Impact Debt Financing Key To Scale Up Climate Resilient Agriculture In India
While it is acknowledged financial stakeholders needs to play a larger role towards the SDGs, especially private sector capital, it is imperative to understand which specific segments within the financing ecosystem are best suited to fund specific sustainability sectors, given each has its own nuances.
Climate resilient agriculture is a key SDG sector in India, given a major portion of its workforce are still employed on farms where climate mitigation, adaptation and resilience are sorely needed. However, the sustainable finance community has generally focused on renewable energy or e-mobility, rather than agriculture.
Scaling up finance for climate resilient agriculture, or natural farming, is now a must! But for this to occur, the farm economics and financial structuring need to come in sync.
The good news is that awareness about improvements to long-term farm economics is picking up. For example, Sa-Dhan (an Indian association of community DFIs) stresses how natural farming results in climate resilient crops by aiding greater microbial presence and root growth in soil, leading to better crop resilience during times of climate calamities. In India’s Andhra Pradesh state, RySS (a provincial government agency) aims to enable its 6 million farmers to adapt to community-managed natural farming (CMNF) by leveraging the state’s history in non-pesticide managed farming. Its experiences demonstrate positive economics in terms of cost savings, increase in returns, positive impact of local value addition services, increase in cropping intensity beyond two per year, usage of fallow land, health benefits to farmers, etc1. Welthungerhilfe (a German private aid organisation) adds to the argument using Sustainable Integrated Farming system, which integrates crops with varied flora and fauna2 such that each element is inter-linked to help the other, say by intercropping, mixed cropping, multi-storeyed arrangement, etc. Data collected on SIFs shows the number of subsystems gradually increased over time. Crops that were not possible earlier were introduced by creating linkages. In certain geographies, more than 95% farmers are getting 90% inputs from their farm itself, reducing input cost. All this led to improved farm economics.
These examples suggest an improvement to farm economics, and this provides the scientific or socio-economic evidence to financiers that positive impact is occurring. For impact debt funds who want to showcase this impact and are willing to bear a certain risk that a nascent sector like climate smart agriculture may carry, this impact creation helps them justify raising and allocation of capital towards climate resilient agriculture practices, to their end-clients. The objective is to narrow on those practices that can provide evidence of such impact, as this would fall in sync with what impact debt firms need.
Moving from farm economics to financial structuring to reduce risks of climate smart agriculture, Rabo Foundation (the impact funder) and USAID India support local financing for agroforestry, sustainable forest management and low-emission agriculture in India, through a loan portfolio guarantee scheme. Its goal is to increase smallholder income, optimize farm productivity and lower emissions. It targets small and medium-sized enterprises, cooperatives, farmer producer companies, etc. that are, directly or indirectly, engaged in sustainable agriculture, forestry and sustainable land use. This guarantee scheme focused on non-banking financial institutions that are mission-aligned to achieve impact, and extend venture debt often without collateral. Samunnati Financial Intermediation and Ananya Finance for Inclusive Growth, two impact venture debt funds, partnered with Rabo and USAID in this program.
Another example is Caspian Debt, an impact venture debt firm. Caspian partnered with Villgro (a social enterprise incubator) to provide small-ticket loans to impact-focused start-ups in sustainable agriculture. It aims to make collateral-free debt accessible to social enterprises at industry interest rates and help them create a good credit history, making them debt-ready for the future. The partnership also plans to create a guarantee-product to de-risk these collateral-free loans.3
Further, Samunnati issued an innovatively structured $4.6mn green bond for climate smart agriculture,4 by leveraging Symbiotics’ (an impact investor) MSME capital market access platform. Without this innovation as part of the structuring, it might not have been able to raise capital of this quantum, since green bonds typically favour large issuances. Similarly, Grameen Impact Capital (an impact venture debt firm) launched a small-sized bond aimed at Ag-Tech companies that are working to enable sustainable agricultural farming practices and improve smallholder income. This impact bond was made possible by adding pre-defined KPIs for borrowers, such that the cost of funding reduces if the KPIs are met. In short, weaving incentive within the structuring to overcome constraints of smaller impact venture debt issues.
Again, these examples suggest making structuring innovations would help reduce perceived risks and facilitate the impact debt fund’s ability to raise capital towards nascent sectors like climate smart agriculture. As these smaller issues pick up and taste success in terms of impact, returns and risk, these would eventually help justify larger issues by a variety of financial sector stakeholders.
In conclusion, bringing farm economics and financial structuring to sync is critical to scale up climate smart agriculture financing, by specifically leveraging impact debt segment in the initial stages. The use-cases cited in this article aim to justify this is occurring in pieces. The task now is to join the dots and scale up the ecosystem of impact debt funding, backed by farm economics’ evidence and structuring innovations, in order to scale up climate smart agriculture in a country where climate risks are growing and the population is expected to cross 1.5 billion.
