Access to Finance & Technology Can Increase Climate Change Resilience & Food Security in Latin America: Four Lessons from Grassroots’ Prospero Microfinanzas Fund

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Latin America and the Caribbean (LAC) has the potential to be the “breadbasket of the world”, with a significant portion of the world’s fresh water and arable farmland. Small farmers represent over 80% of the total holdings and provide between 30 -40% of the region’s agricultural GDP.

However, rural areas continue to be afflicted by high ratios of poverty, which far exceed the regions’ average. Additionally, smallholders are especially vulnerable to climate change, which increases their food insecurity and widens the gender divide, given that women are often already restricted from owning land or accessing resources despite making up a significant part of agricultural labour. In LAC, 39 million people are undernourished and severe food insecurity is on the rise, worsened by climate extremes.

The Prospero Microfinanzas Fund, co-managed by Grassroots Capital Management PBC (Grassroots) and BIM, tackled these issues in six of its nine portfolio companies with mostly rural and agriculture-focused clients in LAC. As the fund is winding down in 2019, Grassroots reflects on four key lessons as we launch a new initiative to address food security, climate resiliency and the Sustainable Development Goals (SDGs) in LAC.

1.    Financial Inclusion has a Role in AgTech Adoption

Low productivity exacerbates the effects of climate change, gender inequality, and poverty. Productivity of the agriculture sector is 25% of that in the US, and output per worker has risen at only 0.6% per year since 2000, one of the weakest of any region in the world. Agriculture technology (agtech), such as irrigation systems for efficient water use, drought resistant seeds, and climate-smart fertilisers, is on the rise. In Latin America, even a marginal increase in agtech adoption would improve productivity exponentially, and increased productivity will have a multiplier effect on the region’s development and food security globally.

But given the high risk and low returns of the agriculture sector, credit and other investment is scarce. Technological solutions focused on improving the efficiency of current farming practices have difficulty reaching scale, regardless of their efficacy, since most cannot achieve the exit returns that venture capital firms are seeking.

This is an opportunity for financial service providers (FSPs) to reach these populations and fill this gap. However, FSPs often do not serve smallholders at all. Access to finance remains elusive for many rural smallholders due to a number of factors, like remoteness, and violence – particularly in the volatile political and economic environments in Central America, which make profitability and risk management a challenge for FSPs. Estimates are that less than 10% of microfinance portfolios are dedicated to agricultural credits in LAC.

Prospero’s portfolio companies that serve rural areas have developed financially sustainable ways of providing these clients with appropriate products and services that are delivered responsibly. Over 40% of their aggregate portfolios are in agriculture. They have built professionally-run operations with robust governance, which enhance their ability to manage risks at the institutional level.

Furthermore, these companies are dedicated to helping their smallholder clients adopt technologies and manage the risks related to their agriculture businesses and deal with climate change. They offer other financial services, such as agricultural insurance, and finance for environmentally efficient products such as solar lighting and irrigation, water and sanitation products, and green credit lines.

In addition, they combine financial services with technical assistance to their smallholder clients, like training in agronomic techniques, productivity improvements, risk management, access to markets through alliances, and digital and technological tools for the dissemination of good agricultural practices, climatic information and market prices.

2.    Technical Assistance Is a Tool for Implementation

Technical assistance is critical to successfully reducing information and skill gaps and ensuring maximum utilisation and optimisation of necessary techniques and best practices. Asymmetries increase costs, reduce efficiencies, and hinder implementation of climate smart solutions. Widespread adoption of new agtech advances requires more than just data; the training to analyse and use these data must be made widely available to the smallholder producers that are the backbone of the agriculture value chain in LAC.

Coupled with its investments, Prospero provided linked technical assistance to address key areas for smaller, earlier stage FSPs: governance, risk management, business development, and social performance management. Although Prospero did not provide technical assistance directly aimed at agriculture, many of the portfolio companies provide technical assistance to their clients for adaptation solutions (solar, water, agriculture), and work with fintechs and different business models, as mentioned above. Building on this experience, Grassroots’ new initiative will partner with experts to provide supplementary technical assistance in the implementation of agtech and climate smart techniques directly to portfolio companies so they can better serve their smallholder clients and improve climate resilience.

3.    Financial Service Providers Care About Climate Change

FSPs are often told to “stay in their lane” and limit their involvement to what they know – responsible provision of financial services. Given the scope of the negative and increasingly imminent impacts of climate change, remaining uninvolved is not an option – particularly for those institutions already serving smallholder clients. With the outreach and “high touch” advantages of FSPs, they are perfectly placed to partner with external experts, technology providers, and likeminded investors to address this issue and better serve their clients.

Addressing the impending global consequences of climate change will require a wide scale paradigm shift across all activities. All Prospero’s investments were bound by an exclusion list intended to bar activities with negative environmental impacts. Additionally, Prospero’s rural portfolio companies already consider the impact of their clients’ activities on climate change when making credit decisions, and provide technical assistance to improve their clients’ climate smart practices.

With Grassroots’ new initiative, sustainability will be a key feature and considered in equal measure with financial returns. The investment strategy will go beyond exclusion lists to actively cutting the carbon footprint of companies and their clients, and encouraging implementation of products and techniques that have positive environmental impacts.

4.    Impact Measurement and Management Is Key

To successfully achieve any impact, but especially complex and ambitious objectives like climate change resilience and other SDGs, the targets and metrics – as well as the objectives themselves – must be clearly identified. As Grassroots learned with Prospero, the key success factors must be identified at the beginning, with buy-in from all stakeholders, and frequent monitoring and course correction where necessary.

There has been substantial effort and progress in measuring non-financial performance, however there is still much room for improvement, particularly in measuring impact. Prospero’s portfolio companies have already begun measuring outcomes. New technologies like big data and blockchain enable lower-cost data collection and analysis that can directly link to SDG outcomes. This is particularly important in climate change: experts say significant reductions in emissions are required to stem the imminent consequences of global warming, where even half a degree can have catastrophic global impact. Responsible FSPs, supported by likeminded investors, are well poised to be an important part of the solution.

Author: Anna Kanze – Grassroots Capital Management