Sustainable Value Chain Finance Workshop · Theainforest R Alliance and the Citi Foundation...

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RAINFOREST ALLIANCE AND THE CITI FOUNDATION > RAINFOREST ALLIANCE AND THE CITI FOUNDATION >

RAINFOREST ALLIANCE AND THE CITI FOUNDATION

Sustainable Value Chain Finance Workshop

April 20, 2011

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RAINFOREST ALLIANCE AND THE CITI FOUNDATION Sustainable Value Chain Finance Workshop

April 20, 2011

TABLE OF CONTENTS

Executive Summary

I. Problem Statement and Opportunity 4

II. Value Chain Finance Framework and Models . . . . . . . . . . . . . . . . . 6

i Diagram 1 — Value Chain Finance 6

ii Diagram 2 - Value Chain Analysis 7

iii Value Chain Business Models 8

1 Producer/Association Driven Model 8

2 Buyer or Lead Firm Driven Model 8

3 Facilitated Business Model 9

4 Integrated Value Chain Models 9

III. Enabling Conditions . . . . . . . . . . . 12

i Long-Term Investments 12

ii Risk Mitigation 14

iii Information and Information Management 16

iv Certification 17

v Capacity Building 19

vi Local Engagement 20

vii Other Areas of Focus 21

IV. Conclusion and Recommendations . . . 22

V. Appendix 1: Workshop Participant List . 24

VI. Appendix 2: Agricultural Value Chain Finance, Nicole Pasricha, MEDA . . 26

VII. Appendix 3: Why Inject Sustainability Incentives Into Supply Chain Finance? Tensie Whelan, The Rainforest Alliance . 26

“�Increasing�common�understanding�of�the�motivations�of�each�player�in�the�chain�will�be�critical�to�the�success�of�financing�that�increases�sustainable�practices.”

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|Executive SummaryThe Rainforest Alliance and the Citi Foundation Sustainable Value Chain Finance Workshop held on April 20, 2011, in New York City, brought together actors in agriculture value chains — representing buyers, exporters, retailers, producers, insurers, the financial sector, civil society and development partners.

Although individual participants had begun to discuss sustainabil-ity and value chain finance in their own work, this was the first time that a diverse group of stakeholders from different parts of the value chain had gathered to discuss the topic.

Value chain finance encompasses the financial flows among the players within a value chain as well as financial flows from outside actors directed at the value chain. In recent years, as value chains have become more closely integrated and more sophisticated, dozens of new forms of in-kind and cash financing have developed to assist actors to produce more and better quality products, particularly in the agriculture sector. This provides an opportu-nity to scale up sustainable agriculture and reduce risk in value chains, if financing mechanisms and incentives

could be applied to assist producers to adopt sustainable practices.

Currently, value chain actors such as buyers, exporters and producers are working together to implement sustainable management practices such as Rainforest Alliance certification across large volumes of commod-ity crops. Innovation in value chain financing could provide the ability for the chain to scale up these practices more quickly and more comprehensively.

The goal of the April Workshop was to understand the financial dynamics of the full value chain, offer a set of recommendations to the financial sector and value chain financiers on how to embed incentives for sustainable production into the financing of agricultural value chains, as well as to explore piloting sustainable value chain finance innovations.

During the Workshop, participants addressed the following questions:

• What is being done already in sustainable value chain finance that we can learn from?

• Which value chain finance instruments might lend themselves to incentivizing sustainability?

• How do we mainstream sustainable value chain finance?

• How do we pilot test injecting sustainability into new instru-ments in our value chains?

Workshop participants agreed that a variety of value chain finance instruments could be used to increase sustainable production, and that no one instrument could be applied alone or broadly to all chains. However, they concurred that the success of any financing initiative hinges upon a range of enabling conditions that have yet to be

sufficiently addressed by the value chain. In order for innova-tive financial tools to help increase sustainable production, efforts must first be made to create appropriate enabling conditions, including increasing long-term investment, rather than one-off or short-term finance alone; employing better risk mitigation tools; improving information systems; increasing the reach of certification and taking greater advantage of its benefits; building capacity by farmers to understand finance and financiers to understand agriculture; and increasing local engagement (e.g., local banks and governments). The group made specific recommendations around creating these enabling conditions and called for this follow-up report as well as another meeting to further develop joint projects and plans.

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The world’s agricultural system is in crisis. Global demand for food will increase 50% – 60% by 2030. An equivalent increase in conventional agricultural production — which is responsible for 70% of deforestation, 60% of the world’s freshwater use and is a significant contributor to greenhouse gas emissions — is not sustainable.

Conventional agricultural production is often characterized by the excessive use of expensive chemicals and poor waste management systems that degrade productive land and contribute to pollution. Workers frequently labor under unsafe and unhealthy conditions, and small producers often operate at a loss. Fortunately, more sustainable production practices are being adopted and demanded throughout the value chain. There is growing consensus that best practice in sustainability for farmers requires a comprehensive management system that protects water, biodiversity, forests and soil, reduces waste and pollution, improves working and living conditions for farm workers and their families and increases yield and quality — resulting in improved net farmer income to meet the needs of a growing population.

Increasingly, buyers and retailers such as Walmart, Unilever, Kraft and Mars are reducing risk in

their value chains by requiring that producers demonstrate compliance with best practice in sustainability through certifica-tion such as Rainforest Alliance certification. However, sustain-able practices such as those required by certification often require up-front and ongoing investments that small holders in particular may find difficult to finance.

Innovative value chain finance can allow the chain to scale up sustainable practices more quickly and more comprehensively. In recent years, as value chains have become more closely integrated and more sophisticated, dozens of new forms of in-kind and cash financing have developed to assist actors to produce more and better-quality products, particularly in the agriculture sector. This provides an opportunity to scale up sustainable agriculture in value chains, as financing mechanisms and incentives can be applied to assist producers in adopting sustainable practices.

