Impact Debt Financing is Key to Developing Climate-Resilient Agriculture in India -Sandeep Bhattacharya, Sourajit Aiyer
While it is recognized that financial actors need to play a greater role towards the SDGs, particularly private sector capital, it is imperative to understand which specific segments of the financing ecosystem are best suited to finance specific sectors. durability, as each has its own nuances.
Climate-resilient agriculture is a key SDG sector in India, given that a large portion of its workforce is still employed on farms where climate change mitigation, adaptation and resilience are key. indispensable. However, the sustainable finance community has generally focused on renewable energy or electric mobility, rather than agriculture.
Increasing funding for climate-resilient agriculture, or natural agriculture, is now essential! But for this to happen, agricultural economics and financial structuring must be synchronized.
The good news is that awareness of improvements to be made in the long-term agricultural economy is growing. For example, Sa-Dhan (an Indian association of community-based DFIs) highlights how natural farming results in climate-resilient crops by promoting greater microbial presence and root growth in the soil, leading to better resilience. crops in times of climatic calamities. In the Indian state of Andhra Pradesh, RySS (a provincial government agency) aims to enable its 6 million farmers to adapt to Community Managed Natural Agriculture (CMNF) by leveraging the history of the State in agriculture managed without pesticides. His experiences demonstrate positive economics in terms of cost savings, increased yields, positive impact of local value-added services, increased cropping intensity beyond two per year, use of fallow land, health benefits for farmers, etc.1. Welthungerhilfe (a German private aid organisation) adds to the argument using the sustainable integrated farming system, which integrates crops with varied flora and fauna2 so that each element is interconnected to help the other, for example by intercropping, mixed cropping, multi-tiered arrangement, etc. Data collected on SIFs shows that the number of subsystems has gradually increased over time. Cultures that were not possible before were introduced by creating bonds. In some geographies, more than 95% of farmers get 90% of the inputs from their own farm, reducing the cost of inputs. All this led to the improvement of the agricultural economy.
These examples suggest an improvement in agricultural economics, and this provides financiers with scientific or socio-economic proof that a positive impact is occurring. For impact debt funds that want to showcase that impact and are willing to bear some risk that a nascent sector like climate-smart agriculture may carry, this impact creation helps them justify raising and the allocation of capital to climate-resilient agricultural practices, until they are terminated. clients. The aim is to limit practices that can provide evidence of such an impact, as this would match the impact that debt firms require.
Moving from agricultural economics to financial structuring to reduce the risks of climate-smart agriculture, the Rabo Foundation (the impact funder) and USAID India are supporting local financing of agroforestry, sustainable management of forests and low-emission agriculture in India, through a loan portfolio guarantee program. Its objective is to increase the incomes of smallholders, optimize agricultural productivity and reduce emissions. It targets small and medium-sized enterprises, cooperatives, agricultural producer societies, etc. who are, directly or indirectly, engaged in sustainable agriculture, forestry and sustainable land use. This guarantee program has focused on non-banking financial institutions with a mission to impact and expand venture capital debt that is often unsecured. Samunnati Financial Intermediation and Ananya Finance for Inclusive Growth, two impact debt funds, have partnered with Rabo and USAID on this program.
Another example is Caspian Debt, an impact venture lending company. Caspian has partnered with Villgro (a social business incubator) to provide small loans to impact-focused start-ups in sustainable agriculture. It aims to make unsecured debt available to social enterprises at industry-leading interest rates and help them build a good credit history, making them ready to take on debt for the future. The partnership also plans to create a collateral product to reduce the risk of these unsecured loans.3
In addition, Samunnati issued an innovatively structured $4.6 million green bond for climate-smart agriculture,4 leveraging Symbiotics’ MSME capital market access platform (an investor impact). Without this innovation as part of the structuring, it might not have been able to raise capital of this amount, as green bonds generally favor large issuances. Similarly, Grameen Impact Capital (an impact venture capital firm) launched a small bond aimed at Ag-Tech companies working to enable sustainable farming practices and improve smallholder incomes. This impact bond was made possible by adding pre-defined KPIs for borrowers, so the cost of funding decreases if the KPIs are met. In short, weave incentives into the structuring to overcome the constraints of lower-impact venture capital debt issuances.
Again, these examples suggest that delivering transformative innovations would help reduce perceived risks and facilitate the ability of the impact debt fund to raise capital to nascent sectors like climate-smart agriculture. As these smaller issuances multiply and become successful in terms of impact, return and risk, they could eventually help justify larger issuances by a variety of players in the financial sector.
In conclusion, synchronizing agricultural economics and financial structuring is key to scaling up climate-smart agriculture financing, specifically leveraging the impact debt segment in the early stages. The use cases cited in this article are intended to justify that this happens in pieces. It is now about making ends meet and scaling up the ecosystem of impact debt finance, backed by evidence from agricultural economics and structuring innovations, to scale up climate-smart agriculture in a country where climate risks are increasing and where the population is expected to cross 1.5 billion.
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