purchase of the biodigesters. The program has finance. The project covers 10,000 hectares of resulted in 333,500 mtCO2e reduction. The cost per degraded land, has an annual estimated amount of offset in the program is US$19; all possible offsets 17,024 mtCO2e reductions, and has been consistently are already sold out, indicating a functioning transfer generating credits since 2014. of funds to the project level. On the other hand, the Note: Gold Standard projects can be found at https://registry.goldstandard.org/projects?q=&page=1. 120 APPENDIX A.3 The Mapping of Private Flows The mapping of private flows is based on identified cases through keyword search, subsequent portfolio analysis, and a review of the annual statements of stakeholders along animal protein chains, as well as interviews with experts and snowball sampling (interviewees selected from earlier participants’ con- tacts). The identified cases can provide only a snapshot of the private finance landscape, as a complete mapping is not possible because of data constraints (Table A.2). Of the 23 cases directly related to mitigation projects, 9 were flows that originated from asset management institutions; the remainder were through foundations, not-for-profit organizations, MFIs, and value-chain actors such as feed producers. Equity and debt are the main instruments observed, either in the form of shares of impact funds or other products marketed by as- set managers, or in credit and loans to farmers, PPPs, or cooperatives in local contexts. These instruments are the most widespread because they make it possible to cope with livestock risks or give the opportunity for shareholders to contribute toward mitigation without having to put large sums of money into risky ventures. Another main instrument used is self- or value-chain finance. In some cases, companies, foundations, and other personal investors may use grants to develop commercial and institutional capacity in the sector. For ex- ample, the Bill & Melinda Gates Foundation has given grants to the International Livestock Research Institute (ILRI), the Food and Agriculture Organization of the United Nations (FAO), and national governments with the objective of ad- vancing the understanding and research of sustainable livestock. 121 TABLE A.3.1 An Inventory of Private Climate Flows Animal Protein Adaptation Livelihood Mitigation Outcome Outcome Outcome Sector Case Description Funding Instrument Geography Link Direct Climate Finance Flows toward the Animal Protein Sector 1 CAMBio II Financed by a GCF facility dedicated to financing Blending of debt, equity, Latin America Link Green Climate Fund private sector projects relating to mitigation and guarantees with and the (GCF) private sector and adaptation activities at all levels. concessional funding, Caribbean facility (Central Provision of concessional loans and technical as well as promoting American Bank for assistance to encourage MSMEs with agriculture, PPPs for infrastructure Economic Integration) livestock, and forest to invest in adaptation. resilience projects Grant component will provide financial rewards to MSMEs and intermediary financial institutions for their successful implementation of adaptation activities (activity-based). 2–3 Althelia Climate Fund The Althelia Climate Fund invests in projects Althelia Climate Brazil Link Mirova Natural Capital that reduce deforestation, mitigate climate Fund GP Sarl is change, protect biodiversity, and provide a fair an independent and sustainable living to rural communities, while management company offering investors a fair return on capital. established to manage Projects: Novocampo Programme and the fund, bridge loan, INOCAS: Improving pasture management blended finance to generate sustainable vegetable oil. through cooperation The focus is on grazing management, avoided with several DFIs deforestation due to sustainable intensification Local project-level of livestock, avoided deforestation due to farms and communities offering alternative livestock-production– related livelihoods, silvopastoral systems. 4 Sustainable The Sustainable Ocean Fund creates investor value Blended finance Global Link Ocean Fund and social impact by providing growth capital to Mirova companies that harness the ocean’s natural capital. Its aim is to reduce demand of emission-intensive protein sources and support mangrove conservation. APPENDIX 122 123 APPENDIX Animal Protein Adaptation Livelihood Mitigation Outcome Outcome Outcome Sector Case Description Funding Instrument Geography Link 5 Lafise Bancentro The eco.business Fund provides dedicated financing Blended finance Nicaragua Link eco,business and technical assistance to financial institutions and invested either Link Fund managed by businesses committed to environmental practices in via intermediaries Finance in Motion unique ecological landscapes. The fund focuses on committed to sustainability in four economic sectors: agriculture promoting green and agri-processing, fishery and aquaculture, forestry, finance or directly in and tourism. Since its launch in 2015, the eco. businesses that pursue business Fund has successfully built a portfolio of sustainable production US$333 million in cumulative investments (as of and consumption December 31, 2019) in Latin America and the Caribbean Grant element support, and expanded to Sub-Saharan Africa in 2019. technical assistance, Project: Satellite-based forest monitoring to and capacity building ensure sustainable livestock production. Its aims are grazing management, avoided deforestation through sustainable intensification of