Unlocking the Value of Carbon and Biodiversity in Agriculture: A New Era for Climate-Smart Insurance and Food Systems
Transforming Food Systems and Protecting Biodiversity
Most crop and tree farming operations depend on weather (local) and climate (wider) patterns of natural inputs (temperature, water/precipitation, light; soil as another non-weather related input, of highly limited availability) to be viable operations meaning, being able to generate, with as little uncertainty as possible, a viable harvest at the end of a planting/seeding cycle. Climate change, a systemic risk on its own merit, increases the frequency and intensity of outlier weather phenomena (e.g., extreme temperatures, excessive precipitation, drought, flood, wind storms) that may impair such desired harvest viability.
The Limitations of Current Agricultural Insurance Models
Current insurance schemes in agriculture are essentially climate adaptive, not climate mitigatory, and focus narrowly on market-valued assets, overlooking critical ecosystem services such as carbon sequestration and biodiversity despite their obvious role in the expression of these two factors. As an ever more widely available risk transfer mechanism to offset farming’s operational uncertainty, agricultural insurance is a form of property insurance. Assets are usually valued based on recognized/acceptable market values or production costs. The idea is, after a proved insurable peril’s occurrence, to assist the farmer to either fully receive lost assets in the form of the monetary value of their expected yields/installed productive capacity or, e.g., to be able, mid-season, and the existence of willing conditions, to be able to replant/seed and still originate a viable harvest.
Agricultural insurance, as an increasingly widely available risk transfer mechanism to offset the operational uncertainty of farming, is a form of property insurance. Assets are usually valued based on recognized/acceptable market values or their production costs. The idea is, after a proved insurable peril’s occurrence, to assist the farmer to either fully receive lost assets in the form of the monetary value of their expected yields/installed productive capacity or, e.g., to be able, mid-season, and the existence of viable conditions, to be able to replant/seed and still originate a viable harvest.
Why Agroforestry is Key to Climate-Resilient Agriculture
Agroforestry is usually understood as a farming system with a perennial tree component sharing the same area as a major underlying crop, the latter usually of an annual cycle. These systems, due to the perennial tree component, store carbon and support high biodiversity levels, especially if the tree component is composed of mixed species, strongly autochthonous, and planted many years ago (old), attracting other life forms, including other non-commodity (i.e., that do not produce, tradeable commodities such as bark, wood, fruit, or sap) producing plant species of high biological value. The trees’ deep root systems hold the soil, allow water to percolate down to strategic water aquifers, and the tree canopy and trunks limit upper soil layer exposure to the elements, limiting carbon release into the atmosphere, providing mechanical protection to winds, increasing soil health, and structure. Yet these ecosystem services are economically invisible as they do not possess an objective commodity value tradeable on a regulated, validated market. These carbon-rich systems also reduce exposure to several insurable perils such as drought, landslide, flood, and mechanical damage due to excess wind, among others.
Redefining Insurable Interest: Valuing Ecosystem Services
An insurable interest is something measurable, valuable, and at risk, as is the case with a farm’s biological productive assets. Under an agricultural insurance scheme, the loss of a farmer’s assets due to an insurable peril, as contractually agreed in the policy wording, puts the farmer in a lesser financial position. However, climate change’s increased Frequency and Intensity of odd phenomena are increasing the possibility of this industry disappearing in the future in many regions, as it only covers sudden, accidental, and unforeseen events, not loss-generating events that occur every year, maybe several times a year. Not being able to insure their livelihood is especially dramatic for low-income farmers who have a reduced ability to sustain shock, usually at the forefront of climate change consequences.
Agriculture is responsible for circa 25% of GHG and land use change due to farming, and deforestation is one of the major causes of loss of biodiversity across multiple ecosystems worldwide. The Green Revolution promoted food security based on a multi-prong approach of improved genetics, watering, fertilization, mechanics, and other improvements, and the belief that by developing an effective “Ford” inspired assembly line, it would be easier to maximize one of its fundamental objectives, a profitable way of life.
Without minimizing the food security and economic credentials of this approach and the many benefits it brought to an ever more affluent and organized society, the truth is that we now have sufficient knowledge to understand that within our limited planetary boundaries, this approach minimizes the interconnected nature of our natural world and the biological, and physical systems that support it, creating other problems that we can’t avoid looking in the eye.
Carbon as an Insurable Asset: A New Model for Sustainable Insurance
By assigning real value to carbon and linking it to reduced climate risk and financial losses, insurers can incentivize resilient, biodiverse systems, which means recognizing carbon stored in perennial components of farming systems, especially in agroforestry, as an insurable interest. The loss of carbon sink assets due to an insurable peril (e.g., drought) under a parametric policy would trigger an indemnity aimed at positioning the farmer in the financial position it held at policy inception. Insured farmers would be motivated to due everything in their power to keep these assets in prime condition, producers of tradeable commodities or not, to avoid being in breach of the policy’s indemnity requirements.
