• How the agrifood sector is becoming more sustainable

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    Climate change and the struggle to prevent it pose enormous challenges for agrifood production in Spain. In turn, improving the sustainability and resilience of the sector will be key to achieving the environmental targets set out in the European Green Deal. Agri-environmental indicators show that, despite some progress in recent years, the sector needs to tackle significant aspects, such as reducing the use of chemical pesticides, fertilisers and antimicrobials in agriculture, as well as improving animal health and welfare, increasing efficiency in the use of energy and water resources, promoting food consumption that is more sustainable and healthier and reducing food loss and waste, fostering a circular economy. The new CAP, with eco-schemes as its key measure, and the Next Generation EU funds will support the sector’s green and digital transition.

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    The threat of climate change and transition to a sustainable food system

    Spain’s agriculture has traditionally benefited from a privileged geographical location and climate but it is particularly vulnerable to climate change. Increased soil erosion, floods, droughts and wildfires, along with an increase in pests and diseases, are just some of the direct effects. In turn, primary sector activity also contributes to climate change: crop specialisation and intensification, the use of chemical inputs and the industrialisation of livestock production all have negative impacts on water, soil, air, biodiversity and habitat conservation.

    Agriculture contributes to climate change and, in turn, suffers directly from its consequences

    It must therefore move towards a new model that protects the natural resources on which it depends.

    EU countries are increasingly aware that they need not only to mitigate climate change but also adapt to it. Consequently, given growing concerns for the environment, the agrifood sector must move forward in its transition from a system that emits greenhouse gases (GHG), demands a large amount of natural resources and also pollutes them, to a new model, increasingly widespread, that provides healthy, nutritious food sustainably, protecting the natural resources on which agricultural activity itself depends.

    In addition to improving the sustainability of agrifood production and downstream distribution, another important lever for change is to promote healthier and more environmentally sustainable consumption patterns. For example, a diet with a larger proportion of vegetables, organic foods, seasonal and local produce. Similarly, the reduction of food loss and waste and promotion of the circular economy are also key factors in moving towards a sustainable food system, as stated in the European Commission’s «Farm to Fork» strategy.

    The Farm to Fork strategy

    The Farm to Fork strategy
    Source: European Commission.
    From the European Green Deal to the CAP Strategic Plans

    The EU is deploying a wide range of tools to provide stakeholders with mechanisms and incentives to support this transition to a sustainable food system and, in turn, to help achieve the targets set out in the European Green Deal. One important addition in the reformed Common Agricultural Policy (CAP), which will enter into force in January 2023, is the drafting of National Strategic Plans to establish priorities in terms of aid and incentives for the various production subsectors.6The star measure is eco-schemes, which are voluntary and reward sustainable practices. Spain’s Ministry of Agriculture has proposed two eco-schemes, with a budget of 1,107.49 million euros, which group sustainable practices into two areas: agroecology and low carbon agriculture. The first group includes activities such as pasture management using sustainable mowing, crop rotation and the maintenance of non-productive areas and other biodiversity aspects. The second group includes extensive grazing, conservation agriculture and the maintenance of living or dead vegetation cover.

    • 6. Spain’s Ministry of Agriculture, Fisheries and Food must submit its Strategic Plan to the European Commission by 30 December 2021.
    The new CAP, with eco-schemes as its key measure,

    together with Next Generation EU funds, will support the sector’s green and digital transition.

    In addition to the CAP, the European NGEU funds will also help to finance the green and digital transition of the primary sector. In particular, item 3 of Spain’s Recovery, Transformation and Resilience Plan, aimed at the environmental and digital transformation of the agrifood and fisheries system, provides for an investment of 1,502.8 million euros. The plan is based on four fundamental pillars: (i) improving efficiency in irrigation, (ii) promoting sustainability and competitiveness in agriculture and livestock farming, (iii) a digitalisation strategy for the agrifood sector and the rural environment, and (iv) modernising the fisheries sector, by promoting sustainability, research, innovation and digitalisation.