livestock, avoided deforestation through offering alternative livestock-production related livelihoods, silvopastoral systems, and efficient livestock processing. Animal Protein Adaptation Livelihood Mitigation Outcome Outcome Outcome Sector Case Description Funding Instrument Geography Link 6 Livelihoods Fund Impact investment funds’ mission is to build Private companies Kenya Link more resilient rural communities and ecosystems invest equity to the alongside sustainable businesses. Development of funds. The Livelihoods large-scale, impactful, and replicable solutions for Funds finances ecosystem restoration and sustainable farming in project developers emerging economies (Africa, Asia and Central/South (for example, NGOs) America). Twelve major companies have invested upfront. Projects further in the Livelihoods Funds so far: Danone, Schneider generate carbon credits Electric, Crédit Agricole S.A., Michelin, Hermès, SAP, Groupe Caisse des Dépôts, La Poste, Firmenich, Voyageurs du Monde, Mars Inc. and Veolia. Project: KENYA (Mount Elgon): agroforestry & sustainable dairy cycle with 30,000 farmers. The project simultaneously tackles poverty and environmental degradation, promotes a sustainable supply chain and aims at restoring 20,000 hectares through agroforestry. An innovative partnership has been signed with Brookside, a local milk company, in which Danone owns a stake, for the sale of milk produced by the farmers over 10 years. The project will be implemented by NGO partner VI Agroforestry. 7 Climate Smart Idea endorsed by the Climate Finance lab Blended finance Brazil Link Cattle Ranching 2015–16, commencement in March 2018. Naturevest and the This is an innovative business model for cattle ranchers Nature Conservancy to adopt more sustainable and efficient practices. It plans to co-invest in 30 rural properties, and scale up to 100 properties by 2022, covering potentially 300,000 hectares and mobilizing US$205 million in the state of Pará alone. APPENDIX 124 125 APPENDIX Animal Protein Adaptation Livelihood Mitigation Outcome Outcome Outcome Sector Case Description Funding Instrument Geography Link 8 Conexus Impact Fund The project is in development, in Credit guarantees, Brazil Link Conexus the market testing stage. convertible debt, credit The platform has three main pillars: business recovery, private equity, assistance, community-led enterprises, and new market and other types of opportunities, operated by the Instituto Conexsus, impact investments and appropriate finance mechanisms to ensure viable and scalable businesses, led by the Conexsus Impact Fund. It already involves more than 1,000 community- led enterprises, more than 80 private companies, several leading banks and credit cooperatives, and a range of other impact investment instruments. 9 Solidaridad Solidaridad International is an NGO that Grants Global Link International aims at implementing sustainability along the value chains, working with producers, key stakeholders, and producers. It has programs on livestock and dairy in 10 countries. 10–11 BlueOrchard BlueOrchard is a leading global impact investment Blended finance, debt, Global Link manager and first commercial manager of and equity financing to microfinance debt investments worldwide. institutions in emerging It provides examples of recipient clients in and frontier markets Mongolia (animal financing through loan) and Philippines (microloans for productive assets). 12 SimGas BIX is an investment vehicle initiated by the Shell Debt financing to Kenya Link BIX Capital Foundation, Cardano Development, and FOUNT. MSMEs through an SimGas designs, produces, and installs biogas innovative result-based systems for households in Africa and Asia. SimGas finance structure systems enable rural households with livestock to use the manure from their livestock to generate clean fuel for cooking and organic fertilizer. 13 Sustainable Sustainable Transition Bond aims to support Green bond Brazil Link Transition Bond suppliers halt all deforestation (Amazon region). Marfrig S.A. Animal Protein Adaptation Livelihood Mitigation Outcome Outcome Outcome Sector Case Description Funding Instrument Geography Link 14 Bovaer® This is a private company active in nutrition, Own finance in R&D Global Link DSM health, and sustainable living. It provides financing for R&D of a feed additive to reduce methane emissions from ruminants that can contribute to the CSR pledge of companies that may source from farms that utilize the product. 15 Yara International This is an international fertilizer company, producing Value chain finance and Global Link solution for grasslands to enhance animal health. training for clients 16 Verified Sourcing IDH, The Sustainable Trade Initiative, brings PPPs Global, currently Link Areas (VSAs), Pilot governments, companies, civil society End buyers are pilots in Brazil, in Mato Grosso organizations (CSOs), and financiers connected to the Vietnam, and IDH together in action-driven coalitions. compacts in various Indonesia IDH works on monitoring, convening public- ways, including via pilot private partnerships, and developing the projects to support Verified Sourcing Area (VSA) model. implementation of the compact targets or sourcing from the region. 17 Integrated Crop- Rabobank is a cooperative bank with their Blended finance facility Brazil and Link Livestock-Forest international banking focusing on international Indonesia Link Systems business and rural activities, in general, and on WWF Brazil, Rabobank, the food and agricultural sector, in particular. and UNEP It works on the integration of trees with pastures and/or crops, and on the reduction of indirect emissions through renewable energy. 