Francois Gigante, Consultant, Climate Finance Unit (CFU) at UN Environment Programme (UNEP), 28th January 2021.
Halting the loss of the more than seven million hectares of tropical forests that disappear annually, tackling climate change, while growing sustainable agricultural production to feed the estimated nine billion people that will be on the planet by 2050, are among the most defining challenges of the 21st century.
It is for that reason that UNEP together with Rabobank initiated a partnership with the objective to issue USD 1 billion in debt to farmers and corporates that focuses on the much-needed transformation in the way banks finance commodities that we use on a day-to-day basis such as soy, beef, palm oil, rubber, coffee, etc.
The AGRI3 Fund closed the first two transactions with Rabobank in China and Brazil with de-risking capital from the fund. The investments focus on more sustainable farm practices, forest protection and improving of local rural livelihoods.
Different deals for different outcome
Although the two deals are loan issued by Rabobank with guarantees from the AGRI3 Fund, the transactions differ in terms of region, commodity and underlying specifics. What are the merits of those investments towards mainstreaming of an innovative financial product?
The investment in China, Chongqing region (USD 10 mln, 3 years) is linked to a chili processing plant combined with benefits directed to rural smallholder famers. The benefits grant access to financing, training, high-quality inputs and a guaranteed floor price. The loan aims to enable farmers to switch from poor yielding crops to more lucrative cultivation and therefore to increase their income, while becoming a more sustainable production and maybe inspiring a new quality standard for pepper growing in China.
The non-standard nature of the transaction is due to a high perceived risk by local commercial and state banks resulting from 1) an uncommon set of activities funded, and 2) geographical and crop concentration. AGRI3 de-risking through a guarantee was therefore needed.
In addition, the Technical Assistance Facility of AGRI3 Fund supported making this deal “investment-ready” and is currently engaging with the client to offer support needed to fulfil the conditions of the deal and to maximize impact.
The interest of executing such a niche transaction, out of the financial benefit, is to test their processes against execution challenges and hurdles, streamlined the execution, strengthen the collaboration with the Technical Assistance Facility and proving the ability to execute tailormade transaction. This is an important step to insure minimum transaction cost and therefore profitability.
The investment in Brazil (USD 5 mln, 10 years) is linked to cattle producer in Mato Grosso with forest replanting, forest protection (2581 ha) and renovation of degraded pastureland (1200 ha) in line with recognized E&S guidelines. Brazil has the largest commercial cattle herd in the world and is the world’s largest exporter, leading to 80% of deforestation in the Amazon is driven by the cattle sector[1]; Brazil’s livestock is responsible for more than half of the country’s GHG emissions. The goal is to increase profitability, through improve intensification and productivity, while accelerating compliance with Brazil’s Forest Code legislation.
AGRI3 de-risked this loan through a guarantee by extending the duration of the repayment period, effectively enabling the commercial bank to issue a long-term loan, compared to the market standard in Brazil. There is potential for replicability of this kind of sustainable business model in a large market such as Brazil, which therefore offers the potential for scaling up the number of loans, and thereby the large-scale impacts and systemic change that can be achieved.
A step towards a larger impactful portfolio
The two transactions are just the beginning of a longer journey towards mainstreaming sustainable commodity production financing. However, what these transaction show is some initial ‘proof-of-concept’ how to marry the need to sustain and growth agricultural production to feed more people, while doing so in a way that is in line with meeting objectives under the Paris Climate Agreement, the post 2020 Biodiversity Framework while improving rural livelihoods, all key issues to meet the SDGs.
For AGRI3 to mainstream this type of financial products, there is a need to demonstrate the possibility of performing efficiently and reaching a wide market. Both criteria are essential. So, these two transactions are a step in the right direction to prove that it is feasible to build a profitable impact transaction portfolio due to a sufficient size and controlled transactional cost. However, in 2021 we hope to see more of these ‘proof-of-concept’ transactions that demonstrate that a bigger scale is possible and ultimately move towards a new ‘asset class’ for sustainable land use finance.
About the AGRI3 Fund
The AGRI3 Fund is a partnership by Rabobank, UNEP, IDH, The Sustainable Trade Initiative and FMO. Investment Advisors are Mirova Althelia, FOUNT and Cardano Development. The Ministry of Foreign Affairs of the Netherlands is a donor of the AGRI3 Fund.
Please find more information on agri3.com and UNEP Land Use Finance Programme on UNEP website.
[1] Greenpeace (2009); Amazon Cattle footprint Mato Grosso: The State of Destruction
