As more investors are investing in “green” sectors like sustainable agriculture, the lack of traction of small-scale conservation initiatives is unfortunate. After all, food security and livelihood creation are at the core of the agriculture sector’s influence on developing economies.
Capital is available. But without the ability to effectively attract finance, enterprises find their impact is limited.
Part of this problem boils down to the lack of financial preparedness of agribusinesses. In contrast, sectors like technology in developing regions see far greater levels of investment going into incubator programs, helping organizations to successfully attract investments.
The same pace of development is necessary for the conservation finance space. Two organizations working on this issue are Root Capital and Fauna & Flora International (FFI). Root Capital is a nonprofit investment fund offering capital and advisory services to agribusinesses in developing countries. FFI is a conservation charity that provides technical support to conservation projects around the world.
Root Capital specifically works with small and growing agribusinesses in Africa, Latin America, and Asia. Their business model typically entails aggregating smallholder farmers to strengthen their economic position. Enterprises must also have specific criteria in place to ensure a positive social and environmental impact on their community.
Alexandra Tuinstra, senior director of advisory services at Root Capital, said that a primary challenge for agribusinesses in attracting finance is to meet the requirements in situations that call for a desired level of business administration capacity.
For instance, Tuinstra said that most of these businesses serve rural communities in remote areas. Here, opportunities to access formal education are scarce. Staff who have been fortunate enough to receive secondary or higher of education or specialized training are often difficult to attract and retain.
It is also a luxury for these enterprises to have the expertise needed to implement professional administration and accounting practices. This includes maintaining and interpreting financial statements and using business intelligence. Limited access to reliable, current data about the sector and information on financing options that may be available are also obstacles on the road to reaching full growth potential.
Ultimately, Tuinstra said, it is not a lack of available capital that is the biggest barrier to accessing finance. Rather, it is the inherent complexity in aligning the disconnect between investor and enterprise capacity. Specifically, there is a gap between the capacity of investors to meet rural enterprises where they are and the enterprises’ capacity to grow and mature.
Investors are also challenged with questions around how to accurately assess the unique needs and risks that impact-focused enterprises face. Commercially minded traditional investors find it difficult to value a business when impact creation is deemed as important as profitability.
Financial institutions are also more likely to work with businesses who have data from over three years of financial statements and cash flows. Without alternative mechanisms of financing in place, new businesses often find themselves in a downward spiral.
Paul Herbertson, director of conservation finance and enterprise at FFI, said that access to finance is a main barrier to growth. This is especially true in “rural areas for innovative business models.”
FFI typically works with community-based small businesses as well as formal collaborations.
“The ability of these businesses to support return-seeking capital is often not aligned with the level of risk,” Herbertson said. “You are seeing investors with much lower risk tolerance and opportunities that have a much higher risk profile.”
FFI also works with enterprises that have unproven business models that often make them costlier to finance, Herbertson said. These factors limit the investment attractiveness of such enterprises.
Observing the Market
Both Tuinstra and Herbertson said there are no notable geographic differences in terms of the investment readiness of enterprises. Instead, sector and subsector factors play a bigger role in shaping their outcomes.
Herbertson said tourism, particularly in Africa, is based on a conservancy model. These enterprises tend to be far more established in the region. This allows them to be “slightly more technically capable on the business side of things.”
As such, they are able to articulate their business models to investors. This ability is less common in community-focused sustainable agriculture work than it is in conservancy-oriented ecotourism.
Finding the Right Fit
Often the key struggle for businesses is to determine the right fit when it comes to choosing the mode of capital raising, Tuinstra said. There are many investment vehicles available for agriculture in developing regions. But the minimum loan size is too high for these businesses to absorb.
“We need to meet each other in the middle. Investors could do a lot to adapt to the needs of these businesses [although] a lot of the barriers come from the capacity of the businesses themselves,” Tuinstra said.
Tuinstra and Herbertson said they agree that it is necessary for supply-side measures to customize financial products to the needs of enterprises. Until this occurs, demand-focused intervention is the best path forward. More effort must be dedicated towards supporting enterprises to achieve scale. Technical assistance and grant finance are certainly two means of doing so.
Herbertson said he primarily sees demand for blended capital from conservation-focused organizations where grant financing is used as a de-risking measure. Debt financing is also relatively straightforward for projects FFI has dealt with historically since most enterprises are community owned.
Bridging the Gap
Intermediaries such as Root Capital and FFI have an innate understanding of where conservation-focused enterprises are falling behind. This allows them to offer targeted services that bridge this gap.
“The entrepreneurial perspective is something we have to work on with cooperatives,” Tuinstra said. “How do you balance a perspective that looks for efficiencies and cost savings [while] you are still safeguarding your social mission? This balance is not easy for any organization.”
Root Capital’s financial advisory services help agribusinesses develop a solid financial culture. They provide training and consulting on business administration and financial planning, guidance to the businesses’ agricultural support teams, and assistance with information technology.
“One of the services we provide our clients most often is cash flow development and projections. This is key to determining financing needs. It is one of the most difficult things for businesses,” Tuinstra said.
One aspect that is often overlooked is the wider community impact of agribusinesses in their role as lenders to producers. Root Capital works to strengthen the operations of local agribusinesses by acting as “local mini-banks,” Tuinstra said.
Herbertson said FFI’s support is primarily to develop enterprises from a business perspective. They focus on “supporting conservation initiatives that have an interest in establishing themselves in a way that attracts private investment.”
For example, FFI supports small agriculture-focused enterprises in accessing international markets. Herbertson said his organization connects small businesses to “a network of large, ethical international companies that are keen to get more biodiversity-positive and ethically sourced ingredients in their products.”
FFI also works with mainstream investors to help them understand risk, Herbertson said. These include foundations that finance enterprise development and impact investment. FFI also has a stream of work dedicated to responsible investment in the mainstream financial sector to “support them in understanding their dependencies on biodiversity.” This is done typically through negative screening efforts and by conducting cross-sector riskbenchmarking exercises.
Strengthening the Ecosystem
There are additional barriers to financial preparedness that cannot be addressed by intermediaries. Tuinstra calls them the “indirect subsidies” that we take for granted. These include transportation infrastructure, crop insurance, and formal education. These resources are sometimes unavailable to enterprises working in developing nations.
While these factors can be addressed at the policy level, more involvement on the ground is important. Direct financial preparedness support is crucial to ensure more capital is diverted towards environmental goals.
The implications of this are vast. Market-based solutions are incredibly appealing in an era when government and donor resources to developing markets are increasingly constrained.