18 Bill & Melinda Gates Grants are disbursed to ILRI, FAO, and national Grants Global Link Foundation governments to advance research. 19 Walmart Walmart has a commitment to achieving zero Private own finance Brazil Link net deforestation by 2020 for key commodities Value chain finance (beef, pulp, soy, palm oil, paper) It created the Brazilian Beef Monitoring System to track the origin of meat. APPENDIX 20 Carrefour Carrefour aims to develop a zero-deforestation Private own finance Brazil Link beef meat production system by 2030. Value chain finance It provides technical assistance and credit facilities to local ranchers. 126 127 APPENDIX Animal Protein Adaptation Livelihood Mitigation Outcome Outcome Outcome Sector Case Description Funding Instrument Geography Link 21 Cencosud This supermarket chain is committed to source meat Private own finance Brazil Link from processors who are not linked to deforestation 22 Cargill Cargill has committed US$30 million to finance ideas Private own finance Brazil Link to halt deforestation from beef cattle raising. Finance for research and development 23 McDonald’s McDonald’s partnerships with local companies to Own finance Brazil Link improve tracking of beef from local suppliers Long-term project financing Indirect Climate Finance: Investments within the Animal Protein Sector That Have an Observed Climate Outcome but Do Not Specifically Advocate It 24–28 Bill & Melinda Gates This private foundation works with partners worldwide Grants Global Link Foundation and within the United States in: Global Health, Global Strategic Investment Development, and Global Growth & Opportunity. Fund: Direct equity Livestock-related grants are disbursed in investments, volume connection with R&D concerning health guarantees, loans, and as well as rural development. credit enhancements Examples of livestock-related projects supported through grants are: SAHEL Capital Agribusiness Managers Ltd. (Sahel region) and Heifer International. Examples of livestock-related projects within the Strategic Investment Fund Portfolio are ClinVet (Morocco) and Hester Biosciences Africa Ltd. (Tanzania). 29–30 Rabo Foundation Rabobank is a cooperative bank with their Long-term loan Tanzania Link international banking focusing on international facility and advice and India Link business and rural activities, in general, and on Long-term the food and agricultural sector, in particular. grants, technical Project: Mruazi Heifer Breeding Unit Fostering focuses assistance, industry on crossbreeding to enhance productivity and smart knowledge, loan farming using a smartphone app (Tanzania). Project: Madhya Pradesh Women Poultry Producers Company Private Limited is a chicken feed factory run by women (India). Animal Protein Adaptation Livelihood Mitigation Outcome Outcome Outcome Sector Case Description Funding Instrument Geography Link 31 Coopers-K AATIF is an innovative public-private partnership with Depends on investees Kenya Link Brands Kenya the objective of leveraging African agriculture potential, (intermediary Africa Agriculture helping reduce poverty and increasing food security. investment companies, and Trade Investment AATIF finances new plant for minerals and nutrition direct investment Fund (AATIF) supplements for livestock in East Africa. companies, or financial AATIF contributes capacity building and institutions) funding of local financial institutions. Instruments range from senior debt, mezzanine, guarantees, and risk sharing to co-financing and warehouse financing. Interest rate is market- based and average tenure is 5 to 8 years 32 Aqua-Spark Aqua-Spark is an investment fund with a focus on Private equity (minimum Global Link sustainable aquaculture businesses around the world. US$250,000) The SMEs Aqua-Spark investments are working toward the production of safe, accessible aquatic life, such as fish, shellfish, and plants, in ways that do not harm the oceans. Investments lead to reducing the demand for emission-intensive protein sources, and result in sustainable feed production. 33–34 UFF African Agri This blended finance institution specializes in Private equity, loans Eswatini, South Link Investments African agriculture fund management and advice. Local project-level Africa, Nigeria Projects: Eastern Cape Boerbokke, Nigeria Pandagric farms and communities Animal productivity and health (breeding), grazing management, on-farm production of fodder, use of feed additives APPENDIX 128 129 APPENDIX Animal Protein Adaptation Livelihood Mitigation Outcome Outcome Outcome Sector Case Description Funding Instrument Geography Link 35–36 SilverStreet Capital This is an impact investment firm Debt, equity Tanzania and Link managing African agricultural funds. Investment in Zambia Projects: Poultry and Feed, and Cattle Ranching infrastructure, e.g., Projects focus on sustainable intensification processing plants, of livestock, on-farm production of fodder, storage, logistics, animal productivity & health (changing the the seed sector… composition of the herd, improved breeds), and (in the case of poultry) reducing the demand of emission intensive protein sources. 37–40 Acumen Acumen is a nonprofit impact investment fund tackling Patient/philanthropic Ethiopia, Kenya, Link poverty by investing in sustainable businesses. capital Pakistan Of 91 projects, 23 are within agriculture and four Seed and early stage fall within the animal protein sector: EthioChicken investments (Ethiopia), Juhudi Kilimo (Kenya), National Rural Support Program (Pakistan), and Sahayog (India). The projects focus on animal health and breeding, and (in the case of poultry) reducing the demand of emission-intensive protein sources. 