I.� Problem�Statement�and�Opportunity

P R O B L E M S TAT E M E N T A N D O P P O RT U N I T Y

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Innovative�value�chain�finance�can�allow�the�chain�to�scale�up��sustainable�practices�more�quickly��and�more�comprehensively.

Innovative value chain financing for sustainability will require multistakeholder partnerships. International financial institu-tions are needed to inject targeted funding into the chain, while local financial service providers can reduce transaction costs through their ability to reach agricultural production areas. NGOs and development organizations can provide technical assistance. The commitment to purchase by key demand-side partners provides security for the investor and may provide a mechanism for loan recovery through a variety of financing arrangements. Certification systems not only help producers to adopt sustain-able practices, but also have the complementary benefits of establishing internal controls strengthening producer adminis-tration and improving perfor-mance in the market.

These dynamics and phenomena are true for nearly all commodi-ties in all regions. Cocoa in West Africa serves as a valuable example. Its value chain will not be able to function in the

future without multistakeholder intervention. Very few producer groups in the region have access to the range of services and institutions that would enable them to transact loans or credit. Because of this, cocoa trading companies have needed to fill the financing gap as part of their commercial relationship with producer associations. The recent growth of certification — as well as the escalating prices of cocoa and all commodities — has increased the quantity of financing needed by farmers from traders, hence increasing the risk that traders assume. As these risks continue to escalate, traders will not be willing or able to manage for them. In order to secure the success of the cocoa value chain in the future, other stakeholders must step in and relieve traders of some of this risk, work together to reduce risk overall and increase efficiencies through better business management and sustainable practices. This presents both challenges and opportunities.

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II.��Value�Chain�Finance�Framework�and�Models

The following discussion of value chain finance models is shaped largely by the book Agricultural Value Chain Finance: Tools and Lessons,1 by Calvin Miller (UN Food and Agriculture Organization) and Linda Jones (Aga Khan Development Network), and a presentation given at the Workshop by Nicole Pasricha, Director of Inclusive Rural Finance at MEDA with assistance from Linda Jones.

Much of the below content and diagrams come from Nicole’s presentation. Her complete presentation can be found as Appendix 3.

A value chain is the chain of activities and actors that transforms a product or service from an idea or a raw form to a product to reach a distinct market. For our purposes, value chain finance is defined as the financial services and credit that flow from one actor to another in the value chain or from financial institutions to value chain actors, usually related to the sales relationships between the actors.

Value chain finance can be depicted as at right in Diagram 1, where gray lines signify capital from sources external to the production chain, violet lines signify financial flows between actors in the chain and turquoise lines depict product flow.

DIAGRAM 1Value Chain Finance

Medium & Large Exporters & Buyers

Commercial Banks

Banks, SME Lenders, etc.

MFIs, NGO, Cooperatives

Local Traders & Processors

Cooperatives

Farmers

Input Suppliers

1http://www.amazon.com/Agricultural-Value-Chain-Finance-Lessons/dp/1853397024

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There are five main components to consider in value chain analysis, as depicted in Diagram 2. These are the involved markets; the actors directly providing inputs, producing and distributing the product; the relationships and embedded services between these actors; the financial, general and specialized services coming from sources external to the production and distribution chain; and the enabling environment, including tax and trade policies and regulations.

There is a wide spectrum of possible relationships between buyers and sellers in the value chain. Ranging from the less to more formal, these include spot market relationships, informal agreements, formal agreements, relationship-based partnerships, capital investment- based partnerships and vertical integration.

VA L U E C H A I N F I N A N C E F R A M E W O R K A N D M O D E L S

DIAGRAM 2Value Chain Analysis Framework:

5 Main Components

Enabling environment

Producers

Input Suppliers

Wholesalers

Retailers

• Tax and trade • Political/regulatory • Economic

Markets: export, local

GeneralServices

SpecializedServices

FinancialServices

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VALUE CHAIN BUSINESS MODELS

Value chain business models fall under four categories. These are the Producer Driven Model, the Buyer/Lead Firm Driven Model, the Facilitated Model and the Integrated Model, and are depicted below.

1) PRODUCER/ASSOCIATION DRIVEN MODEL:

Producer/Association Model: Example of direct finance and producer association repayment

Finance

Finance

Finance

Grower

Grower

Grower

Repayment of loans on behalf of farmer

Producer Association

Banks/FinancialInstitutions

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2) BUYER OR LEAD FIRM DRIVEN MODEL*:

Lead Firm Model: Example, buyer borrows money, finances chain

Fina

nce

Buyers

Banks/FinancialInstitutions

Prod

ucti

on

Flow of finance

Flow of products

Processors/Aggregators

Grower Grower Grower Grower

*There is also an Alternative Lead Firm Model (not shown here) with direct finance from Banks/financial institutions to growers.


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VALUE CHAIN FINANCE INSTRUMENTS

Value chain finance instruments can be categorized as those that are agricultural product based, accounts receivable based, physical asset based, risk mitigation instruments and financial enhancements.

Agricultural product-based financing is financing tied to the eventual sale/purchase of an agriculture product. Forms of this financing include trader credit, input supplier credit, marketing company credit and lead firm financing.

Accounts receivable-based financing is based on a receivable such as an invoice. Forms include trade receivables finance, factor-ing and forfeiting.

Physical asset-based financing uses assets, such as a commodity, as a guarantee. Forms include warehouse receipts, financial leasing (lease-purchase) and repurchase agreements.

Risk mitigation financial instruments aim to lower risk. Forms include insurance, forward contracts and futures.

