Article

Nature positive starts with agriculture

Meeting nature goals is only possible with farmers in the room

19 Jun 2024 6 min read

Eric Wilburn*

Improving the sustainability profile of farming is central to meeting global sustainability goals on climate and biodiversity. The agriculture sector is responsible for around a third of global greenhouse gas emissions, and it’s also linked to at least 90% of deforestation.¹ It is therefore understandable that some regions are beginning to regulate this sector to bring it in line with sustainability goals, such as the EU’s new regulations to promote climate-smart and nature-positive farming—often labelled “regenerative agriculture.” However, today a tradeoff exists between the industry’s environmental and financial sustainability, which needs to be carefully navigated by new policies.²

[8] European Commission, (2023), Opening Speech Delivered by Mr. Janusz Wojciechowski at EU Conference on EAFRD Financial Instruments, Organized by the European Commission, Brussels.Link for Institute Disclaimer

Regenerative farming can be bad business

Humanity needs to produce food today and for as long as it will exist. At the same time, farms need to be able to run a profitable business today, but also tomorrow. The industry needs to transition to a better operating model for society to meet its climate and environmental targets. But there is a tradeoff between regenerative farming and agricultural yields in the short term. For instance, multiple meta-analysis studies have demonstrated that a shift to farming practices that maintain or improve environmental conditions can be more profitable than conventional agriculture, but such a transition requires both time and investment in the short term.^3,4

Mandating regenerative agriculture to promote more environmentally sustainable farming therefore risks rendering farms financially unsustainable in the short term—unless two problems can be addressed.

Problem #1: Farmers are not paid for the good they do

Today the regulatory environment constricts what farmers are permitted to do, but neither the government nor the markets offer incentives for changing practices to comply with these requirements. Policymakers could introduce new incentives that provide farmers with compensatory measures for carbon and biodiversity outcomes—from maintaining soil fertility to increasing water retention. This would make it worthwhile for farmers to implement regenerative practices by rewarding them for doing so, in the same way farmers grow crops mostly because they can sell them for cash.

Until farmers are paid for providing positive outcomes, as some areas are starting to do for carbon sequestration,⁵ the business model simply will not generate the incentives for them to change their practices. Fortunately, some organizations are already putting forward ways to measure and value nature, including the Taskforce for Nature-related Financial Disclosures, the Science-based Targets for Nature, and GRI’s Principles for Banking Nature-related Guidance.

Problem #2: Farmers incur costs to do good

Ensuring farmers receive the financial support, e.g., through subsidies, to be able to move to regenerative farming is critical all around the world. They can only produce food today and contribute to a functioning ecological system that will provide fertile ground for future generations’ food production if they are supported in the initial stage of the transition. One analysis found that, depending on location, it typically takes 5–8 years for farmers to be able to become profitable again after adopting regenerative practices.⁶

A low-hanging fruit is to distribute subsidies more equitably. One interesting design flaw in some subsidy schemes, like the EU’s, is that subsidies to farmers are allocated based on the number of hectares they cultivate. This means about 80% of the EU farming budget goes to roughly 20% of farmers, who tend to also run the largest businesses.⁷ According to a 2023 survey by the European Commission, 83% of all farmers in the EU experienced an increase in production costs, but only 12% managed to significantly increase their selling prices. The total financing gap for EU agriculture is now EUR 62bn.⁸ Better allocation of subsidies—such as increasing the proportion allocated to small farms or linking payments to environment-friendly activities—could ease the financial pressure faced by most farmers and help to reduce the short-term financial cost of more regenerative farming.

Applying “carrots” in a smart way is important at a time when “sticks” are also being introduced. Some of the increase in production costs is due to existing regulations that aim to transition farming toward nature-positive outcomes. But many new regulations, such as the Soil Monitoring Law, will increase the cost of production further. For instance, this law would require EU member states to monitor the health of their soils and fertilizer use and will in effect give soil similar protections received by air and water, thereby enabling the capture of more CO₂, but also further increasing production costs for farms.

Sow it goes

Addressing the lack of incentives for farmers to transition to regenerative farming, and the fact that it involves a short-term dip in yields, will be crucial to ensure agriculture supports sustainability goals. While so much of the discussion in the past has centered around when and how to apply “the stick,” balancing a nature-positive climate transition with financial sustainability, will require to focus more on offering “the carrot” if real progress is to be made. Most large corporations have the financial buffer to make changes to their practices and still turn a profit. This implies that they can bear the burden of greater sticks. In contrast, smaller scale farmers, in Europe and around the world, have weaker balance sheets. A short-term increase in costs creates a risk of insolvency. For them, a better approach than the stick is to incentivize them with direct payments for nature-positive activities or outcomes.

¹Cerutti et al., (2023), Food System Emissions: A Review of Trends, Drivers, and Policy Approaches, 1990–2018; Pendrill, F. et al., (2022), Disentangling the Numbers Behind Agriculture-Driven Tropical Deforestation, Science.
²Birdlife International, (2024), The Real Deal Behind Europe’s Farmer Protests.
³ARIV, (2024), Decades Matter: Agricultural Diversification Increases Financial Profitability, Biodiversity, and Ecosystem Services Over Time.
⁴Science Direct, (2022), Financial Profitability of Diversified Farming Systems; A Global Meta-Analysis.
⁵S&P Global, (2022), Carbon Farming: Opportunities for Agriculture and Farmers to Gain from Decarbonization.
⁶Reuters, (2022), Europe Sows Seeds for Sustainable Farming Revolution, But Will They Grow?
⁷Birdlife International, (2024), The Real Deal Behind Europe’s Farmer Protests.
⁸European Commission, (2023), Opening Speech Delivered by Mr. Janusz Wojciechowski at EU Conference on EAFRD Financial Instruments, Organized by the European Commission, Brussels.