41–42 Tanga Fresh and Dob equity invests in businesses that create social and Private Equity Tanzania Link Countryside Dairy sustainable impact and deliver long-term profitability. Link dob equity Tanga Fresh has built and improved the cold chain of milk within Tanzania. Countryside Dairy is the first processer-owned and controlled retail network. They will set up and operate a network of branded, company-owned dispensers’ shops. The focus is on avoided food loss, localization of value chains, and indirect emissions throughout the processing. Animal Protein Adaptation Livelihood Mitigation Outcome Outcome Outcome Sector Case Description Funding Instrument Geography Link 43 Green Dairy Kukula Capital is a leading venture finance Debt and equity Zambia Link Kukula Capital and private equity firm in Zambia. financing Through Kukula Fund I and Kukula Seed Fund, Kukula Capital invests in Zambian growth companies with capital and expertise. Green Dairy is a commercial dairy farm, located outside Solwezi, which sells fresh milk products to the local market. The focus is on avoided food loss, localization of value chains, and indirect emissions throughout the processing. 44 Shreedhar Dairy IntelleGrow empowers emerging businesses of Debt financing for small India Link IntelleGrow (Calvert India with collateral-free/secured loans. and growing businesses Impact Capital) With a loan from IntelleGrow, Shreedhar Value chain finance Dairy’s processing plant was equipped with up-to-date technologies. Products need to survive India’s long distribution chain and through innovative packaging, Shreedhar Dairy products are free of contaminants and bacteria. 45–56 OIKOcredit Oikocredit is one of the leading global social Loan and equity Global Link investors in agriculture and supports small- investment scale farmers by providing access to finance and capacity building for agricultural cooperatives, producers, processors, and distributors. Impact: Rural employment, poverty alleviation and food security. Of 513 projects, 103 are related to agriculture and 12 are related to the animal protein sector (see Table A.3.2). 57–58 African Agricultural Pear Capital Partners is a specialist agriculture Blended finance Uganda, Kenya Link Capital Fund investment firm that has been investing in Pear Capital Partners small- and medium-sized agribusinesses. and Bill & Melinda Of 23 projects managed by Pearl Capital APPENDIX Gates Foundation Partners, two fall within the animal protein sector: Biyinzika Poultry International Ltd. (Uganda) and Eldoville Dairies Ltd. (Kenya). 130 131 APPENDIX Animal Protein Adaptation Livelihood Mitigation Outcome Outcome Outcome Sector Case Description Funding Instrument Geography Link 59–60 Agriculture Africa 2019 Village Capital is the largest organization worldwide Seed capital Africa Link Village Capital (ceniarth to support impact-driven seed-stage startups. and smallfoundation) Projects relevant for the animal protein sector are: Aywajieune (Senegal) and CAPTURE Solutions (Kenya; smart farming: LivestockMANAGER app and LactoCAPTURE app). 61-68 Shuraako Shuraako as part of One Earth Future (OEF) works in Blended finance, Somalia Link conflict-affected areas and underserved small and seed capital medium enterprise (SME) markets in Somalia to develop a more resilient and responsible private sector. Out of the 104 entrepreneurs fostered by the program, eight are within the livestock sector. 69-70 Agricare Ltd. And Injaro carries out investment activities Investments in debt, Ghana and Link Proveto SA for poverty alleviation. quasi-equity, and Côte d’Ivoire Injaro Agricultural Agricare Ltd. (Ghana) produces and sells equity in SMEs Capital Holdings animal feed in its trading area. Proveto SA (Côte d’Ivoire) supplies inputs for broiler production: day-old chicks, starter feed, and veterinary products to local farmers. 71 Paniel Meat Processing Fledge is a global network of company accelerators Seed funding of Rwanda and Link and Livestock Bank and seed funds that help entrepreneurs create US$15,000–US$20,000 neighbors Fledge impactful companies and co-ops at scale through Revenue-based equity short, intense programs filled with education, investing: the investor guidance, and a massive amount of mentorship. buys equity in the Paniel produces meat from farming livestock company, but the and aims to make its meats available and company repurchases affordable to all income categories in Rwanda and that equity using a neighboring countries, supplies to retailers. small percentage of “top-line” revenues, returning only 2x–5x. Animal Protein Adaptation Livelihood Mitigation Outcome Outcome Outcome Sector Case Description Funding Instrument Geography Link 72 Samunnati Financial ResponsAbility Investments AG is an asset manager Private equity fund India Link Intermediation and in the field of development investments and offers Investing growth Services Pvt Ltd. professionally managed investment solutions to capital in SMEs in responsAbility private, institutional, and public investors. developing countries and OIKOcredit Samunnati is an Indian Non-Banking Financial across the agriculture Company that provides loans to smallholder farmers and food value chain and small and medium-sized businesses across the agriculture value chain (dairy emphasis). 