Finally, financial enhancements are financial contracts that spread risk among several parties. Forms include securitization instruments, loan guarantees and joint venture finance.

ADDITIONAL TOOLS AND COMMENTS BY WORKSHOP PLENARY

These instruments, definitions and categorizations were reviewed at Workshop. In addition to the instruments above, Workshop participants named other financial tools and approaches to be considered for successful sustainable value chain finance. These included:

• Distribution finance: In distribution finance, a financial institution, such as a large international bank, acts as a middle man between a buyer and producer, creating a longer payment period for the buyer (they are able to pay later), and a shorter payment period for the producer (they get paid earlier). Companies and banks can extend longer credit terms for producers that show better performance, and they could also do this for certified sustain-able producers.


3) FACILITATED BUSINESS MODEL:

Faciliated BIZ Model

GroupGroup Group

BuyerBanks/FinancialInstitutions

Finance

Market

Quality

Production

Farmers FarmersFarmers

NGO/Gov’tFacilitator

4) INTEGRATED VALUE CHAIN MODELS

Integrated Value Chain Models can take two forms. The first is integra-tion within the value chain, with linkages between value chain actors. Examples would be those chains supplying supermarkets and horticul-ture value chains. The second type is an integrated agricultural services model led by large NGOs or financial conglomerates.

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• Supplier finance: In this case, a bank arbitrages the credit cost between a large buyer and their tier-one supplier. This is a product that allows for producers to be paid earlier than usual.

• Timely working capital: Organizations like Root Capital focus on providing working capital to producers with sustainable practices in place, and this approach has shown a high degree of success. Providing working capital is simple but critical to the success of agricultural value chains in that it prevents farmers from needing to side-sell crops. (When a farmer side-sells a crop, the farmer harvests and sells the crop before it is fully mature, meaning that they often harvest a smaller crop, and receive a lower market payment.)

• Loan reliability systems: Improved loan reliability could allow producers to receive additional funds.

• Value chain finance integration with microfinance: Microfinance institutions could provide

financing to small farmers as part of their normal loan portfolio, but with preferential rates to reflect the market demand and support for sustainability and lower risk.

• Long-term financing: Farmers often need three years or more of investment to improve sustainability, quality and yields. A one-time, one-year loan is not sufficient.

• Interest rates tied to conser-vation outcomes: Interest rates can be directly tied to conservation outcomes. For example, an increase in the population of an endangered species could directly lower the rate of a loan received by the relevant producer.

• Savings from sustainability as collateral: Savings from sustainability practices can be used as collateral in project financing. Because sustainability practices frequently yield cost efficiencies, the resulting savings or additional revenues (from increased energy efficiency, for example) can provide capital.


• Credit from input suppliers: There is more immediate incentive for local players, such as input suppliers, to provide credit.

• Special purpose vehicles (SPVs): Special purpose vehicles, which prevent the commingling of assets, can be formed specifically to manage investments in sustainability in agricultural value chains. SPVs may make such an investment more attractive to potential donors, because they guarantee that funds will be isolated and

dedicated to the specified purpose. Following the review of value chain finance instru-ments, participants also gave general feedback on issues related to the success of financing that increases sustain-able production. Participants discussed the following:

We need to be aware of other (nonfinancing) needs on the ground Because there are other immediate roadblocks to the success of sustainable production beyond lack of financing (such as market accessibility), more

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Close�working�relationships�with�buyers�will�aid�in�the�success�of�any�new�initiatives.�

in-depth, on-ground needs assessments are necessary to avoid beginning misdirected initiatives.

Trust is currently lacking, and must be built Lack of trust due to historical reasons such as interest rates, miscommunication and lack of education is an important issue within the chain — from farmers to banks and vice versa. NGOs with local relation-ships can play a role helping to build trust between financial institutions and producers.

Short-term and long-term finance and structures Both short-term and long-term finance are needed in tandem. There should also be two structures for risk-sharing among small holders: one for the short term and one for the long term.

Irreversibility and inheritance of poverty Value chain actors need to be responsive to the fact that farmers are susceptible to irreversibility. One bad crop year has an irreversible effect on their

children, through loss of nutrition and education. When families can sustain education and nutrition, then we can begin to mitigate the passing down of poverty.

Local banks are frequently inefficient and infrequently lending Should NGOs and international financial institutions work with these banks or work directly with the producing enterprise? Should they invest in changing the behavior of local banks?

Relationships with buyers are critical Close working relation-ships with buyers will aid in the success of any new initiatives.

Risk is two-way and must be considered from the producer perspective Risk needs to be considered from the farmer perspective as well as from the perspective of involved finance suppliers. Risk, such as that of drought, has a strong effect on farmer behavior, and this needs to be incorporated into financing plans.

Where to invest in the value chain? Some workshop partici-pants expressed an interest in investing directly with farmers, rather than traders or others further up in the chain, saying that those further removed from the problem will be less concerned with the success of investments in sustainability. Others in the group said that international players – who have a long-term view – are the better investment. Financing could also be inserted at the level of broader, public-private partnerships, rather than at that of individual players in the chain.

Work with tools that are already in place Product financ-ing instruments are currently in the market and working. Some participants recommend focusing on these tools, while shoring up enabling conditions.

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III.� Enabling�Conditions

Workshop participants agreed that a variety of value chain finance instruments could be used to increase sustainable produc-tion, and that no one instrument could be applied alone or broadly to all chains.

It was determined that for such financial tools to succeed, efforts must be made to create supportive enabling conditions, and these enabling conditions became the workshop’s primary focus.

A series of interventions for improving enabling conditions emerged, but most centered around 1) long-term investment, rather than one-off or short-term finance alone; 2) risk mitigation efforts; 3) improved information systems; 4) certification; 5) capacity building; and 6) increased local engagement.

