A climate 'win-win' for UK governments

By Rebecca Renfro

6th April 2021

FFCC recently launched a new report, Farming Smarter: Investing in our future, urging government to establish an Agroecology Development Bank. The report outlines the urgent need for an institution to serve this distinct and specialised role in agricultural and rural transformation, enabling the sector to help deliver the climate and nature ambitions of UK governments.

So how would an Agroecology Development Bank speed transition to fair and sustainable farming and provide UK governments with a win-win for nature and climate? Our launch webinar brought together people making change from across the farming, finance and environmental sectors and asked this question, and more, of our expert panel.

Why is an Agroecology Development Bank needed?

Governments have, in the past, kickstarted transitions to cleaner energy, housing and transport acknowledging that the market alone is rarely capable of making the bold moves needed to accelerate change.

The same shift is now needed for agriculture and the food system.

Farmers want to be a force for change. Some are already making huge strides to more regenerative farming practices. While some farmers are currently able to access finance needed, many of the most innovative (and potentially impactful in terms of delivering a transition to agroecology) can’t. This includes new entrants, tenant farmers (up to 40% of the market), horticultural businesses and many others.

Why a bank rather than another type of institution?

Agroecology businesses are fundamentally bankable, but there are several gaps in the supply of finance by deposit-funded retail banks that a national development bank can help overcome. 

A new mission-driven national institution can play a broader role in overcoming ‘lock-ins’ that impede systems change, and it can drive a transition to agroecology at the pace and scale required to meet the UK’s societal goals, in particular the need to transition to a net zero carbon economy. 

Why should government listen to this idea?

It provides a ‘win-win’ for the UK government in the run up to the UN Climate Change Conference (COP26) by helping the sector deliver against climate and nature ambitions and, at the same time, allowing agricultural businesses to thrive.

How will the bank be funded?

The initial capitalisation of the ADB would come from the government through HM Treasury. 

A few UK banks have been capitalised in this way. The BBB was initially funded with £1bn of government fund while the Green Investment Bank was capitalised with £1.5bn. The Scottish National Investment Bank, which launched in 2020, has been capitalised by £2bn of Scottish government funding. Most recently, the UK Infrastructure Bank has been capitalised with £5bn from HM Treasury, and will also be able to borrow up to £7bn and issue £10bn of guarantees.

Would it need private financing?

Once capitalised, the ADB can raise additional funds to finance additional investment and grow its balance sheet.

Capitalised by HM Treasury, the ADB would be able to borrow on wholesale markets, benefitting from low borrowing costs as a state-backed institution. The ADB would encompass a range of complimentary activities ‘under one roof’ including research, market development and the supply of finance. 

Would private financing be possible?

In the UK context, raising finance from capital markets should not be a problem given the UK’s strong credit rating and the historically low rates that the market is offering at the moment. A 10-year government gilt is currently yielding just 0.27%. ADB bonds could provide long-term and relatively low-risk investment opportunities for investors such as local government pension schemes and private pension funds. 

Why should Treasury provide the initial capitalisation?

The existence of positive environmental and social benefits justifies public intervention, including in the financial sector to unlock new sources of finance. 

The positive impact of a new ADB is as much captured in the word ‘development’ as in the word ‘bank’. The need extends beyond simply a need to plug gaps in the supply of finance.

Why is it specific to agroecology (AE) – what about other sustainable farming approaches?

See definition of AE above - AE includes practices such as regenerative farming, no-till, organic farming, agroforestry, and more and involves planting diverse crops, reintroducing hedges and other techniques designed to improve biodiversity.

We have focused on an agroecology development bank because this is where we see the gap in financing. This is a movement that is gaining ground and huge interest amongst farmers who see the potential to improve profitability (because of huge reductions in input costs) – but new entrants, horticultural growers and many others who want to move to agroecological methods are prevented by a lack of financing.

Are there comparisons in other sectors?

The report draws comparisons between the investment made in offshore wind farms, among others, pointing out that – like AE – offshore wind was economically viable but was an early-stage technology with minimal financial track record or historical performance data. The Green Investment Bank acted as a centre of expertise, crowding private sector finance to support profitable but unproven projects. The barriers were similar (skilling up staff, developing technical expertise, collating data, and evaluating risk) and broader than just a question of availability of capital at the right price. But, unlike wind farms, AE has multiple yields and impacts, extending beyond food products to timber and textiles, and across environmental outcomes from carbon sequestration to biodiversity restoration. All of this adds weight to an argument for an institution capable of managing the complexity of the opportunity AE offers the UK.

How does this relate to National Infrastructure Bank and other new institutions?

The report suggests that a new bank would be complementary to the British Business Bank, the newly established National Infrastructure Bank, the Scottish Investment Bank and Development Bank of Wales.