Improving Agricultural Practices to Address Climate Risks

Improving Agricultural Practices to Address Climate Risks
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03 of 12

This insight is part 03 of 12 in this Collection.

December 18, 2023 12 mins

Improving Agricultural Practices to Address Climate Risks

Improving Agricultural Practices to Address Climate Risks

Good agricultural practices reduce emissions, expand carbon sequestration and benefit the supply chain from the very first mile — all key components of achieving future climate goals.

Key Takeaways
  1. The FAB industry produces more than one-third of global greenhouse gas emissions, but sustainable practices are emerging.
  2. Supporting farmers who are using regenerative agricultural practices benefits the entire supply chain and reduces damaging environmental impacts.
  3. De-risking projects and using climate analytics will help secure investment, expand insurance capacity and mitigate physical climate risk.
Better Informed

The food, agribusiness and beverage (FAB) industry is a significant contributor to climate change. It produces more than one-third of global greenhouse gas emissions  and accounts for 70 percent of our global use of freshwater. With the worldwide population anticipated to reach almost 10 billion by 2050, finding more sustainable and equitable ways to feed a growing population requires urgent action by an industry that already faces increasing pressure to innovate its processes and products. 

Across the world, solutions to address climate stress linked to food systems are in high demand, and are driven by a mix of science, innovation and digital acceleration. Regenerative agriculture is increasingly seen as a critical climate solution. The Food and Agriculture Organization of the United Nations calls it “an inclusive agroecosystems approach for conserving land and soil, biodiversity and improving ecosystem services within farming systems.”

Scaling up regenerative practices can support habitat restoration, conservation, increase food security and farmers’ incomes and reduce supply chain risks such as raw material price volatility for producers. 

The FAB value chain is highly consolidated, except at the base or the “first mile,” where farmers, growers and fishers are typically small-scale, individual or family businesses, with little connectivity to the end market they serve. De-risking the first mile of the supply chain will help scale food production sustainably to feed a growing global population, while limiting supply chains’ impact on nature (also referred to as “externalities”). 

The FAB Supply Chain
“Climate is a material and evolving enterprise risk, and a strategic priority for the C-suite. The challenges in transitioning, de-risking and scaling production are clear pain points for our clients. They make up the focus of our collaboration with partners to ensure the food system becomes more sustainable.”

– Ciara Jackson, Global Food, Agribusiness and Beverage Leader

Better Advised 

Regenerative Agriculture Addresses Several Climate Challenges

Regenerative agriculture and the conversation around how to store more water in the soil is discussed frequently. Correct implementation of regenerative nature practices leads to many co-benefits: 

  1. While fresh water is used by many industries, agriculture uses up to 70 percent of available fresh water globally. By transitioning to more regenerative agriculture practices, this demand will be cut in half.
  2. Soil can absorb water from rainfall more efficiently, reducing the risk of flooding and keeping moisture in the soil when drought hits. Healthy soils also release water slowly, which reduces the need to irrigate.
  3. These methods also have advantages when it comes to carbon sequestration. As soil health is rebuilt, it supports more biodiversity, making it possible to store carbon as well as micro and nano-nutrients. Conversely, unhealthy soil leads to water runoff, which can carry away not only the fertile topsoil of crops, but also pollutants, such as man-made pesticides and fertilizers. This may then contaminate the fresh water supply.
  4. In the event of extreme weather events, such as flash floods or droughts, water that has been re-absorbed and stored in the soil creates a healthy ecosystem. The combination of improved chemistry and soil structure creates a stabilizing effect. The roots of the plants can grow deeper, thanks to a breathing, structured soil that protects the plants by anchoring them more strongly in the earth.

Transitioning to regenerative agricultural practices takes time, and there is inherent volatility in the process. There must be a strong incentive for farmers to make the shift. Farmers typically incur the risk of transitioning through yield reduction as they initially reduce fertilizer inputs.  