The group agreed that rather than focusing on certain stakeholders or project areas, these enabling condition recommendations are about improving capacity and understanding at all levels throughout the entire value chain. There is clear overlap in the content of these categories: for example, capacity building, certification and improved information systems all have elements of risk mitigation. The groupings as presented here are based on those defined by workshop participants.

LONG-TERM INVESTMENTS

Long-term investment and contract commitments, used in conjunction with short-term value chain finance and project finance, are critical for the success of new financing initiatives encouraging sustainability. There are necessary up-front costs to producers making changes to sustainable practices, such as those related to new water systems and improved worker housing facilities. In the short term, farmers need capital to make these changes, and in the long term, producers need to be able to pay for the upkeep of facilities and make necessary improvements to keep pace with advancing sustainability requirements. Farmers are also far less likely to make investments in sustainability if they do not yet know if their crop will have a buyer two or three years down the road. Long-term financing arrangements can help producers

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E N A B L I N G C O N D I T I O N S

continue to comply with sustain-ability requirements and can also provide the necessary security in future income allowing a farmer to make such investments.

Forward contracts are one possible way of making longer-term investments in sustainable production. A forward contract is one between two parties to buy or sell an asset at a decided future date and set price. In the case of agricultural value chains, the buyer, agreeing to purchase the crop at a future time at a price decided upon today, will benefit if the trading value of that crop goes up in the time period between the contract and the sale. The seller, in this case the producer or co-op, will benefit from the existence of the forward contract if the trading value of the crop goes down in the interim and will also benefit simply through the guarantee of a buyer.

In general, long-term contracts can guarantee purchase or off-take and revenue for a producer investing in sustainabil-ity. An off-take agreement is a type of forward contract in which

the buyer agrees to purchase only a portion of the crop, and it could also be useful in sustain-able value chains.

Land leasing is another long-term investment tool that can be used to increase sustain-able production. Land leasing arrangements vary widely – from small-scale sharecropping to more formally structured large agricultural tenancies – but are always defined by a distinction between ownership and use of the land. Sharecropping and small-scale tenancies are most common in the developing world. For local farmers without sufficient means to purchase land, leasing from a land owner for a fraction of the price of purchase, or for a portion of the harvest, can provide critical income and contribute to food security. It should be noted that land leasing is a relationship highly dependent on trust, which can be increased as discussed later through local partnerships and two-way education.2

Large land owners can use leasing to increase sustainability by requiring tenants to follow

defined sustainable practices. Land leasing could also be used to allow companies, NGOs or other groups to temporarily hold and manage producer land. During that time period, entities with the necessary technical skills, funding and capacity could bring about necessary invest-ments and conversions to sustainable practices or the expansion of sustainable practices to scale. Separately, equipment can also be leased to small holders, allowing for greater yields, leading to time and capital available for invest-ment in sustainable practices.

Workshop participants stressed the importance of professional-izing the long-term loan process in agricultural value chain finance. Clearly defined equitable terms will help to build trust, reduce risk and contribute to the success of any financing initiatives. Workshop participants also underlined that long-term investments are critical to the success of infrastructure developments that enable chain functioning.

In�general,�long-term�contracts��can�guarantee�purchase�or�off-take�and�revenue�for��a�producer�investing�in�sustainability.

2 ftp://ftp.fao.org/docrep/fao/007/y5513e/y5513e00.pdf, http://www.fao.org/DOCREP/004/Y2560E/y2560e03.htm#bm3.2.1

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RISK MITIGATION

In financing small holders, SMEs and co-ops, international financial institutions and local banks take on the risk that producers may default or become insolvent for any reason, ranging from crop failure due to weather events, pests, disease and local political unrest, to business mismanagement. In receiving financing, producers also take on the risk that they may default or become insolvent, and in their case any recourse for default or insolvency would compound the direct results of crop or business failure, such as lack of needed income and food. Further, agricultural commodities are subject to high price volatility, placing increased risk on both parties.

In order for value chain finance initiatives encouraging sustain-ability to take root, risk as perceived by financiers and producers must be addressed. This may take the form of mitigation through better business practices, more equitable sharing of risk through-out the value chain, improved

information systems related to risk or new approaches to insuring agricultural crops in the developing world. The success of many of these are linked to information and information management, which was covered in a subsequent section.

RISK MITIGATION THROUGH SUSTAINABLE PRACTICES

Increased sustainable practices, such as those mandated by certification, reduce risk by minimizing harmful effects of weather events, limiting land degradation, reducing costs and increasing crop yields. Certification also mitigates risk by requiring better business systems. An international export insurer confirms that because certifica-tion includes processes for counting and tracking agricul-tural products, it leads to less theft and less insurance risk overall. Leveraging the benefits of formal investments in sustain-ability, such as improved or new metrics demonstrating sound farm management and produc-tion practices, is one way to reduce risk and encourage


Increased�sustainable�practices,�such�as�those�mandated�by�certification,�reduce�risk�by�minimizing�harmful�effects��of�weather�events,�limiting�land�degradation,�reducing�costs�and�increasing�crop�yields.

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investment. Extending the time horizon of insurance and risk assessments will also highlight the link between sustainability practices in a given year and higher outputs over the long term. Monetizing the risk reduction achieved through certification would also provide a strong push for value chain finance investments linked to sustainable practices.

RISK SHARING

As producers currently bear the most risk, some risk must be transferred and shared by others in the chain. This can be done in a variety of ways. Loans can be guaranteed by those parties in a position to do so. As described above, a system can be developed wherein buyers take first loss in the case of crop failure. Risk-sharing facilities (loan contracts), which define risk per party, can also be created. Through such facilities, other actors in the chain could take on some of the risk usually held by farmers, traders or others. As an example, GIZ (formerly GTZ) found success working with a risk-sharing facility in the form of a guaranteed risk fund in Kenya,

which shared the risk of default-ing small enterprises between a bank and a GIZ project.

