Four Ways Investors Can Boost Sustainable Agriculture
This article was originally published on IISD's State of Sustainability Initiatives website and is reprinted here with permission.
For investors, managing risk is crucial for success. In the agriculture sector, instability driven by price swings, supply chain disruptions, and climate change can discourage financial service providers. Furthermore, agricultural projects that could drive biodiversity loss or deforestation are increasingly being refused by investors, given the risks to their reputation and brand value. These developments come at a time when investment is needed more than ever to establish resilient and sustainable farming that maintains soil health, conserves biodiversity, and enhances community well-being.
Recent estimates indicate that there is an estimated USD 260 billion annual investment gap that must be bridged to meet the targets of Sustainable Development Goal 2 (zero hunger) by 2030. Moreover, an average of USD 711 billion per year is needed to close the investment gap to protect and regenerate biodiversity, which is the basis of agriculture and the food that we need.
Without innovative and committed investors, there is no way to end hunger and guide the sector toward greater sustainability. Here are four ways investors can manage risks while supporting sustainable investment in agriculture, drawing from on-the-ground success stories that often incorporate voluntary sustainability standards such as Organic, Fairtrade, or the Rainforest Alliance.
Build a supportive, blended financial ecosystem that includes public, private, philanthropic, and first-loss investors.
Investors know the value of a diversified portfolio, and the same logic applies to blended financing models that can reduce and spread risk between private capital and development funding in an investment deal. And first-loss investments (also called first-loss capital)—where a principal investor agrees to take the first losses, should any occur—can similarly improve investee risk profiles and encourage investors to back smallholder farmers and prioritize sustainable operations.
For example, the Africa Agriculture and Trade Investment Fund uses blended financing to mobilize private and public capital to back cotton producers in West Africa. At the same time, this approach supports the achievement of developmental goals, such as increased productivity, improved cotton quality, and the encouragement of more sustainable practices that protect High Conservation Value areas and water sources. The fund includes a first-loss guarantee by Germany’s Federal Ministry for Economic Cooperation and Development, as well as a technical assistance facility.
Know your farmers, and learn about their financial needs and investment potential.
Understanding crop production, commercial calendars, and other facets of farming can bring investors valuable insights about social and environmental risks and opportunities to make a difference through investment. These details should inform investment analysis and decision making.
With a good understanding of conditions on the ground, the Moringa Fund made an impactful investment in ComaFruits, a company that helps land-locked mango producers in Mali get their product to market. This investment helped ComaFruits move up the value chain, as they were able to build a production plant that turned potentially wasted fruit into pureed, frozen, and dried mango products. ComaFruits also helped producers become certified under sustainability standards, which led to higher-quality produce, the adoption of agroforestry and sustainable land use practices for enhancing and restoring biodiversity, and greater access to more export markets.
Create custom financial products that respond to farmer needs.
Equities, loans, or hybrid instruments that incentivize sustainability and adjust to fit farmers’ realities—by incorporating elements like grace periods and compensatory interest rates for farmers with good social or environmental performance—can lead to better investment outcomes while supporting farmers, their communities, and the environment. Central banks and development banks can also play a role by creating the products and conditions to support financial service providers, such as lowering tax rates, lowering regulatory capital reserves, or collateral requirements, and allowing for on-lending, wherein financial services providers borrow money from central banks or development banks and, in turn, provide sustainability-linked loans to farmers.
AlphaMundi Group took this approach when its impact debt fund (SocialAlpha Investment Fund) extended a flexible line of credit to Olivado, a Kenyan company that specializes in producing oil from Fairtrade- and Organic-certified avocados. In this case, the loan provided a smaller amount of credit early in the year, and a larger amount in April and May when the avocado season was in full swing. It also allowed for additional credit for a possible secondary harvest in September and October. This arrangement allowed Olivado to pay farmers in real time instead of waiting for them to generate cash from oil sales. Olivado also supports avocado farmers to adopt practices that encourage the efficient use of water and the protection of soil biodiversity by capturing rainwater for irrigation, monitoring water levels in trees regularly, and using only organic fertilizers.
Along the same lines, Conservation International Ventures provides concessionary loans to small and medium-sized enterprises whose business operations support preserving and restoring biodiversity. One such enterprise is CorpoCampo, a family-run company that sources organic-certified acai berries and palm hearts from smallholders in Colombia’s Amazon region. The long-term loan helped in expanding their production plant and installing a facility to process the acai pulp, while Conservation International Ventures charged a reduced interest rate in instances where CorpoCampo sourced from smallholders engaged in biodiversity conservation and ecosystem restoration initiatives.
Think outside the box to create an impact on sustainability.
Mercon Group got creative when it decided to administer USD 450 million in loans to coffee farmers, largely in Central and South America, with interest rates tied to sustainability results measured against an index aligned with Rainforest Alliance criteria.
Investors can also support initiatives that bring together farmers that adopt farming practices that protect the environment and support community well-being. When small-scale farmers form groups or cooperatives, they can share facilities and costs, do better at the negotiating table, and realize more market opportunities—all of which can support more resilient, sustainable, and less risky operations. Investors can also partner with sustainability standards and other actors to provide agricultural extension services, such as advice, data, and technology transfer, and technical assistance for producers on sustainable farming, sound business practices, and opportunities to add value to their products. These efforts can open more valuable markets and strengthen the investment case for farmers.
This article draws on research from IISD’s State of Sustainability Initiatives’ recent report Standards and Investments in Sustainable Agriculture.
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