73 Lilongwe Dairy This is a multilateral, treaty-based Long-term project Malawi Link Eastern and Southern development financial institution. financing African Trade Lilongwe Dairy is a Malawian family-owned company Corporate financing & Development engaged in the processing of milk and milk products. Bank (TDB) The project provides employment, supports local cattle owners by assuring them of a ready market for their milk, and supports nontraditional suppliers of milk by purchasing raw milk in surplus months when other local processors were unable to consume all the milk produced. 74 Nestlé Nestlé purchases from local rural producers. Value chain finance China, India, Link The Moga processing facility in India has Own finance of training Colombia, increased production from 2,000 to 300,000 Indonesia, tons and introduced tree-planting programs. Pakistan 75 New Hope Liuhe CSR policy targets policy alleviation, production, Own finance, CSR China Link Co., Ltd. and sales of animal feeds into rural households. Provision of The focus is on localization of value chains, microfinance animal productivity, and health. APPENDIX 132 133 APPENDIX Animal Protein Adaptation Livelihood Mitigation Outcome Outcome Outcome Sector Case Description Funding Instrument Geography Link Potential Climate Finance: Investors within Agriculture, Forestry and Land Use That Include Animal Proteins That Could Be Climate-Mainstreamed 76-79 Global Partnerships Global Partnerships is an impact-first investor Impact First: Loan Latin America & Link dedicated to creating and managing impact directed to regional the Caribbean investment funds, using capital from those funds microfinance and Sub- to make loans and early-stage investments in institutions and project- Saharan Africa sustainable solutions that help impoverished people level agribusinesses increase their incomes and improve their lives. Microfinance: Providing Projects leverage finance for microfinance institutions. tailored credit and Microfinance Institutions that focus on livestock training to producers farming are: FUNDEA (Guatemala), FDL (Nicaragua, has a dairy-focused credit), Juhudi Kilimo (Kenya, animal financing for dairy cows), Musoni Kenya (Kenya), and BRAC (see below). 80 BRAC BRAC is an international development organization. Microfinance Liberia, Sierra Link Program: Creating Sustainable Value Chains for Farmers and training Leone, Uganda and Poultry Rearers. It aims to improve food security, income, and nutrition by developing highly productive, environmentally sustainable farming livelihoods. The focus is on developing value chains through capacity building, extension services, and market access. 81 INOKS Capital INOKS is an independent, alternative asset Short-term: Commodity Global Link manager that supports commodity value chains structured trade finance throughout emerging markets worldwide, including Mid-term: Debt-to- the animal protein sector along the value chain. equity conversion option It has 10 objectives: Local availability, self- Long-Term: Early sufficiency, access to finance and to markets, stage private equity optimal use of resources, consistent quality, stable pricing, competitive market, transparent operations, and value adding production. Animal Protein Adaptation Livelihood Mitigation Outcome Outcome Outcome Sector Case Description Funding Instrument Geography Link 82 Kiva Kiva is an international nonprofit organization Crowdfarming/ Global Link providing a platform for lenders and borrowers. crowdfunding Out of the 4,878 loans presented on their platform, 61 fall within the Livestock category that aims at animal financing to increase rural incomes. 83 Oxfam Unwrapped Oxfam Unwrapped is a range of unique charity gift Crowdfarming/ Global Link cards that help people beat poverty definitively through crowdfunding the finance of purchase of pigs, goats, or chickens. 84 SV Capital This is the first South African crowd- Crowdfunding directed South Africa Link investing fund manager. toward animal financing A pool of funds is used to purchase livestock managed by Beefcor, one of the largest feedlots in South Africa. The livestock is fed and maintained until it reaches the optimum weight to be sold to an abattoir. The value of investment is based on the weight gain of the cattle as well as the selling (market) price. 85 Livestock Wealth Through crowdfarming, individuals can invest Crowdfunding directed South Africa Link in pregnant cows or free-range calves. toward animal financing Note: The checks indicate animal protein sector relevance and whether a case achieves single or multiple outcomes. Checks in lighter shades point to secondary outcomes—that is, the focus is on other outcomes. AATIF = Africa Agriculture and Trade Investment Fund; CSOs = civil society organizations; CSR = corporate social responsibility; FAO = Food and Agriculture Organization of the United Nations; GCF = Green Climate Fund; IDH = The Sustainable Trade Initiative; ILRI = International Livestock Research Institute; MSME = micro, small, and medium enterprise; NGO = nongovernmental organization; OEF = One Earth Future; PPP = public-private partnership; R&D = research and development; SME = small and medium enterprise; VSA = Verified Sourcing Area. APPENDIX 134 APPENDIX TABLE A.3.2 Projects within Oikiocredit’s Portfolio Directly Related to Animal Protein Value Chains Loan Size (ISO Project Company Value Chain and Country codes) A freezing tunnel to increase Tradimer Suarl XOF 163,989,250 Seafood and fish production and create jobs exporter, Senegal Better processing Cooperativa de Producción USD 530,000 Alpaca and vicuña machinery for alpaca wool y Servicios Especiales de los wool producer, Peru Productores de