However, as with other sectors, the financial requirement for decarbonizing this sector is equally substantial. Estimates suggest cashflow requirements of up to $130 billion annually by 2030.82 This is far higher than the average investment level in 2021-22, estimated at $6.5 billion.83 The gap in funding is more acutely felt in EMDEs, where the problem is compounded by financial barriers and heightened risks fuelled by unstable markets and regulatory uncertainty. Hybrid finance mechanisms can de-risk investment opportunities in the AFOLU sector and help attract private capital.84 Instruments such as concessional loans, guarantees from MDBs and crop insurance offer options for reducing the perceived risks associated with long-term, high-risk projects.85,86 Incentivizing sustainable practices in the sector may call for the implementation of a range of policy and market-based instruments, such as carbon pricing and associated stringent and enforceable regulatory frameworks.87 For example, some carbon pricing instruments can be adapted to make it economically viable for landowners to adopt practices that increase carbon sequestration. Emissions trading schemes can provide financial incentives for reducing emissions, thus encouraging investment in low-carbon technologies and sustainable land-use practices.88 Additionally, eco-labelling and certification schemes – along with public engagement campaigns – can drive consumer demand for sustainably produced goods, further incentivizing producers to adopt environmentally friendly practices. The AFOLU sector offers significant opportunities for technological innovation. Breakthrough technologies such as precision agriculture, which utilizes data analytics and satellite technology to optimize farming practices, can significantly reduce emissions.89,90 Advanced biotechnologies, including genetically modified crops that require less water and fertilizer, can contribute to emissions reductions.91 In forestry, technologies such as drones and remote sensing can improve monitoring and management, helping to optimize forest growth for carbon sequestration and prevent illegal logging.92 Integrating climate goals into agricultural and land- use policies is critical for aligning the sector with broader decarbonization strategies. This integration involves ensuring that food production systems are sustainable and resilient to climate impacts, thereby supporting long-term food security.93 Community engagement remains an important aspect of policy initiatives in this sector, as involving local stakeholders in decision-making processes enhances their effectiveness and sustainability. Incorporating traditional knowledge and practices into modern land management strategies can also improve outcomes and ensure cultural appropriateness.94 Bridging the Gap: How to Finance the Net-Zero Transition 12

Bridging the Gap How to Finance the Net Zero Transition 2025