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    Environmental indicators in the primary sector

    The European Commission has analysed the situation of individual Member States in relation to their contribution to each of the Green Deal ambitions. The table below lists these targets and the reference values of these indicators for the main countries.7

    To make Europe the first climate-neutral continent by 2050, the first milestone has been set for 2030: reduce greenhouse gas (GHG) emissions by at least 55% compared with the 1990 level. While GHG emissions from EU agriculture have fallen by a significant 20% since 1990, no progress has been made since 2005. And in Spain the situation has been reversed: emissions have increased since 1990 (6.5%) with just a modest reduction since 2005 (–3.7%).

    • 7. «Commission recommendations to Member States as regards their strategic plans for the CAP», European Commission, December 2020.
    In relative terms, GHG emissions by Spain’s agricultural sector

    are lower than the EU average, which has set itself the target of at least 55% below 1990 levels by 2030.

    Despite this trend, it is important to note that, in relative terms, the sector is responsible for 12.0% of the economy’s total GHG emissions compared with an EU average of 12.7%. Furthermore, if we take into account the fact that the primary sector contributes 2.9% of GDP compared with 1.6% in the EU, the result is that GHG emissions by Spain’s agrifood sector per unit of GVA are significantly lower than the European average (1.2 kg/euro compared with 1.7 kg/euro in the EU).8 Similarly, emissions from agriculture per unit of agricultural land (tonnes of CO2 equivalent per hectare) are lower in Spain (1.6 compared with 2.5 in the EU).

    The second EU milestone is contained in the Farm to Fork strategy, which sets a target of 50% reduction in the use and risk of chemical pesticides by 2030. In recent years, Spain has significantly reduced the use of this type of chemical and the challenge is to continue moving in this direction. The target for antimicrobial resistance is a 50% reduction of the overall antimicrobial sales for farm and aquaculture animals by 2030, compared with the EU baseline in 2018. In this respect, Spain lags behind the EU average.

    On the other hand, Spain performs positively both in its share of agricultural land used for organic farming, an aspect we discuss in more detail in the next section, and the proportion of agricultural land occupied by highly diverse landscape features. In this case Spain, with 13.2% of its land, already exceeds the target of 10%.9

    • 8. Data from the European Commission’s Common Monitoring and Evaluation Framework (CMEF) for the CAP 2014-2020, https://agridata.ec.europa.eu/extensions/DataPortal/cmef_indicators.html
    • 9. EU Biodiversity Strategy 2030.

    European Green Deal targets and reference values

    European Green Deal targets and reference values
    Notes: GHG stands for greenhouse gases. UAA stands for utilised agricultural area. Source: CaixaBank Research, based on the European Commission’s COM (2020) 846.
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    Nitrate pollution from agriculture remains one of the greatest pressures on the aquatic environment. In this respect, the EU has set a target of reducing nutrient losses by at least 50% by 2030 while ensuring there is no deterioration in soil fertility, an aspect in which Spain needs to improve considerably. An increasing number of EU countries are also affected by water scarcity, often caused by excessive abstraction of water for agriculture and livestock. Climate change will further aggravate the problem of water availability in many regions, including Spain.

    Finally, the new CAP establishes digitalisation as a priority across the board, believing that the transition towards a sustainable food system must be supported by knowledge, innovation and digitalisation. In this respect, one key factor in developing rural areas and reversing their depopulation is the availability of a fast, reliable internet connection. While there has been a notable increase in the proportion of households in rural areas with next-generation broadband access, there is still a significant gap with respect to urban areas. The goal is to cover 100% of the population by 2025.10

    • 10. This target is included in the Agenda España Digital 2025.
    58.7% of Spanish households in rural areas

    had access to fast broadband internet in 2019. The goal is to cover 100% of the population by 2025.

    The green and digital transition of European agriculture is also creating new business opportunities which the sector must take advantage of, for example by better aligning its production with evolving consumer tastes. Sustainability will become a competitive advantage for those companies and farms that achieve a balance between economic growth, environmental care and social well-being, while those that fail to comply with environmental standards will be penalised by increasingly demanding and environmentally aware consumers who identify with the most sustainable brands and products.

    A firm commitment to boosting organic production

    The commitment to more sustainable production schemes, such as organic farming,11 is relentless. Spain, with more than 2.44 million hectares of these crops in 2020, is the first country in the EU and the third in the world after Australia and Argentina. However, in terms of its share of utilised agricultural area (UAA), it is above the EU average, as noted in the previous section, but well below leading countries such as Austria, Estonia and Sweden, which exceed 20%. Four million additional hectares would be needed to achieve the 25% target set in the Organic Action Plan.