Risk sharing can take on many forms, and can sometimes provide a stepwise path to a full risk transfer. The “Sustainable Agriculture Guarantee Fund” at Rabobank provides a guarantee to local banks in an emerging market if they lend to an identi-fied sustainable agriculture SME. Each year, over three to four years, the SAGF reduces the percentage guarantee, such that the local banks ultimately become comfortable financing the sector.

Workshop participants also recommended a focus on financial enhancement instru-ments in financing; financial contracts that spread risk among several parties, including securiti-zation instruments, loan guaran-tees and joint venture finance.

Given that sustainable practices are necessary to increase supply sufficiently to match future demand, it is in the buyer’s best interest to invest. Large buyers are better able to withstand some losses by small-holder producers than NGOs, better

suited than development-minded international financial institutions and less hesitant than local banks.

BETTER RISK INFORMATION

Workshop participants recommended that risk tracking and assessment methodology be applied at all levels of the value chain. They discussed the need for better information systems related to risk based on local and regional considerations (weather, social, political); past perfor-mance of producers and traders; and other factors, such as climate change-related risks. This information could be compiled in a third-party managed registry or rating system that would communicate credibility to financiers. A similar registry could be compiled including past performance information on traders and local banks. This would communicate reliability to international financial institu-tions, NGOs, market-facing companies and more. Rating systems could and should also be applied to particular products and/or commodities. Participants noted that risk assessments should be carried out by those


Given�that�sustainable�practices�are�necessary�to�increase�supply�sufficiently�to�match�future�demand,��it�is�in�the�buyer’s�best�interest�to�invest.�

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with some vested interest in the success of financing. NGOs working in certification may be qualified to take on this role.

IMPROVED INSURANCE

Workshop participants strongly recommended providing insurance that more directly benefits farmers. As one example, IFC, through the Global Index Insurance Facility (GIIF), is working to encourage the uptake of index insurance, which better accounts for the natural conditions and events particular to agricultural production than does traditional insurance. It does this by covering the potential events causing crop failure, instead of to a particular property (traditionally land or crop). This insurance pays out after quantifi-able risk events – for example, a certain number of days without rain, which could damage a crop – rather than at the time of crop failure.3 The GIIF is currently working to increase access to index insurance through techni-cal assistance, data gathering, risk pooling and co-financing.4

More information on this initiative can be found here: http://www ifc org/ifcext/gfm nsf/Content/Insurance-GIIF.

INCOME SMOOTHING

Systems should be developed to help producers save and smooth their income. Increased savings can also come from financial education (discussed under Capacity Building) and certification.

FUTURE RESEARCH

Further energy should also go to researching specific dependen-cies on specific commodities and the macro risks involved in such dependencies. This information would strengthen value chain finance in these commodities and would benefit financing initiatives aimed at increasing sustainability.

INFORMATION AND INFORMATION MANAGEMENT

In addition to the need for risk-tracking assessment method-ology, there is a strong need for more studies on the social, environmental and economic


impacts of sustainable practices (verses non-sustainable ones), tracking and information sharing. These metrics should be used as incentives for financing, and built into an accessible business case for sustainability in the value chain. To enable or improve the lending environment, workshop participants also recommended information related to country regulations, including warehouse laws; a confidential risk registry (with limited access and penalties for abuse); improved, streamlined record-keeping systems; and systems for tracking titles to land.

As the lending environment improves, it is imperative to quantify the benefits of sustain-

able practices and share this information effectively. Quantifying and communicating the increased yields, reduced costs, reduced risks and lower pricing (when applicable) of certified sustainable practices will be key to any sustainable value chain finance initiative. The monetization of metrics demonstrating the benefits of certification, and the monetiza-tion of metrics demonstrating other efficiencies and risk reduction, may be key to increased financing.

As more actors get involved in sustainable value chain finance initiatives, risk sharing and scalability become the next

3http://www.proventionconsortium.org/themes/default/pdfs/GIIF_overview_Feb06.pdf4http://siteresources.worldbank.org/INTARD/Resources/Managing_Ag_Risk_FINAL.pdf

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challenges. Scalability will take increased capital inputs, but also improved and streamlined information systems. Record-keeping systems for producers related to business practices and certification should be standard-ized, as could loan documents, and potentially those documents and systems used in data collec-tion and tracking by certification groups. Input provider and shipping information should also be tracked in the same or similar systems, and those systems relevant to producers should be accessible by mobile device.

A social responsibility rating system incorporating sustainability criteria could highlight producers to receive better interest rates.

As a final result, such improved information systems should help actors in the chain to determine their individual strategies, benefit the functioning of the chain as a whole and encourage sustainable production.

CERTIFICATION

Certification is a means to credibly document that a change

toward sustainability has taken place. The costs involved in making the necessary up-front investments in environmental, social and economic sustainability are high from the perspective of small holders and SMEs. These costs are followed by that of certification itself, and later, there will be costs associated with maintaining certification and making further improvements. Much funding for these expenses currently comes from the public sector and philanthropic sources, but in order to apply sustainabil-ity at scale, more private financ-ing is needed. Investments in the value chain must come from value chain actors themselves.

At the same time, private companies are acknowledging that sustainability certification will soon become the cost of doing business in agricultural value chains. Interested parties need to work together to determine how to bring certifica-tion to scale and how to incorpo-rate sustainability requirements from the beginning of any trade or project financing.