One main added advantage of this approach is the biodiversity component being “protected” due to the reduction of land use change and deforestation, but also by “indirectly insuring” biodiversity, as there is a direct correlation between higher carbon sequestration of agroforestry systems with older tree components and higher biodiversity levels.
Agricultural insurance, hence, has the power to become not only a climate-adaptive mechanism but also a mitigatory one by motivating investments in farming (there’s no investment without insurance) based on fundamentals that are economically, financially, and sustainably sound.
The Accessibility Gap of Carbon Credits
While carbon credits dominate policy discourse, they remain inaccessible to most farmers as they are mostly traded at the sovereign or company level, and have a limited impact on transforming farming practices at scale. Agricultural insurance is widely understood, provides tangible risk offsets, and is increasingly being accepted as an effective solution for low-income communities via parametric insurances: transparent, remotely verifiable, with quick enrollments, and payouts. As it is a solution that depends on being client-centric and used as collateral for many investment endeavours, it is a very effective tool to promote a realistic, planet-bound, sustainable economic system that benefits different economic actors.
A dual-sum-insured model, with a first component of traditionally market-value-based assets and a second component of sequestered carbon value, not only aligns with ESG goals and accountancy disclosure standards but also helps insurers adapt products beyond agriculture to include other climate-smart investments, from heat-adapted housing to green liability portfolios. Therefore, the considerations made here can be extrapolated to other forms of property & casualty insurance, engineering, energy, or even liability insurance. This enlarges the scope of acceptance of this rationale.
Rewarding Resilient Systems Through Insurance Incentives
Insurers then have the opportunity to reward higher carbon sink and correlated higher biodiversity farming systems by reducing premiums or allowing for longer period policy covers, among other rewarding measures, offsetting the impact that paying two sum insured sections could bring to the farmer simply because these systems are more resilient and store more carbon, hence they should be worth more in insurance terms. This is not just “green talk,” but risk reduction logic insurers already use in, e.g., property insurance (e.g., premium discounts for solar panels, heat-resistant roofs, etc.).
A Future-Proof Role for Financial Institutions in Food Systems
One of the main positive notes of this approach is that it would help the banking and insurance industry look into the future with less worry and be a more active participant in the transformational change of our food systems without compromising its current batch of clients, as it is something that can be gradually adopted based on sound economic rationales.
Building a Realistic Transformation: Beyond Revolutionary Rhetoric
In true form, it is also not realistically expected to completely obliterate industrial farming by decree and 100% reverse the transformation our food systems went through, mainly since the onset of the Green Revolution, nor should we lose that know-how. However, we can definitely use it differently for the greater good by continuing to invest in research that, under a climate-smart agriculture ethos, increases productivity, reduces GHG, and protects biodiversity, limiting the impact on yields that a radical transformation of food systems would entail.
Oundoubtdetly, we can promote a transformation, not based on stalled revolutionary and counterrevolutionary arguments and counterarguments on the validity of one or other food systems as it would occur in the 70’s, but based on a realistic approach that considers both the validity of our existing economic system and the planet boundaries and limited resources we all live in.
In addition, we need to consider that the double materiality rationales of most ESG standards also need to start considering one simple fact: our human world and institutions are based on conventions we agree to elevate to the status of existence. They don't naturally exist. We created them so that we, so we understand, may function as a society with relative predictability and avoid chaos. However, they all have one element in common: humans. Humans eat and generate waste. Agriculture and its role in human existence, for our food security at least, needs to be accounted for, irrespective of whether an “institution” is directly linked to agriculture or not. We are all inevitably directly linked to agriculture, an activity that, for instance, uses at least 70% of the world’s fresh water.
The banking and insurance industries, international economic development stakeholders, and ESG standards regulators, under recognized fora and programs, would need to convene to define the regulatory environment required to validate this approach. We also need to invest in comparative studies to assess the insurable risk reduction features of sustainable farming systems with strong, highly biodiverse, and carbon storage characteristics so that insurance solutions may be based on sound underwriting principles.
Further reading
An additional Profit with Carbon Farming - Carbon Offsets Protocol and Certification Agencies
Climate-Smart Forestry: Strategies, Benefits and Challenges
How legumes improve carbon sequestration and mitigate climate change in agriculture
Regenerative Agroforestry: Lessons from Western Uganda
Agricultural Insurance and Risk Management
Agricultural Insurance - A Financial Tool for Farmers to Offset and Manage Risk