    • 11. Organic farming is a system of agrifood production and management that combines the best environmental practices, a high level of biodiversity and preservation of natural resources and the application of high animal welfare standards, so that products are obtained from natural substances and processes (MAPA).

    Share of utilised agricultural area under organic farming

    Last actualization: 13 October 2021 - 16:38

    Regarding organic operators,12 almost 90% out of a total of 50,047 in 2020 were primary producers while the rest were industrial operators and traders. However, the number of operators is growing much faster (more than double) further down the food chain.

    • 12. An organic operator can be an individual or company and must meet certain requirements to be able to produce, process, prepare or package food of agricultural origin in order for it to be marketed using the terms ecological, biological or organic. In Spain there is a General Register of Organic Operators (REGOE) that collates the information provided by each autonomous region.
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    By region, Andalusia leads the field both in terms of land under organic farming, with more than 45% of the total, and in terms of organic livestock farms, with almost 60%. By type of crop, cereals for grain production come top (43% of the total) and, by type of livestock, cattle (48%). Compared with other countries, the Spanish agrifood sector is the world’s leading organic producer of olive oil and wine and the second for citrus fruits and vegetables.

    However, one of the challenges facing organic production in Spain is the low domestic consumption: per capita consumption of these products in 2019 stood at 50.2 euros, a far cry from countries such as Denmark or Switzerland, which exceed 300 euros. As a result, most of Spain’s organic produce, around 60%, is exported.13 The change in habits brought about by the pandemic has boosted healthier, more sustainable and local consumption, so the trend in domestic consumption of organic produce is clearly upward.

    • 13. Sociedad Española de Agricultura Ecológica (SEAE), MAPA (2021), «Análisis de la caracterización y proyección de la producción ecológica española en 2019» and Ecovalia (2021), «Informe anual de la producción ecológica en España».
    Organic farming in Spain, on the rise

    Area under organic farming

    Last actualization: 13 October 2021 - 16:38

    Organic operators in the primary sector (producers)

    Last actualization: 13 October 2021 - 16:39

    Organic operators in the secondary sector (manufacturers and processors)

    Last actualization: 13 October 2021 - 16:40
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Green finance in focus

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April 12th, 2019

In 2015, in Paris, 196 countries committed to work to limit global warming to 2°C (or below) with respect to pre-industrial levels. In order to comply with the Paris agreements and achieve a transformation towards a low-carbon economy and a more efficient use of resources, major structural changes and a considerable mobilisation of resources are required. In Europe alone, the European Commission estimates that additional investment amounting to 180 billion euros per year (up to 2030) is required in the energy and transport sectors (see the first chart).1

The challenge, therefore, is vast and requires the active participation of a wide range of players, including the affected industries and governments. But the role that the financial sector can play in the transition towards a sustainable economy is also key. In this article, we focus on the role of green finance in the fight against climate change and the obstacles that are holding back its full development.

In effect, the financial sector, as an intermediary between savings and investment in the economy, can facilitate the channelling of funds towards activities that contribute to more sustainable forms of development and have environmental benefits, such as those aimed at reducing air pollution, improving energy efficiency or adapting to and mitigating the effects of climate change. Following this logic, green finance (which is part of a broader concept of sustainable finance)2 has become a priority issue in several international forums, including the G20 agenda. Furthermore, its development in recent years has been quite remarkable. As the second chart shows, interest in investments and financial instruments linked to sustainability, such as green bonds, is growing rapidly.

However, despite the progress made in recent years, there is still a long way to go and the deployment of private capital to finance green projects is still limited. For example, total green bonds issuances reached 500 billion dollars in November 2018, just 11 years after the first green bond was issued. This may seem like a lot, but this figure represents less than 1% of total bonds issued worldwide.3 In addition, green infrastructure assets represent less than 1% of the total assets held by institutional investors.4

In this context, the potential to scale green finance is considerable. To do this, however, a series of institutional and market barriers must be overcome, some of which relate specifically to the mobilisation of resources towards green investment projects.