For for-profit companies, there are significant benefits to investments in sustainability, but proponents of certification currently fall short in presenting a clear business case. Rainforest Alliance certification has been shown to significantly increase yields and reduce costs, and where this has been tracked and demonstrated, banks and businesses have increased their loans and commitments. In El Salvador, where Rainforest Alliance-certified coffee farms have increased yields by an average of 76% (versus 22% in a control group) and where farmers have been shown to earn an additional $321 per hectare due to increased yields and premiums, Salvadoran banks have responded by lending an extra $10 per bag of Rainforest Alliance-certified coffee for the two-month harvest. In this example, certification invest-ments cost producers around $70 per hectare, and donors paid around $53 per hectare to provide technical assistance.

At�the�same��time,�private�companies�are�acknowledging�that�sustainability�certification��will�soon�become��the�cost�of�doing�business�in��agricultural��value�chains.�

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Cases such as this must be used to develop a business model or framework to demonstrate the returns on investments in sustain-ability and certification. This framework may vary from country to country and value chain to value chain, but should include information related to increased yields; increased crop quality; reduced costs; and reduced risk, including the lower risk of crop failure in the case of some adverse weather, lower risk of stolen or lost crops, and reduced reputational risk. A business case for sustainability must also demonstrate the long-term necessity of sustainable practices: Land degradation is a business concern and cannot be relegated as an issue for environ-mentalists. Further, as in the case of El Salvadoran coffee, this model should show that invest-ments in sustainable practices can lead to increased financing of agricultural value chains.

In order to best present this case, it is critical to design the measurement of sustainable value chain finance impacts.

Positive impacts must then be leveraged for increased involvement. This leverage may come through effective communication of the business case or monetization of the benefits of certification. In addition to cost-benefit and impact analyses, there could also be a standardized system for rating how well investments in certification perform.

Where investments in sustainabil-ity are already being made, the savings or additional revenues due to certification can be used as collateral on loans. Sustainable practices frequently yield cost efficiencies, and the resulting savings or additional revenues (from increased energy efficiency, for example) can provide capital. In using this approach, IFC has found that there is a challenge in making sure these resulting savings are used as collateral. One option is to engage large companies and ask them to provide incentives. At other times governments can provide these.

Producers can be encouraged to switch to sustainable practices through business cases tailored to their perspective or by banks or financial institutions offering improved loan rates for certified farms. Interest rates can also be tied directly to conservation outcomes, but this creates a complex monitoring and evaluation need that may not always be able to be implemented.

Workshop participants recommended that a group be formed to work on the business model/framework for sustainable value chain finance and, following that, to convince banks, financial institutions and others to lend the costs of certification or to support or incentivize sustainable practices.

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CAPACITY BUILDING

The success of innovative value chain financing depends primarily on the decisions of involved producers and finance suppliers. These decisions will hinge on the financial and agricultural knowledge of these actors, the information and communication opportunities available to them and their technical capacity (skills).

Currently, partially due to lack of financial literacy, producer demand for finance is frequently very low. Farmers are wary of loans, at the same time that banks are hesitant to provide funds. Increasing local financial literacy would increase the demand for and acceptance of ready financing.

A recent IFC project involving Nespresso, Ecom and the Rainforest Alliance underlines this problem. In this case, the buying company (Nespresso) is driving demand for sustainable coffee, which leads the trader (Ecom) to take up a loan with a develop-ment bank/donor (IFC) to provide credit to the involved coffee

farmers for the purpose of sustainability improvements and certification. In this instance the Rainforest Alliance participates by providing technical assistance. However, producers have shown little interest in the available loans. Without producer uptake, such an initiative simply can’t move forward.

Work is also needed to increase the business acumen at the level of co-ops or small enterprises for more efficient functioning. With these improvements, the risk reduction inherent in more efficient business practices could be monetized. In some cases, buying companies, financing institutions or intermediary organizations may need to make business practice education a contract requirement.

Root Capital’s Financial Advisory Services program (FAS) is currently working to increase producer financial capacity by designing, testing and packaging training materials for would-be borrowers, as well as providing business management guidance and technical assistance. Root

Capital works to document and disseminate lessons learned and efforts to increase financial literacy, business acumen and access to technical assistance should take advantage of this resource.

While financial and business education is needed for produc-ers, co-ops and small enterprises, financial institutions and private sector buyers need education in sustainable agriculture. There is currently a premium in the price of agricultural trade finance due to a lack of understanding of on-the-ground processes. Larger institutions can and should invest in agricultural specialists to inform these investments. Additionally, workshop participants recommend holding a conference to build agricultural knowledge and awareness in financial institu-tions. Corporations that have already engaged in the sustain-able finance dialogue, such Nestlé, Unilever and Kraft, have an opportunity to share what they have learned with other buyers, financial institutions, and less-knowledgeable corporations.

Increasing�local�financial�literacy�would�increase�the�demand�for�and�acceptance�of�ready�financing.�

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Trust between farmer and lender, and lender and farmer, is currently a huge challenge in agricultural value chains. Increasing common understanding of the motivations and scope of work of each player in the chain will be critical to the success of financing that increases sustainable practices.

Financing success and chain functioning will also be bettered through improved communication among chain actors and increased access to information. Mobile technologies, primarily cell phones, which are cheap and accessible to producers, can be used not only to increase communication with farmers and but also to streamline business procedures. As an example, Farmers in Kenya working on a GIZ project have used cell phones to transfer money to savings and operational accounts. Additionally, mobile technology can be used to access unified educational and training tools and information-sharing hubs.

Capacity building itself of course necessitates financing, and small philanthropic amounts will not be sufficient. Structures should be explored through which savings from increased efficiencies in the chain are used to involve more players in education and technical assistance efforts.

