Funding Nemo: Can sustainability data boost private lending to farms?

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Farmers in a filed in Afghanistan
Better data may help us protecting the environment while increasing investment in agriculture. Photo: Rumi Consultancy/World Bank

Funding the world’s 500-million-plus smallholder farms to help them plant, harvest, and sell their crops may be one of the best ways that we can achieve Zero Hunger (UN Sustainable Development Goal 2) by 2030. 

Unfortunately, participating in the current financial system remains out of reach for most smallholder farmers across the world, leaving a gap of $150 billion between what is needed and what is available. Despite the hype around mobile lending as a tool to unlock credit for smallholder farmers, limited data and poor commercial banking access make it prohibitively costly for many private lenders to properly assess smallholder risk. 

Much like Nemo, the titular fish in the 2003 film Finding Nemo, these smallholders are lost in the depths, not of the ocean, but of the global financial system. Can government and private lenders work together, like Nemo’s father Marlin and sidekick Dory, to find them? 


"Much like Nemo, the titular fish in the 2003 film Finding Nemo, these smallholders are lost in the depths, not of the ocean, but of the global financial system. Can government and private lenders work together, like Nemo’s father Marlin and sidekick Dory, to find them?"


 

One way to find them may be by providing private lenders with greater access to data on smallholder participation in public programs that encourage adoption of more sustainable environmental practices.

At first glance, environmental sustainability may appear unrelated to a firm’s financial viability. However, there is a mounting body of evidence that environmental sustainability is good business and a great opportunity for private lenders. Ongoing “green” efforts by the world’s largest banks demonstrate a growing shift in preference towards sustainability initiatives, with lenders rewarding green borrowers. In 2019, BNP Paribas, for example, allocated $21.5 billion solely for firms in the renewable energy sector.

This same logic can and should be applied to smallholder farmers. Many governments already pay farmers for adopting more sustainable farming practices.  For example, EU countries provide “green direct payments” to farmers that adopt practices like crop diversification to meet environmental and climate goals. Similarly, Uruguay’s recent Agriculture National Adaptation Plan contains a wide range of policy incentives for farmers that embrace environmentally sustainable techniques and reduce their greenhouse gas emissions.

With these programs already in place, making the data available through public records (much the same way public records are accessed by credit agencies) to lenders may be an inexpensive way of increasing financial inclusion. Research suggests that private lenders offered better credit opportunities to farms that were certified as “sustainable” by the Rainforest Alliance compared to similar non-certified competitors (Figure 1). Always searching for better ways to fund smallholders, private lenders can use this information to identify better borrowers. 

Credit for certified farms - average dollar value of loans awarded

Figure 1. Reproduced from Rainforest Alliance study

Let’s dive deeper into what’s going on here. For starters, the agronomic practices associated with sustainable farming can improve resilience to climate change, through healthier soils and crops. Moreover, these sustainably produced crops may be reaching higher-priced, wealthier consumer markets, which produce a more stable cash flow than similar crops sold in lower-priced, more volatile markets. Finally, the Rainforest Alliance found that certified farms tended to keep clearer internal records and maintain better internal organization. 

So, good stewards of the land tend to be better credit risks, and all we need to do is make sure this information is easily accessible to the lenders to get finance flowing.

The environmental footprint of farming is expanding alongside the world’s growing food needs.  By 2050, agricultural production will have to rise by 70% to meet projected demand. Without effective stewardship of the land, this growth will hasten the ongoing climate crisis. 

That means we have a win-win opportunity when it comes to sustainability and financial inclusion. By sharing data on environmentally conscious farms, governments can continue to reward sustainability while also helping lenders provide much-needed capital to farmers.  Like Marlin and Dory teaming up to find Nemo in the Pixar classic, governments can team up with private lenders to find and fund smallholder farmers.

 
We hope to crowd-in some of the world’s best minds to participate in a global conversation on food and technology through the “What’s cooking? Rethinking farm and food policy in the digital age” blog series. We invite people with diverse backgrounds and perspectives to join us and share their comments.

Authors

Atharv Gupta

Bachelor of Science in Foreign Service candidate at the Walsh School of Foreign Service, Georgetown University

Julian Lampietti

Manager, Global Engagement in the Agriculture and Food Global Practice

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