Camélidos Andinos Ltda Enhancing agricultural ProDev-Rwanda Ltd USD 2,168,930 Aggregation, processing, value chains and distribution of animal feeds, Rwanda Funding for a dairy Agricultural producer EUR 80,000 Small-scale dairy production unit Milka Staneva Vasileva breeding and farming, processing, and local distribution, Bulgaria Funding for the dairy CALCAR, Cooperativa USD 5,405,883 Dairy production, value chain Agraria de Responsabilidad processing, and domestic Ltda Carmelo and international distribution, Uruguay Funding to combat rural CPF, Colonia Piraí Foundation USD 540,000 Livestock production and poverty and support capacity building, Bolivia indigenous youths Promoting dairy Les Mamelles Jaboot SA XOF 500,000,000 Dairy processing, Senegal consumption and local cereal varieties Storage, access to markets Sociedad Agropecuaria de ARS 5,686,800 Feed production, and agricultural supplies Correa Cooperativa Ltda aggregation, Argentina for local farmers Supporting cattle COPAGRAN, Cooperativa USD 5,741,000 Beef production, farming and agriculture Agraria Nacional aggregation, Uruguay across Uruguay Supporting smallholder Samunnati Agro Solutions INR 120,000,000 Aggregation, distribution of farmers and market traders, Private Limited dairy, poultry, and fish, India developing local agricultural economies in India Wool processing and CLU, Cetral Lanera Uruguaya USD 6,000,000 Wool aggregation, trading for farmers processing, and throughout Uruguay distribution, Uruguay Note: Further information about Oikiocredit’s Portfolio can be found at https://www.oikocredit.coop/en/what-we-do/partners/our-partners/ map?searchText=Cooperativa%20de%20Pro&zoom=9&lat=-23.973488289035668&lng=-57.086990000000014 and https://www. oikocredit.coop/en/what-we-do/partners/partner-detail/25928/tradimer-suarl, 135 APPENDIX Jurisdictional Approaches TABLE A.3.1.1 Existing Jurisdictional Initiatives Initiative Description Pilots/Jurisdictions Commodities/ Provides information for companies Under preparation Jurisdiction interested in responsible sourcing Approach Independent experts assess subnational-scale programs against criteria established by committed buyers and two standards FCPF’s Carbon Fund Methodological Framework VCS’s Jurisdictional and nested REDD framework Integrated The BioCarbon Fund’s Initiative for Colombia, Orinoquía Food Systems Sustainable Forest Landscapes Ethiopia, Oromia Leadership Multilateral fund supported by governments Indonesia, Jambi and managed by the World Bank Mexico, Nuevo León Zambia, Eastern Province LandScale Initiated by the Climate, Community & Biodiversity Costa Rica, Greater San José Alliance, the Rainforest Alliance, and Verra (Ethiopia) Provides measurable social, economic, and Ghana, Juabeso Bia & Kakum environmental indicators of state and trajectory Guatemala (Indonesia) (Kenya) (Peru) (Mexico) Verified Initiated by IDH in 2018 Brazil, Mato Grosso Sourcing Areas Provides a platform for committed buyers to connect (Colombia) (VSA) to coalitions of stakeholders in sourcing areas (Gabon) (facilitates information and communication) (Ghana) Coalitions consist of farmers, producers, government, and (India) civil society who have jointly agreed on a compact Vietnam, Lam Dong Committed buyers can support compacts, monitor progress, Indonesia, Aceh and deliver on their sustainability commitments Next steps are the development of the VSA business case and guidance material and setting up an MRV system and VSA platform Landscape Initiated in 2016 by the WWF Cameroon, TRIDOM Finance Lab Incubator for sustainable landscapes programs Fiji, Great Sea Reef Build learning, capacity, and impact Georgia, Adjara mountains measurement, via online platform Malaysia, Kedah state Four-step incubation process: Discover (ideas for commercial Paraguay, Upper Parana potential, impact at scale, governance and support structure), Atlantic Forests structure (team, partners, technical resources and sourcing Russia, Dvinsky Forest funds business case and concept note), Develop (full-fledged proposal), Fund (coaching for investor and donor cases) Note: Geographies in bold involve animal protein–relevant commodities; geographies in brackets are possible/future pilots. FCPF = Forest Carbon Partnership Facility; IDH = The Sustainable Trade Initiative; MRV = measurement, reporting, and verification; VSA = Verified Sourcing Area; VCS = verified carbon standard; WWF = World Wildlife Fund. 136 APPENDIX Index-Based Livestock Insurance Schemes Table A.3.2.1 lists Index-Based Livestock Insurance schemes along with the country in which they operate and some information about each scheme. TABLE A.3.2.1 Index-Based Livestock Insurance Schemes and Companies Country Name Information Schemes Kenya Kenyan Livestock • Government-sponsored program established in 2015 Insurance Program (KLIP) • Designed for very poor herders with few livestock units, this program has no financial sustainability despite private sector involvement • 18,000 pastoralists rearing 90,000 livestock units • In 2017 and 2018, 6,000 and 12,000 farmers were given payouts after a dry season of KSh 87 million (US$860,000) and KSh 202 million (US$2 million), respectively. Ethiopia Satellite Index Insurance • Operated through the World Food Programme Ethiopia for Pastoralists in Country Office alongside the Ethiopian Government and Ethiopia (SIIPE) the International Livestock Research Institute (ILRI) • 5,001 households were insured through four insurance companies (2019) • Mandatory contribution to community work Senegal, Malawi, R4 Resilience Initiative • Run by the World Food Programme (WFP) Kenya, and Zimbabwe • Reached over 87,000 farmers in 2018 Cameroon Pilot project • Engaging AXA and ACTIVA Insurance • The aim is to have 135,000 contracts by 2020 Zambia Pilot project • Originally aimed at 60,000 beneficiaries in 12 districts • 2018: The government made weather-based insurance compulsory for farmers that take part in the Farmer Input Support Program (FISP), leading to more than a million insured farmers Mongolia World Bank partnership • A World Bank–funded project initiated in 2005 with Government • Designed to protect against dzuds or harsh weather of Mongolia • Involves five private insurance companies and is ongoing Pakistan Kashf Foundation • Loan program for animal insurance against theft or death due to illness • Not IBLI, but could provide a platform to set it up Brazil Agricultural Activity • Insurance to protect against weather events or diseases Guarantee Program • Promotes insurance market, mostly for (PROAGRO) crops but some also for livestock 137 APPENDIX Country Name Information Insurance Companies Kenya Takaful Insurance • Operates under the Islamic Law of Sharia in of Africa (TIA) order to cater to and attract Muslim clients Ethiopia Oromia Insurance • Active in the Borana region Company (OIC) Kenya, Uganda, UAP Insurance • Traditional insurance for livestock and crops, has Tanzania, Rwanda, potential to transition to index-based insurance Burundi, Democratic • Partner of ILRI Republic of Congo, and Sudan Sources: Kilimo 2018; WFP 2018, 2019. 138 APPENDIX APP END IX B List of Interviewees Name Affiliation/Position and Summary of the Interview Date FRITZ • Chair of the Guiding Group, Global Agenda for Sustainable November SCHNEIDER Livestock (GASL). Interview consisted of: 22, 2019 • Overview of the governance structure and project/activity pipeline • Discussion of funding sources from public and private sector, and relationship with private sector stakeholders • Regional overview of the state of main mitigation pathways, obstacles and opportunities, and efforts for mitigation along livestock value chains RICHARD • Ruminant Methane Specialist for RuMeth International. Interview consisted of: November BOWMAN • Overview of Richard Bowman’s trajectory and experience 22, 2019 regarding ruminant methane feeding supplements • Overview of RuMeth International project pipeline, with special interest in Dairy Feed Improvement Uganda (DFIU) Project • Review of experiences and expertise on CDM market structure, pricing, and governance, as well as CDM methodology development and its associated opportunities and limitations • Exploration of Molasses Urea Product (MUP) feed additives as a mitigation pathway, and its environmental and economic viability VIKAS • AGP-II Task Team Leader and Senior Agricultural November CHOUDHARY Specialist. Interview consisted of: 25, 2019 • Introduction to AGP I and II projects and the components related to capacity building, institutional engagement and agricultural & livestock sectors • Contribution of the projects toward climate mitigation, challenges and opportunities • Experience of local stakeholder interaction within the sector, emphasis on improvements in mitigation along value chains and private sector engagement • Experience with blended finance institutions and mechanisms, and their ability to leverage private investment within the sector 139 APPENDIX Name Affiliation/Position and Summary of the Interview Date MILENA • GEF Climate Change Specialist, Latin America regional team, November GONZALEZ Climate change mitigation. Interview consisted of: 26, 2019 VASQUEZ • Overview of GEF secretariat role regarding climate mitigation within livestock, governance structure and project pipeline • Governance structure and relation between GEF, implementing agencies and project-level stakeholders • Introduction to Climate-smart Livestock Production and Land Restoration in the Uruguayan Rangelands project. State of the project, contribution to climate mitigation, stakeholder involvement, potential for replicability and scale-up, obstacles & opportunities • Expertise in regional approaches toward climate mitigation with special emphasis on main mitigation pathways per region, obstacles and opportunities for scale-up • Expertise in promotion of greater private sector involvement in sustainable livestock projects. Emphasis on public-private and blended finance mechanisms RUARAIDH • Executive Director, Global Roundtable on Sustainable November PETRE Beef. Interview consisted of: 28, 2019 • Introduction to GRSB and the governance structure, financing, and project pipeline • Expertise in smallholder farmers’ obstacles to adapting sustainable livestock practices, with emphasis on climate mitigation pathways, and how to address these obstacles • Overview of the state of main mitigation pathways per region; challenges and opportunities for scaling up and leveraging investment • Expertise in the potential for climate mitigation along livestock value chains. Emphasis on demand-side mitigation pathways, state, and feasibility, and the potential new products to reduce emissions from enteric fermentation • Expertise on promotion of greater private sector investment in sustainable livestock projects. State of blended finance and impact investment in the sector • Key considerations for private investors in livestock POLLY • Program Leader, Sustainable Livestock Systems at the International November ERICKSEN Livestock Research Institute (ILRI). Interview consisted of: 29, 2019 • Introduction to Polly Ericksen’s position within ILRI regarding climate finance in the livestock sector. Governance