LOCAL ENGAGEMENT

Although increased local engagement was not selected by the group for further in-depth

discussion on the day of the Workshop, it is critical in the success of sustainable value chain finance. Efforts toward sustainability fail if a value chain is secured in which the needs of only elite markets are addressed and if the benefits (production profits and high-quality goods) are not distributed across the chain. Value chain finance needs to be expanded to agricultural value chains relevant to local regional markets – not limited to export markets – and sustainability should be integrated from the start. The sustainability and self-sufficiency of local and regional commodities is integral to international food security and cannot be overlooked.

Local banks and traders, who are closer in the chain to production than international financial institutions and NGOs and thus have an increased interest in the financial viability and overall sustainability of both export and regional chains, must play a key role in new financing initiatives. Groups like IFC’s Financial Markets Sustainability division are working to assist local financial institutions to provide the preexport financing needed to help producers meeting purchasers’ eligibility requirements related to environmental, social and economic sustainability.5 Involving local financial institutions in this way reduces transaction costs because they are able to physically reach agricultural production areas. Local F.I. involvement also increases local revenue and builds self-sufficiency in the value chain.

5 http://www.ifc.org/ifcext/gfm.nsf/AttachmentsByTitle/FMS-EO-Supplychain/$FILE/FMS-EO-Supplychain.pdf

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Banco Ganadero in Santa Cruz, Bolivia, is an example of a local bank taking a leading role in value chain finance. Banco Ganadero currently provides critical financing to processors and exporters in the bean and sesame industry which is composed primarily (95%) of farmers with very small holdings. These farmers receive important preharvest and input supply financing from processors and exporters who themselves receive financing from Banco Ganadero. These processors and exporters have formed an association called CABEXSE. As the companies that make up CABEXSE all have similar

financing needs and require-ments, as the bank becomes familiar with one or more of these companies and adapts its services accordingly, it is able to broaden its offerings to others in the association. As a result of this system, a significant percentage of the bean and sesame industry in Bolivia is financed with local bank funds. Local warehouse inspection companies are also an important part of the equation, as warehouse receipt financing often represents 60% of exporter and processor cash flow needs. Commissions and fees are adequate enough that exporters and processors use local warehouse inspectors frequently.

OTHER AREAS OF FOCUS:

Other areas mentioned for future investigation during the workshop, but not discussed at length, included:

• Subsidies to Develop Self-financing: Outside capital can be used in the form of short-term subsidies to help develop sustainable sources of producer self-financing.

• Financial Institution Demand for Sustainability: Financial institutions can encourage sustainable agricultural practices by making them a prerequisite in funding considerations, or by requiring producers to increase sustainability as a necessary term of the loan.

• Tax Incentives and Governmental Policies: Local, regional and national taxes can be structured to benefit local financial institutions lending to farmers producing sustainably, to directly benefit those producers who employ responsible practices, or to incentivize foreign investment in sustainable agricultural value chains. There are also potential governmental policies not related to taxes that could increase financing, such as loan guarantee programs for financing of sustainable farms.

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IV.� Conclusion�and�RecommendationsIn summary, the workshop group observed that this was the first time a wide group of stakeholders from different parts of the value chain had gathered to discuss sustainability and value chain finance, although individual groups and actors had been beginning to experiment and discuss these ideas.

The consensus of the group was that it was the right time for the design of new ways to scale up sustainability in the agricultural sector through innovative value chain financing mechanisms.

The group focused on a series of interventions for creating enabling conditions necessary for success: 1) long-term investment, rather than one-off or short-term finance alone; 2) risk mitigation; 3) improved information systems; 4) certification; 5) capacity building; and 6) increased local engagement. The group suggested further development and specific recommendations for all these areas.

For long-term investment, participants stressed the importance of professionalizing the long-term loan process in agricultural value chain finance. Clearly defined equitable terms will help to build trust, reduce risk and contribute to the success of any financing initiatives.

Participants also suggested several financial investment models that would give farmers the capital to make investments in more sustain-able practices, such as forward contracts, where the buyer agrees to purchase the crop at a future time at a price decided upon today, off-take agreements, where the buyer agrees to purchase only a portion of the crop, and land leasing.

Regarding risk mitigation, participants agreed that in order for value chain finance initiatives encouraging sustainability to take root, risk as perceived by financiers and producers must be addressed. This may take the form of mitigation through better business practices, more equitable sharing of risk throughout the value chain, improved information systems related to risk and/or new approaches to insuring agricultural crops in the developing world.

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C O N C L U S I O N S A N D R E C O M M E N D AT I O N S

“�As�the�lending�environment�improves,�it�is�imperative�to�quantify�the�benefits�of�sustainable�practices�and�share�this�information�effectively.”

Participants also recommended a focus on financial enhancement instruments in financing; financial contracts that spread risk among several parties, including securitization instruments, loan guarantees and joint venture finance, and that risk tracking and assessment methodology be applied at all levels of the value chain. They discussed the need for better information systems related to risk based on local and regional considerations (weather, social, political); past performance of producers and traders; and other factors, such as climate change-related risks. Lastly, participants strongly recommended providing insurance that more directly benefits farmers, and creating education and systems to help producers save and smooth their income.

On improved information systems, participants agreed that there is a strong need for more studies on the social, environmental and economic impacts of sustainable practices (verses non-sustainable ones), tracking and information sharing. These metrics should be used as incentives for financing, and built into an accessible business case for sustain-ability in the value chain. As the lending environ-ment improves, it is imperative to quantify the benefits of sustainable practices and share this information effectively.

In terms of certification, participants recommended that a group be formed to work on the business model/framework for sustainable value chain finance and, following that, to convince banks, financial institutions and others to lend the costs of certification or to support or incentivize sustain-able practices.

Concerning capacity building, Workshop participants suggested holding a conference to build agricultural knowledge and awareness in financial institutions. Corporations that have already engaged in a sustainable finance dialogue, such Nestlé, Unilever and Kraft, would have an opportunity to share what they have learned with other buyers, financial institutions and other private sector partners.

