Virtual Policy Dialogue: Creating inclusive food markets by linking certification and finance
On September 7, 2020, IISD’s State of Sustainability Initiatives team hosted a virtual policy dialogue about sustainability certification and access to finance for agricultural producers in Africa, with a focus on least-developed countries.
This event included key actors, including financial service providers, government representatives, producers, and the standards community.
The session was an official Partner Event at the African Green Revolution Forum (AGRF) Virtual Summit 2020.
Topics discussed
- Best practices from selected innovative investment cases of African certified agricultural producers
- Investor requirements, risks, and opportunities to extend financing to sustainable agricultural producers
- Leveraging certification to mitigate financial risk and to build farmer resilience
Guest speakers
- Tomas de la Serna (Incofin)
- Wanjohi Ndagu (Pearl Capital Partners, Yield Uganda Fund)
- Andre Ndikumana (National Agricultural Export Development Board)
- Jean Aime Niyonkuru (Sustainable Growers)
- Rohith Peiris (Sorwathe Ltd)
- Oriane Pledran (Moringa Fund)
Moderators
- Cristina Larrea, Lead, Sustainability Standards, IISD
- Francesca Nugnes, Expert on SME Finance, IISD
- Vivek Voora, Sustainability Standards Advisor, IISD
- Sofia Baliño, Communications & Editorial Manager, IISD
Q&As
The audience asked the panellists several questions that could not be answered within the session’s allotted time. The panellists have responded to some of these questions below.
There needs to be an incentive for farmers to strive for certification and take risks in using credit. As an investor, how do you think these incentives can be increased, as they still seem too inadequate for many producers (e.g., coffee and cacao)? What about payment for performance?
Price incentives have been used in the past; however, they have shortcomings because increasing prices can increase supply, which eventually puts downward pressure on prices. So, it is not a sustainable approach for incentives and certification. A better solution would be to build a receptive market ecosystem for voluntary sustainability standards-compliant producers.
Payment for positive social and environmental performance could also work, but we must think about it as an integrated system. Financial incentives will always be an incentive, but they can’t be the only variable.
As an investor, how do you approach biodiversity, considering policies such as the Convention on Biological Diversity and the ongoing high-level preparatory process of the Post 2020 Global Biodiversity Framework do not highlight enough agrobiodiversity, sustainable agriculture, and market/incentives challenges?
When you invest, make sure you don’t negatively impact biodiversity. Agroforestry has a huge role to play—for example, we can look at some innovative agricultural practices that can help in regenerating soil. Incentivizing partnerships is also important—we can’t just work with small farmers. A landscape approach offers a good opportunity for preserving biodiversity beyond the level of a farmer’s plot.
In terms of incentives and monitoring, what can be done to support more sustainable value chains?
Certainly, public policy has a role to play in incentivizing the improved sustainability performance of value chains through regulations and incentives. Corporate social responsibility initiatives can also lead to better monitoring of business operations to improve sustainability performance.
In this AGRF Virtual Summit, we are talking about Africa feeding itself sustainably. Often these certification schemes can only work for export crops. Do you see any promising examples of certification schemes for domestic or regional markets?
There is potential for using certification schemes in domestic and regional markets, but they will need to be cost-effective for producers and affordable for consumers. For instance, in Brazil and Mexico, there are several certification schemes that work in the domestic markets, with some initiatives in place between countries to potentially recognize them in regional trade. IISD is working on research focused on East Africa that addresses this issue, and we will have some findings to share on the subject next year.
Most certification schemes target export markets in the European Union and the United States, and compliance standards are often costly and ill-adapted to small-scale African producers. But the local and regional markets in Africa could provide opportunities for African farmers and small and medium-sized enterprises, and they could help build more sustainable and resilient value chains. How can certification and finance better target production for the local and regional markets?
Sooner or later, most countries will integrate social and environmental concerns into their local regulations. Certification schemes have an important role to play because they can inspire these regulations and possibly be adapted to local contexts (through a bottom-up approach with local organizations). The standards can also serve as mechanisms of regulatory compliance. However, certification will need to be cost-effective for producers while keeping consumer prices affordable to incentivize local consumption.
What are your thoughts on participatory certification schemes that do not use third-party certification to allow resource-poor producers to access more affordable and locally adapted certification schemes? Can participatory schemes also increase agricultural producers’ bankability?
Participatory schemes can indeed strengthen agricultural producers’ bankability. This system relies on trust and transparency, as farmer-peers are responsible for the verification of the agricultural practices conducted by the certified farmers, as opposed to a certification body. It also depends on other factors discussed in the session, including whether the producers are organized in a group, the type of relationship with their clients, their governance practices, and their level of professionalism.
What about low-value crops that don’t have strict export certification but rather a voluntary certification like the Sustainable Rice Platform? How accessible is financing for these farmers?
Regardless of the certification scheme, bankability is a requirement for producers to get financing. The specific aspects of certification that strengthen bankability (as discussed in the session) include being organized/aggregated, having secure markets (i.e., contract farming), good governance practices, transparency, and record keeping. More information is available in IISD’s report on the issue.
Most small-scale farmers don’t have the collateral needed to access financing. How can this be overcome?
The requirement for collateral is a big challenge, but there are many ways it can be overcome. Socially oriented financiers may be more flexible and possibly accept soft or more mobile collateral (e.g., a motorcycle or a couch from home). Local investors that are capable of visiting the farm (to ascertain the quantity/quality of the future crops) may agree to finance farmers based on future crop cash flow rather than on existing collaterals. Sometimes working with local non-governmental organizations and building group guarantees can also help, as investors may count on the farmer’s network as a potential support/soft collateral. Some investors may accept a sale contract and finance the farmers while being paid back directly by the buyers. Financial service providers are also starting to use data from mobile phone providers to gain insights on the credit worthiness of farmers. They may potentially extend financing without collaterals. The Aceli Africa organization is working to address these types of issues.
What do you mean by financial service providers (FSPs)? Do they include microfinance?
With FSPs, we mean all types of financial institutions, for-profit, not-for-profit, private, public, philanthropic, impact investors, banks, investment funds, etc. FSPs can also include microfinance institutions, but we generally do not address investments of that size. We are focused on the “missing middle” investments that are too big for microfinance and too small for commercial banks. It is also worth noting that the size of the missing middle can vary among countries, in the same way the average microfinance loan in the Democratic Republic of the Congo may differ from similar loans in Brazil.