Financing Sustainable Development Around the World

Financing Sustainable Development Around the World

More than two billion people around the world are dependent for their livelihoods on five hundred million smallholder farms. Yet these smallholder farmers, who typically have less than five acres under cultivation, operate far below their potential because they lack access to the technical assistance and credit they need to implement better farm management practices.

Global smallholder demand for credit is estimated at nearly $500 billion. While "social finance lenders" typically lend to smallholders who don't qualify for traditional or commercial loans, they currently meet only a tiny fraction of that demand — roughly $350 million. That leaves millions of smallholders unable to make needed investments in raising their workers' pay and improving worker safety, building waste management systems, and installing new water-conserving technology — all of which contribute to increases in yields and income.

Traditional aid programs aren't likely to alleviate the problem anytime soon, but urging lenders to change their practices could help. A 2013 study conducted by the Rainforest Alliance in conjunction with the Citi Foundation suggests that better data can dramatically improve smallholders’ access to credit. The study, which compared a hundred and ten Rainforest Alliance Certified™ coffee and cocoa farmers in Colombia and Peru with a non-certified control group, found that 90 percent of the certified producers in the survey tracked both revenue and expense metrics for their farms, while only about 30 percent of the non-certified producers did so. The study also found that the average dollar value of loans to certified producers was $5,562, while it was only $3,311 for non-certified producers — a finding which suggests that many smallholders rarely keep the kind of records, including production cost, income, and delivery history, that would enable potential lenders to assess their creditworthiness.

That's fixable.

To make it easier for smallholders to collect and share data, lending organizations should adjust and standardize their templates, loan application procedures, and producer profiles, focusing on the key indicators they most want to see. Technical assistance and independent sustainability certification programs can teach producers how to keep records that meet those indicators. If certified farmers receive bigger loans because they are better at tracking key financial metrics, that’s an indication of the vast potential that exists to increase access to credit for millions of smallholder farmers.

It also illustrates how farm financing and conservation are linked. Smallholder farmers often don’t have a valid credit history or the collateral for a loan. Rainforest Alliance Certified™ farms often are more desirable candidates for a loan for several reasons. First, the certification system itself involves technical and business management training as well as periodic audits, all of which makes for a more reliable borrower. Second, because we spend a lot of time developing corporate relationships and generating consumer demand for RA-certified products, RA-certified farmers tend to have better access to markets. Finally, certified farms have learned how to manage their natural resources for the long term, which is a definite plus for social finance lenders who have sustainability requirements for their portfolios.

Sustainability certification is a market-driven phenomenon that is growing rapidly: the number and acreage of Rainforest Alliance Certified™ farms worldwide doubled in 2012, and those farms today produce 5.2 percent of the world's coffee, 15 percent of its bananas, 13 percent of its cocoa, and 12 percent of its tea. As the certification concept spreads, we will see more creditworthy farms and more opportunities for lenders, particularly if lenders and certifiers standardize their loan application practices.

The study mentioned above is part of the Rainforest Alliance’s ongoing work to widen credit access for smallholder farms through our Sustainable Finance Initiative. In addition to providing technical assistance to groups of smallholders, we are working to connect those farmers to lenders and provide training to financial institutions looking to incorporate sustainability standards in their application practices. While much of our initial work has been focused on agriculture in Latin America and East Africa, we plan to expand this work to include forestry and tourism.

There's great unmet demand for sustainable development financing and great potential for lenders to improve their bottom lines while helping put millions of smallholder farmers on a path to sustainability. Our goal is to make sustainability as attractive as possible to as many farmers and businesses as possible. By working together, certification programs, technical assistance providers, lenders, and consumers can help millions of people around the world realize improved crop yields and incomes — and contribute to an environmentally sustainable future for us all.

Tensie Whelan is president of the Rainforest Alliance, which works to conserve biodiversity and ensure sustainable livelihoods by transforming land-use practices, business practices, and consumer behavior.