Although no specific recommendations were made to increase local engagement, all workshop participants agreed that efforts toward sustainability fail if a value chain only addresses the needs of elite markets and if the benefits (production profits and high-quality goods) are not distributed across the chain. Value chain finance needs to be expanded to agricultural value chains relevant to local regional markets – not limited to export markets – and sustainability should be integrated from the start.

Overall, the workshop underscored that rather than focusing on certain stakeholders or project areas, improved capacity and understanding is needed throughout the value chain. The participants concluded that the workshop was very successful in initiating dialogue and partnerships among the diverse value chain players.


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|Appendix 1: Workshop Participant List

TOTAL CORE PARTICIPANTS:

Non-RA, Non-Citi Participants:

1. Shari Berenbach, Director, Microenterprise Development Office USAID

2. Thomas Carrol – Partner, Agriculture Practice Co-Leader, Dalberg

3. Michael Carter – Professor of Agricultural and Resource Economics UC Davis

4. Christina Conrad – Interim Risk Manager Calvert Foundation

5. Eva Csaky – Senior Sustainability Finance Specialist at IFC

6. Alejandro Escobar – Investment and Project Officer, MIF, IDB

7. Diego Flaiban – Financial Institutions Officer, Financial Markets Division in the Structured and Corporate Finance Department (SCF) IDB

8. Willy Foote – Founder and CEO, Root Capital

9. Robert Fries – Technical Managing Directors, Financial Services, ACDI-VOCA

10. Andrew Halle – CEO, ECOM

11. Neel Inamdar – Fund Manager at Verde Ventures, Conservation International Verde Ventures

12. Koert Jansen, Fund Manager, Triodos

13. Bernard Kilian, Research Manager and Associate Professor at INCAE. CIMS-L.A.

14. Eberhard Krain, Advisor, Agricultural and Forestry Standards GIZ

15. Joshua Levin, Senior Program Officer, WWF

16. John Magnay – OI

17. Miguel Martins – Sustainability Specialist, IFC

18. John McArthur – CEO, Millennium Promise

19. David McLaughlin, Vice President of Agriculture, WWF

20. Bruce McNamer, President and CEO, Technoserve

21. Ruth Moloney – President, Armajaro Trading

22. Craig Moss, Director of Corporate Programs and Training SAI

23. Nicole Pasricha, Director of Inclusive Rural Finance MEDA

24. Noemi Perez, Executive Director of FAST

25. Steven J. Puig – Vice President for the Private Sector and Non-Sovereign Guaranteed Operations

26. Ted Rekerdres – CEO, Rekerdres and Sons

27. Beth Sauerhaft – Senior Manager of Environmental Stewardship for Pepsico

28. Carsten Schmitz-Hoffman, GIZ (formerly GTZ) Senior Project Manager, Agricultural Products

29. Ken Shwedel – Head of Food and Agribusiness Research Mexico, Argentina and Chile, Rabobank International

30. Priyamvada Singh – Global Trade Finance, East Asia and Pacific Regional Head, IFC

31. David Stern – Finance Director, Kraft

32. Mitchell Strauss – Special Advisor SME Finance & Director of Credit Policy, OPIC

33. George Theuri – Unilever

34. Javier Warman – Associate General Director of Strategic Planning and Sectorial Analysis, Financiera Rural

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|Appendix 1: Workshop Participant List (cont.)

Additional Observers:

1) Edwin Ou – Program Officer, Skoll Foundation

Rainforest Alliance Participants:

1) Tensie Whelan – President

2) Sabrina Vigilante – Director of Sustainable Value Chains

3) Leif Pedersen – Senior, Sustainable Coffee Program

4) Katie Ryder – Associate

CITI PARTICIPANTS:

Core

1) Bob Annibale – Global Director, Microfinance and Community Development

2) Marjolaine Chaintreau – Assistant Vice President, Microfinance

3) Moses Choi – Market Manager, Sustainability, Global Transaction Services

4) Valentino Gallo – Global Head, Export and Agency Finance, Global Transaction Services

5) Roland Hartley – Head, North America Trade Sales, Global Transaction Services

6) Courtney Lowrance – Director, Environmental and Social Risk Management

7) Graham Macmillan – Senior Program Officer, Citi Foundation

8) Katy Mixter – Associate, Corporate Sustainability

9) Jorge Rubio Nava – Director, Microfinance

10) Carlos Parra – Head of Community Development, LATAM

11) Bruce Schlein – Director, Corporate Sustainability

Periphery/dial-in

1) Timicka Anderson – Vice President, Global Banking

2) Robert Constantino – Associate, Export and Agency Finance, Global Transaction Services

3) Bob Kane – Managing Director, Global Banking/Global Consumer Banking

4) Harrison Levy – Analyst, Export and Agency Finance, Global Transaction Services

5) James Mahn – Director, Global Transaction Services

6) Brandee McHale – Chief Operating Officer, Citi Foundation

7) Jeff Miller – Managing Director, Global Transaction Services

8) John Ramirez – Vice President, Global Transaction Services

9) Steve Srinivasan – Associate, Trade Sales, Global Transaction Services

10) Craig Weeks – Global Head, Trade Sales, Global Transaction Services

● PRINT TOC CLOSE < RAINFOREST ALLIANCE AND THE CITI FOUNDATION 26

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|Appendix 2

AGRICULTURAL VALUE CHAIN FINANCENicole Pasricha, MEDA

http://www rainforest-alliance org/svcf2011

|Appendix 3

WHY INJECT SUSTAINABILITY INCENTIVES INTO SUPPLY CHAIN FINANCE?Tensie Whelan, The Rainforest Alliance

http://www rainforest-alliance org/svcf2011

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