Good Practice, Better Finance - Improving access to finance for sustainable producers

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The challenge
How the finance sector views risk
The solution
Developing new methodologies
An innovative approach
How ISEAL members can become involved

Introduction

About the project

Project title: Good practice, better finance: Enabling access to preferential finance terms as an incentive for improving sustainability performance in the agricultural sector

Lead organisation: Bonsucro

Partners: SRK Consulting, Cotton SA, AWS, WWF South Africa, Nedbank

Duration: May 2019 - May 2021

The challenge

It takes more than dedication for farmers to adopt responsible practices; they need capital to buy new equipment, boost productivity, and make other changes that will allow them to meet credible sustainability guidelines and practices. While financial institutions are increasingly investing in agricultural businesses that commit to sustainability, they categorize farmers, and particularly smallholders, as high risk because they often lack credit history and collateral.

Complying with certification standards is not an ironclad guarantee of higher prices or better market access. When this fact is coupled with the costs associated with compliance, it’s easy to understand how a farmer’s profit margin can be further eroded by unfavorable loans or credit terms, sinking them into debt. In the absence of suitable financial support, smallholders are often left with little incentive or means to invest in sustainability.

How the finance sector views risk

The disconnect stems from the way that financial institutions currently evaluate risk associated with these types of investments. When carrying out their due diligence on potential clients, they rely on the Equator Principles (EP) and the Environmental and Social Performance Standards of the International Finance Corporation (IFC). While these standards underscore the importance of assessing impacts and managing environmental and social performance, they focus on the big picture and overlook improvements at the farm or commodity-chain level. They further lack commodity-specific guidance and targets, resulting in inconsistent interpretation. Ultimately, implementation is left to the discretion of individual financial institutions, which often lack the data they need to make informed decisions about how to allocate their funding.

The solution

Project partners Bonsucro, SRK Consulting, Cotton SA (the Better Cotton Initiative, or BCI), the Alliance for Water Stewardship (AWS) and World Wildlife Fund for Nature (WWF) South Africa, in collaboration with local participants such as Nedbank, Akwandze Agricultural Finance, RCL Foods, Sugar and Milling Division, and South African Cane Growers Association will generate real-time information and risk-assessment tools to guide financial institutions in their decision-making processes. This region- and commodity-specific information will incorporate environmental and social criteria derived from ISEAL member standards—boosting recognition of these standards as powerful mechanisms for lenders’ due diligence, and de-risking smallholders in the process.

Using criteria in the BCI, Bonsucro, and AWS standards, the project will examine cotton and sugarcane production in South Africa’s Mpumalanga Province, an area where regular droughts and water-availability issues are increasing risk for both producers and lenders.

Developing new methodologies

Nedbank is particularly interested in mitigating risks linked to climate change, of which drought is the most obvious one. Within Mpumalanga, the pilot will focus on one area where there is already an initiative underway—directly linked to Bonsucro and BCI—to combine the cultivation of sugarcane and cotton.

The partners will establish an environmental and social baseline for the area, and compare the three sustainability standards to the IFC’s Performance Standards. This process will clarify what producers and lenders are missing, and where the BCI, Bonsucro, and AWS standards can fill the gaps to improve monitoring and risk assessment. The end goal is to develop a new finance methodology that recognizes the benefits of complying with ISEAL standards’ environmental and social criteria for these commodities, and incentivizes lending to support the adoption of these criteria.

An innovative approach

Working with a wide range of stakeholders, the project aims to close the gap between IFC’s Performance Standards, the requirements of financial institutions, and ISEAL standards. The partners will pilot new methodologies and tools—such as data-capture technologies—to provide financial institutions with real-time data collection, transfers, and analyses.

This data will make sustainability risk monitoring easier and more comprehensive, helping financial institutions to improve their understanding of regional risk and evaluate that risk at scale. This will additionally allow financial institutions to create a controlled environment within which they can achieve specific goals—for example, investing in better water-management systems to improve watch catchment. Lenders will be able to reward farmers who have good sustainability ratings by offering them better terms of finance—such as lower interest rates, longer-term loans, and loans that are combined with technical support. This in turn would provide farmers with additional incentive for moving toward sustainable production, while setting a powerful example for other producers in the region.

Finally, access to the data will allow farmers to identify which aspects of their operations can be improved, directing financial investment to where it is most needed. It will also help farmers react more quickly to potential risks, improve the extension services that are offered to them, and assist local agencies in anticipating and preventing problems.

How ISEAL members can become involved

ISEAL members will benefit from this project in a variety of ways. The partners will establish a working group of ISEAL members based in Southern Africa whose role will be to receive feedback and share the work of the core project and pilot teams with a wider audience. Through collaboration with the various stakeholders, ISEAL members will improve their understanding of lender requirements and be able to develop similar initiatives to shape the work of financial institutions. Where financial institutions show interest in testing the project’s methodology and monitoring tools in other regions, ISEAL members will be able to grow their certification programs and take on a more active role in areas where there may not currently be working.

Lessons learned will be shared through the working group platform, both in Southern Africa and internationally, and ISEAL members will be able to access this information via websites, conferences, and publications. Additionally, project partners will report on the results, and publish them through a wide variety of channels.