structure, funding, and project pipeline • Expertise in the state of main mitigation pathways by region, challenges, opportunities, and mitigation potential along value chains • Introduction to the Program for Climate-Smart Livestock Systems; review of funding, current state, impact potential • Opinions on the state of MRV frameworks to measure mitigation impact in the sector • Expertise in the promotion of greater private sector involvement in mitigation within the livestock sector, with special emphasis on the main gaps in finance and the role of innovative finance mechanisms in bridging those gaps 140 APPENDIX Name Affiliation/Position and Summary of the Interview Date RAPHAEL • Policy Coordinator at ProVeg. Interview focused on: December PODSELVER • Demand-focused mitigation pathways and how ProVeg is assisting 4, 2019 alternative protein start-ups with obtaining finance. • The role of policy to guide consumer pathways and activities that ProVeg supports, such as plant-based procurement strategies, capacity building, etc MATTHEW • Senior Private Sector Specialist of the GEF. The interview was focused on: December REDDY • Various types of sector activities directed toward 7, 2019 mitigation in the livestock sector • Is the primary motivation of companies to reach scientific targets or because the mitigation technology constitutes a promising business opportunity • Cross-value-chain partnerships, indicated valuable input for the pathway-instrument matrix ROBERT • Carbon Analyst at Brinkman Climate. Interview consisted of: December SEATON • Introduction to Brinkman Climate and their approach toward carbon 9, 2019 offsetting markets in developed countries as well as in the Global South • The role of carbon offsetting markets in targeting climate mitigation pathways such as forest and grassland management or silvopastoral systems • Experience of implementing projects under VCS, obstacles encountered in methodology development and implementation • Challenges and opportunities derived from scaling up carbon offsetting projects in different regions • Challenges and opportunities derived from accessing finance from public, private, and blended sources HAYDEN • Special Representative of New Zealand to the Global December MONTGOMERY Research Alliance (GRA). Interview focused on: 10, 2019 • An elaboration of what mitigation pathways are already best practice and what role technological development will play. • The major obstacle that the animal protein sector faces with regard to climate finance is that institutions would rather direct funds to sectors other than livestock because of the sector’s poor reputation and notoriety as a main emission source ZOE KNIGHT • Managing Director, HSBC Centre of Sustainable Finance. Interview consisted of: December • An overview of the activities and investments carried 17, 2019 out by the Centre of Sustainable Finance • The lack of private finance in the livestock sector and the obstacles associated with it, focusing on the financial capacity necessary to reach a certain threshold that makes livestock-related projects attractive to private investors 141 APPENDIX Name Affiliation/Position and Summary of the Interview Date MARK VAN • Mark van Nieuwland, Vice President/Program Director Clean Cow, DSM, January NIEUWLAND and Carlos Saviani, Director for Sustainability and Animal Nutrition, DSM, 7, 2020 AND CARLOS about Bovaer® and the Clean Cow project. The interview focused on: SAVIANI • Bovaer® and the Clean Cow project (expected market launch early 2021), the importance of sustainable development especially in the dairy industry • The demand of retailers for lower footprint products, and missing equity participation • The importance of the government, its role in enabling innovation to market, and how developed countries lack behind a fair subsidy model for farmers • The animal protein sector is at the early stages of developing and implementing sustainability solutions and DSM, as a forerunner, understands and works to solve those needs MUHAMMAD • Director General at CATIE. The interview focused on: January IBRAHIM • Climate-smart practices and the role of dry-forest corridor silvopastoral systems 7, 2020 • The importance of the policy environment and collaborative relationships and how important it is to use the right incentives for farmers to adopt climate-smart practices • Understanding the high importance to the economy of having a livestock sector that is very sustainable and low carbon • The job of creating awareness and looking at the different dimensions of livestock systems • The advantages of shared risk in climate funding • Indexed based livestock insurance • Productivity issues in developing countries • The general trend to put more emphasis on quantification of the emission factors BERNHARD • Head of Sustainability Management and Lead Agronomist January STORMYR at YARA. The interview consisted of: 16, 2020 AND KEVIN • what is needed to become a crop nutrition company for the future and CUNNINGHAM why this is connected to impacts on climate change. The organization focuses on profitability and economics (as a starting point) through feed efficiency, which is directly linked to yield and quality of forage. • With the right dosage of nitrates, the microbial balance inside a biogas reactor is manipulated, so that the process becomes more efficient and produces a five percent increase in biogas yield • Using a holistic approach and the Cool Farm Tool GHG calculator, the objective is also to reduce the carbon footprint per ton of dry matter produced and to revive degraded lands, 142 6 143