Towards Regenerative Agriculture: Assessing the Viability of Private Sector Investment in Green Water Retention Mechanisms through Green Bonds and Climate Finance

Abstract

Rainfed agriculture is a critical component of global food production and farmers' livelihoods in developing countries, yet it is increasingly under pressure from global climate change. This escalating climate risk impacts both the production (upstream) and industrial (downstream) segments of the agricultural supply chain. Addressing such crises in these regions requires approaches that go beyond conventional methods such as supply augmentation. Recent attention has shifted toward regenerative agriculture, which aims to boost rainfed agriculture without the need for irrigation while mitigating climate risks in economically vulnerable regions. However, sustainable solutions such as water-saving interventions have often lacked adequate financial support, traditionally relying on insufficient public sector investments or not given consideration at all. This case study investigates the potential of water-saving interventions to enhance crop water use efficiency in rainfed agriculture and explores how green finance mechanisms, particularly green bonds, can support the widespread adoption of such practices in the central-Indian cotton supply chain. It further aims to establish the first steps toward a transactional water trading system through the newly emerging concept of water credits, which incentivizes the conservation and efficient use of water resources. A socio-hydrological model is utilized to account for crop-water-farmer feedback and biochar is applied as the soil moisture-saving intervention. The intervention focuses on soil-hydrological dynamics and introduces field capacity changes into the model. The financial feasibility of these interventions is evaluated using a compound interest model that relates rates of return to treatment levels (tons per hectare). Results demonstrate profitability in the majority of the study area, although different treatment levels are observed for optimal returns. Annual return projections range between 3\%-12\%, with the majority of application rates clustering around 2, 15, and 30 tons/hectare, representing a regular trimodal distribution. Strong heterogeneity is observed across the region with non-linear dependence on soil-hydrological parameters. Green bonds, although eligible for such an initiative, are currently unsuitable for financial support due to the immaturity of the Indian green market, lack of issuance for agriculture and water projects, and a primary focus on large-scale projects. The study provides an initial path for a field-scale pilot application scheme in Maharashtra cotton production, though rigorous monitoring plans are essential for assessment. Despite the model's profitable outcomes, the Indian green bond market is still in the growth phase, and more mature markets (e.g., the EU and USA) with institutions that hold more diverse portfolios may be approached to support projects of such scales. Supporting a water credit system is deemed challenging due to India's strongly established groundwater-energy dynamics (irrigation and pumping with fossil fuels) and the government's erratic subsidy programs.