Scaling Climate Smart Agriculture by Financing Small and Growing Businesses

Nearly 2 billion people living in poverty engage in agriculture as a means of survival, and over 1 billion live within the world’s 25 biodiversity hotspots. Excluded from formal markets and unable to access agricultural inputs, market information and credit, many rural poor adopt survival techniques such as illegal logging and slash-and-burn agriculture that degrade the environment and contribute to global warming.

At the same time, these small-scale farmers are highly vulnerable to the impacts of climate change, from drought and flooding to soil degradation and crop pests and diseases.

While daunting, these challenges can be met. At Root Capital, we believe that facilitating the growth of climate-smart agricultural businesses that aggregate hundreds and sometimes thousands of small-scale farmers can break cycles of rural poverty and environmental degradation.

Over the past decade, we’ve financed hundreds of small and growing businesses employing sustainable approaches such as agroforestry, organic production, and responsible harvesting of natural products. Scaling these and other climate-smart practices at the smallholder level can maintain the integrity of valuable landscapes while creating more prosperous and climate-resilient livelihoods for farmers, their families and communities.

Agroforestry in Chiapas, Mexico

Triunfo Verde, a Mexican coffee cooperative and Root Capital client since 2006, is a powerful case in point.

The indigenous farmers of Triunfo Verde live within the Chiapas buffer zone of El Triunfo Biosphere, Central America’s largest continuous cloud forest, which serves as a refuge to dozens of endangered and endemic plant and animal species. Like many of the places where Root Capital works, the region is biodiversity rich but economically poor, and its inhabitants are highly vulnerable to a changing climate that threatens ecosystems and the livelihoods that they sustain.

When Root Capital met Triunfo Verde in 2006, the cooperative had 150 members and annual revenues of just over $400,000. A lack of physical collateral limited its access to finance and, without capital for the purchase, processing, and export of its members’ coffee, sales had been in decline since 2003.

With Root Capital credit and financial management training, the cooperative grew rapidly, reaching sales of $2,500,000 in 2011, an annual compound growth rate of 36 percent. The cooperative grew to over 255 members managing 863 hectares of coffee within an agroforestry system.

Root Capital’s lending enabled the cooperative to work with its existing members, and recruit new ones, to adopt sustainable agricultural practices including organic composting, buffer strip construction, and shade tree planting. While these techniques require an upfront investment, they enrich the soil, protect the watershed, retain moisture, and sequester carbon. In short, they are practices that support both climate mitigation and adaptation.

Moreover, the trade credit provided by Root Capital allowed the cooperative to strengthen market linkages to buyers like Equal Exchange and Sustainable Harvest that pay a premium for shade-grown, organic coffee, giving farmers an immediate incentive to invest in more sustainable production. Seventy-five percent of Triunfo Verde’s members now have organic certification.

Growing Sustainable Rural Prosperity

Triunfo Verde is but one of Root Capital’s clients practicing agroforesty. Last year, Root Capital disbursed nearly $80 million in loans to producers of coffee, cocoa and other products grown in agroforestry systems. In 2011, we lent a total of $111 million to 193 small and growing businesses representing more than 200,000 farm families; approximately 60 percent of the land managed by our clients is certified organic.

Regardless of whether a client possesses an environmental certification, we conduct our own due diligence on business practices related to social and environmental factors. In the case of environmental due diligence, the loan officer engages the client in dialogue regarding the enterprise’s landscape, strengths, weaknesses, and plans for improvement. Leveraging any environmental certification, s/he scores the borrower’s agricultural practices in seven areas, including land use, ecosystem and biodiversity conservation, agrochemicals, and soil management. Based on these scores, the client receives a final assessment that the loan officer uses to (dis)qualify an applicant and identify areas for improvement.

Supporting the growth of businesses like Triunfo Verde represents a catalytic approach to scaling the adoption of climate-smart agriculture.

Beyond linking small-scale farmers to consumer markets that increasingly demand sustainably grown products, small and growing agricultural businesses can serve the critical function of delivering farm-level training through agronomic extension officers and coordinating landscape-level planning that integrates agriculture with water, carbon and biodiversity management. While some of our clients possess more advanced training programs than others, all have the potential to coordinate collective resource management and collaborate with third-party organizations that can transmit best practices in climate-smart agriculture.

Using clean technology in agriculture

The adoption of clean and appropriate technologies is another way that small and growing businesses can increase climate resiliency and preserve the ecosystems upon which rural livelihoods depend. These technologies, including biodigestors, solar panels and dryers, drip irrigation, and water-efficient processing equipment have the dual benefit of improving enterprise efficiency and profits while reducing wood, water, or other natural resource consumption.

Water scarcity is an emerging global threat, with the UN estimating that some two-thirds of the world population will be living in water-stressed regions by 2025 as a result of climate change and other factors. Enabling small-scale farmers to purchase water-efficient processing machinery can help build their resiliency to climate change.

Several years ago, Root Capital loaned $225,000 to the Tanzanian coffee farmer association, Kilicafe, for the purchase of water-efficient depulping machines and washing stations that require up to 80 percent less water than older, household-level equipment used by association producers.

The new processing facilities have improved coffee quality, improved natural resource use, and enhanced climate resiliency in a historically drought-prone region, for the more than 12,000 small-scale coffee producers cultivating shade-grown coffee beside the Mt. Kilimanjaro National Park in the north and in the Mbeya and Mbinga regions in the south.

Root Capital is collaborating with partners to explore lending models for other climate-smart technologies and practices, from coffee tree renovation to drip irrigation to payment for ecosystem services (for example, carbon.)

Scaling adoption of climate-smart agriculture will require collaboration among a wide variety of actors from the government, business and non-profit sectors. By supporting small and growing businesses committed to sustainable practices, Root Capital empowers small-scale farmers to become front-line partners in these global efforts.