Can agriculture be climate-proofed?

This year has shown how much farmers stand to lose from global warming. Thankfully, financial innovation could come to the rescue – and provide investment opportunities.

Would-be donors looking for a charity to back are not short of options. In poor and rich economies alike, throughout the year, a tragic series of natural disasters has reminded us that few regions remain immune to the impact of climate change. NGOs rushed to help those worst affected, and multiple appeals ensued.

Among the victims lay many farmers – and perhaps, in exposed regions, investors’ confidence that agriculture would one day become weather-proof. Climatic volatility has long been one of the main factors keeping institutional capital away from agriculture. Higher food prices, and institutions’ hunger for yield, have started to change this. As global warming makes the sector ever less predictable, could such gains soon be wiped out?

A major difficulty lies in the fact that the effects of climate change are not homogeneous. While models predict productivity levels are likely to suffer across most regions – though some will see a silver lining, as we reported this week – low-latitude countries stand to be more negatively impacted than high-latitude ones. And understanding what macro-changes to temperatures and precipitations mean locally, among many other varying parameters, is an arduous mission.

Yet it is precisely this mission that Global Parametrics, a for-profit venture launched last year, has undertaken. Using detailed risk modelling, the company sells protection to the likes of NGOs, multilaterals, microfinance providers and even municipalities, while sharing the risk with third-party investors via an investment vehicle dubbed the Natural Disaster Fund. GP was established thanks to seed funding from the InsuResilience Investment Fund and the UK’s Department for International Development, which is providing a first-loss piece to the NDF.

“We want to help governments, individuals and corporations understand first the probability of an event happening and then what economic and financial impact it’s going to have. That way they can more easily seek insurance cover and transfer risk to the private sector,” Mike Foster, a senior advisor to DFID, told us.

That, in turn, should open opportunities for institutions to invest. As Hector Ibarra, GP’s chief executive, also told us: “You’re offering a technology that is providing relevant risk metrics in areas of the world where there was a lack of reliable models. As you would expect, when risk is more accurately represented, the confidence of people in doing investments increases because the risk-return profile of a particular investment is easier to assess.”

Whether investors themselves buy the argument will become more evident next year, after the NDF reaches a first closing (expected in January). Ibarra notes that the fund will seek to tap three “buckets” of investors: governments interested in backing the venture (the UK is an early mover); development finance institutions, such as the International Finance Corporation and the Inter-American Development Bank; and eventually, institutional investors interested in deploying capital on social investment grounds.

Reaching the fund’s overall $200 million target may take some time: Ibarra has earmarked three years, with “some flexibility.” The NDF, Foster points out, is still at its proof-of-concept stage. Yet the NDF, and Global Parametrics’ work at large, are only but a part of broader efforts to build Financial Disaster Risk Management solutions – packages that go beyond insurance products to help developing countries prepare for and rebound after climatic events. Should they succeed, investors looking to deploy their money into mitigating global warming will be provided with a new set of options.

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