First of all, there is a lack of a common framework that clearly defines what constitutes a green activity. Specifically, there is currently no standardised classification nor any consistent and reliable labelling of green financial products. This implies that investors cannot be sure that their money is effectively invested in sustainable projects,5 thus holding back the full development of markets for green financial products.

Secondly, other obstacles to be considered are the asymmetric information problems between investors and the recipients of funds. In short, it is argued that the returns on investments in green projects are difficult to assess due to, among other factors, the lack of definitions, adequate risk assessment models and an information disclosure framework that allows comparisons between projects (such as guides for companies to disclose the way they incorporate elements of sustainability into their investment processes or the effects of their products or investments on the climate).6 This lack of information contributes to increasing the costs involved in searching for green projects and limits financial flows towards sustainable activities.7

Thirdly, economic agents tend not to adequately incorporate –in some cases due to a lack of information– the environmental (physical) risk and transition risk8 into their financial and investment decisions, whichleads to a distorted assessment of the risk-return between different projects.9 The fact that agents fail to incorporate the environmental externalities into their analysis implies that, among others, the environmental risk is not reflected in the price of financing and that there is a suboptimal capital allocation between green projects (environmentally friendly) and brown projects (those that do not incorporate the environmental dimension into their analysis and involve an intensive use of fossil fuels). In this regard, an improvement in the transparency and reporting mechanisms so that investors can understand first-hand which companies are less exposed to the effects of climate change, and a correct financial assessment of the environmental risks, would help to discourage investment in the more polluting industries.

In addition, there are also more generic barriers that affect the financing of long-term investments. In particular, some investment projects (including some green projects) require more capital to be financed and/or over a longer than usual time horizon. However, bank financing and financial instruments in capital markets usually have a short to medium term horizon. This maturity mismatch between assets and liabilities used in green projects contributes to there being less financing available for very long-term investments.

In order to overcome these barriers and enhance the role of finance in the ecological transition, broad coordination at the international level integrating all the agents involved is essential, given that this is a global challenge and that establishing a common benchmark and regulatory standards so requires it. In this regard, the European Commission’s work to agree on a common taxonomy, such as the Action Plan on Sustainable Finance (presented in 2018) and the working groups created to involve the financial industry in this process is of particular note.

Similarly, it is important that agents have information on climate scenarios10 in order to properly identify, quantify and mitigate environmental risks and exposures. Also, the regulatory framework must be clear and stable in order to help players anticipate and manage the changes associated with this transition towards a more sustainable economy. Of particular note the initiative of the working group of the Financial Stability Board11 – led mainly by investors and asset managers – to improve transparency, truthfulness, comparability and the dissemination of information related to climate risks.

In short, various agents (companies, governments and regulators) have a role to play to support this transition towards an economy that is more sustainable in the long term. This includes the financial sector, as an intermediary between savings and investment. However, in order for this transition to be effectively financed, it is essential to work to eliminate the barriers that limit the development of green finance.

Roser Ferrer

1. According to the EIB, this figure rises to 270 billion euros if we include the investment needs in water and waste management.

2. Sustainable finance channels funds towards investments with a defined social purpose.

3. Green Finance Study Group (2016). «G20 green finance synthesis report». Toronto: G20 Green Finance Study Group.

4. In addition, it remains difficult to accurately quantify and compare the progress of sustainable finance in the financial markets. This, in part, is due to inconsistencies in definitions, classifications and methodologies, as well as due to the lack of data (historical data, by asset type and by region).

5. This is known as greenwashing risk, i.e. the risk that products and services that are presented as being sustainable or environmentally friendly in reality are not.

6. Long-term investors require information on how companies are preparing for the ecological transition, given that better prepared companies can have a competitive advantage over their rivals.

7. See note 4.

8. Linked to the process of adjusting to a low-carbon economy. This includes regulatory changes, those arising from new technologies and changes of preferences that can lead to a revaluation of various assets and create credit exposures for financial institutions.

9. Specifically, companies that invest more intensively in activities with higher risks related to climate change may be more vulnerable to the transition towards a low-carbon economy, which could end up being reflected in lower returns.

10. With homogeneous models that contain disaggregated data and involve the scientific community.

11. Task Force on Climate-related Financial Disclosures https://www.fsb-tcfd.org/about/#

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    Long-term trends

    Climate change & green transition

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