Climate-smart agricultural finance is a type of climate finance specifically designated for addressing climate change within the agriculture sector, with the goal to promote the widespread implementation of climate-smart agricultural practices globally.

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Global food production is increasingly threatened by geopolitical instability, rapid population growth, soil degradation, water scarcity and, most critically, climate change. In recent years, we have witnessed the devastating impacts of extreme climate events such as heatwaves, droughts and floods on agricultural productivity. The significance of current and predicted climate casualties highlights that climate change can no longer be ignored, particularly by the agricultural industry, which accounted for between 13-21% of greenhouse gas emissions between 2010-2019.

As of 2025, an estimated 295.3 million people continue to suffer from severe food insecurity globally. Despite several advancements in agriculture, climate change remains a significant threat to sustainable agriculture and food security. Without immediate and targeted climate action to build the resilience of the agricultural sector, hunger, malnutrition, and poverty will escalate into a devastating and multifaceted global crisis.

Climate-Smart Agriculture

Climate-smart agriculture (CSA), widely recognized as a strategic approach to addressing climatic threats to agricultural productivity through practices that mitigate and enable adaptation to climate change, has gained increasing attention over the years. Some of these practices include regenerative agriculture, conservation agriculture, agroforestry, integrated pest management, integrated nutrition management as well as the adoption of smart-water management farming systems and climate-resilient crops.

Despite the significant potential of CSA to foster resilient global agricultural systems, its widespread adoption and implementation is still evidently limited, particularly in low income countries with a larger proportion of smallholder farmers.

Climate-Smart Agricultural Finance and CSA Implementation

Climate finance refers to financial resources allocated and disbursed for the fulfilment and support of positive climate action, either through mitigation or adaptation. CSA finance is a type of climate finance specifically designated for addressing climate change within the agriculture sector, with the goal to promote the widespread implementation of CSA practices globally. It can come in the form of loans, grants, equity, and bonds.

Examples of CSA finance-funded projects include the Food Systems Resilience Program for Eastern and Southern Africa and the Agriculture Resilience, Value Chain Development and Innovation in Jordan.

The major contributors to global CSA finance include multilateral development banks (MDBs), multilateral climate funds (MCFs) and bilateral donors. In particular, the World Bank is recognized as the largest contributor, with annual commitments of approximately $3 billion. Currently, 62% of the bank’s agriculture-related funding is allocated to CSA projects.

Over the years, CSA finance has improved farmers’ access to tools that have enabled them to effectively adopt sustainable agricultural practices, such as seeds for climate-resilient crop varieties and cover crops, crop and livestock insurance, precision agriculture, and irrigation systems. These have contributed to increased food security and financial empowerment of farmers globally, but particularly in developing economies.

Consolata Nyaga, a smallholder farmer on the slopes of Mt Kenya, in the district of Embu, prepares her maize plot for planting. Photo: International Maize and Wheat Improvement Center/Flickr.

Despite progress on facilitating a wider implementation of CSA practices, smallholder farmers remain increasingly marginalized as a result of systemic barriers that increase associated investment risks and also reduce potential economic returns. Consequently, CSA projects in developing economies are primarily funded by public-sector finance, particularly the World Bank and the Green Climate Fund.

Globally, CSA finance remains significantly underfunded, as it consists largely of public-sector contributions, often described as patient capital. This is because it is not necessarily deterred by the high-risk, low-return nature of some agricultural investments, given their long-term environmental and social benefits.

Although the climate funding gap is evident across all industries, climate change mitigation and adaptation in agriculture is especially at risk due to significantly lower funding allocations. According to 2019/2020 data collected by the Climate Policy Initiative, CSA projects received less than 5% of total global climate finance.

What’s Behind the Funding Gap?

The CSA funding gap can be largely attributed to limited financial contribution from the public sector. Unlike the energy industry, which generates significantly higher financial returns, the agricultural industry is composed of several emerging markets that require patient capital to yield significant economic, environmental and social returns.

Within the agriculture sector, there is limited private-sector involvement due to the perception that risks may outweigh potential financial return upon investment maturity. While this may not be the case in every investment, it highlights an opportunity for governments and MDBs to address systemic barriers that may hinder the prospects of future investments.

The perceived high risks can be linked to the inability to accurately assess risks associated with potential investments and to monitor and track investment performance as a result of lack of digital tools that facilitate data collection, particularly in developing economies. Most critically, however, it is a result of the lack of uniform methodologies, protocols and baselines for collecting and monitoring sustainability metrics like soil carbon. In addition, given the dynamic nature of agricultural systems, some of the metrics monitored are highly variable and may fluctuate temporally and spatially over time based on management practices and weather conditions. This creates uncertainties around some CSA projects and increases investment risk.

Addressing CSA Funding Gaps

One of the most important steps to bridge the CSA funding gap is to tackle the systemic issues that hinder higher agricultural productivity and increase investment risk. Particularly in developing economies, where the agricultural sector is threatened by internal conflicts and a lack of infrastructure required to support digitization, addressing these fundamental issues is paramount to creating an enabling environment that attracts private-sector funding.

Governments, in partnerships with MDBs, MCFs or bilateral donors should prioritize addressing these core issues, as it improves the prospects of private investments. While addressing fundamental challenges such as limited access to electricity and internet may not eliminate all investment risks, it enables the use of digital tools that enhance operational efficiency and boost agricultural productivity.

In addition, public-sector CSA finance can be used to establish climate-insurance funds that strengthen the resilience of farming systems to climate-related shocks. Such provisions ensure that farmers remain financially capable of repaying borrowed funds, even when faced with extreme climatic threats.

Another significant barrier to CSA funding is the high level of risk associated with the uncertainty of sustainability metrics, driven by the lack of industry-wide standardization. This restricts private investment as investors struggle to track and monitor project outcomes effectively. Targeted CSA financing to improve standardization of sustainability metrics represents a high-return investment opportunity, especially given that this is a multi- sectoral challenge. Investing in research institutions and startups working to address this challenge will not only yield financial returns but will also help in the long-term to build investor confidence in funding CSA projects.

Furthermore, the private sector can explore innovative financing strategies that reduce or manage investment risks. These may include:

Bridging the funding gap heavily depends on how the private sector perceives the agricultural industry. To increase CSA finance in the coming years, there is a lot of work to be done within the sector to develop frameworks that manage risks and ensure long-term, sustainable returns.

MDBs can work together with governments to oversee the management of international private investments by acting as trusted intermediaries, particularly in regions where the risk of loan misappropriation is high. They can also promote financial discipline through sanctions that encourage accountability and incentivize early loan repayment and strong investment performance by offering performance-based interest rate reductions.

Featured image: Steven Weeks/Unsplash.