“De-risking is essential,” remarked Andrew Mude, an economist with the African Development Bank Group, at an Aon-hosted event during Climate Week NYC in September 2023. “As Africa rightfully increases the share of climate mitigating and adaptation financing it receives, directing some of these resources to improve the integration of risk management in Africa’s agri-food system will accelerate the transition to a resilient and sustainable agriculture."

Implementing regenerative practices at scale would immediately reduce systemic physical climate risk. Reduced volatility in supply chains benefits producers and consumers. De-risking regenerative agricultural practices will encourage farmers to make this transition, safe in the knowledge that they are protected financially.

Better Decisions

$108B

Between 2008 and 2018, the impacts of natural disasters cost the agricultural sectors of developing countries over $108 billion in damaged or lost crop and livestock production.

Source: United Nations, March 2021

Three Ways to Match Data to Risk Capital for Sustainable Agriculture

In order to de-risk these new farming practices, data is needed to develop innovative risk financing solutions and promote financial inclusion for small-scale farmers. 

  • Crop Insurance

    At the farmer level, crop insurance is the seed of resilience for small farmers who are exposed to the worst impacts of climate change. Supporting them through their journey toward healthier, climate-resilient soil and crops will yield both improvement and financial resilience. Producers will benefit from lower raw material volatility. They will also have access to crop data on a real-time basis, allowing for transparency, risk management and reporting. There is significant potential for all participants across the entire value chain. Thanks to emerging technologies, it is now possible to monitor crops and soil health at a much more granular level to better understand effective care and monitor progress toward genetic potential.

  • Transparency in Data

    In addition to lower raw material price volatility, producers will also benefit from greater transparency in data to monitor crop data in real-time. This allows for better risk management and easier regulatory reporting. The data gathered will help assess physical risk, and lower transition risk and reputational risk at a time when “greenwashing” has become a concern among investors and a reputation risk for companies. 

  • Improvement in Risk Assessment

    For insurers, emerging data, analytics and technology — such as hyper-granular satellite data capture and AI — will unlock innovation and improve risk assessment. This means regions that previously had limited transparency, which made risk, yield and loss assessment challenging, can now be closely monitored and protected by specialty insurance.

“Insurers can also support farmers beyond access to insurance by providing advanced warnings in case of extreme weather events,” says Stephanie Betts, global head of alliances, coalitions and reporting in Aon’s Climate team. “And they can educate farmers on the steps to transition to regenerative practices, which will benefit the whole ecosystem by lowering systemic risk in our food systems.”

$24B

Profits for the world’s largest livestock producers could fall by almost $24 billion by 2030 as a direct impact of climate change.

Source: FAIRR

Working Together for a Sustainable Future

In a globalized and hyper-connected world, supporting and protecting farmers through the life cycle of their crops creates returns that benefit the entire FAB ecosystem. As farmers adopt more sustainable practices, co-benefits will ripple through the value chain, support local GDP growth, and mitigate crop damage and drought, while helping the world progress toward a net zero future. 

$1.5T

The top 25 companies in the FAB sector generated $1.5 trillion in revenue in the past year, while profits for the sector increased to more than $155 billion.

Source: Forbes Global 2000: The World’s Largest Food Companies In 2022

Quote icon

While there’s impressive innovation around climate tech and carbon sequestration, carbon capture starts with soil. If we don’t make these changes to our agricultural systems, the game is up. The energy transition will be hampered by water scarcity.

Stephanie Betts
Global Head of Alliances, Research and Reporting, Aon Climate

Helping people make the right climate decisions involves de-risking these practices through improved data and technology, and enabling capital to flow where it needs to, thus addressing the protection gap.

Aon’s Thought Leaders
  • Stephanie Betts
    Global Head of Alliances, Research and Reporting, Aon Climate
  • Christopher Coe
    Global Agricultural Leader, Reinsurance Solutions
  • Ciara Jackson
    Food, Agribusiness and Beverage Industry Practice Leader at Aon

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The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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