Title Landscape Resilience Fund
Country/Location Sub-Saharan Africa, Southeast Asia, Latin America
Size $25m
Revenue Model Low interest, flexible loans to local small and medium-sized enterprises
Private Investment/Finance Structure $25m in grants from Chanel
Public/Philanthropic Investment $1.3m for from Global Environment Facility for pre-investment support
Env/Social Impact Sustainable Agriculture and Forestry

Improved Climate Resilience for Smallholder Farmers

Improved Income for Smallholder Farmers

As climate change accelerates, businesses, regions and countries must adapt to increasing physical climate risks. However, there is a lack of funding directed towards projects that deliver climate adaptation. It is estimated that, for developing countries alone, $140-300bn of climate adaptation finance will be needed annually by 2030. In comparison, climate finance flows to developing countries for both mitigation and adaptation reached $79.6bn in 2019. Most of this funding is directed towards climate mitigation [1]. The Landscape Resilience Fund (LRF) was launched in June 2021 as a public-private partnership to target climate adaptation projects in developing countries. It supports small and medium-sized enterprises (SMEs) within sustainable agricultural and forestry supply chains to improve the resilience of smallholder farmers, using technical assistance grants and low-interest loans. It aims to mobilise $100m by 2026.

Urs Dieterich, Managing Director, Landscape Resilience Fund at South Pole

Urs Dieterich, Managing Director, Landscape Resilience Fund at South Pole

The LRF was co-developed by South Pole and the World Wide Fund for Nature (WWF), which act as Fund manager and Fund advisor respectively. Urs Dieterich, Managing Director of the LRF, says: “It’s clear that adaptation finance is grossly underserved. Despite the growing frequency and impact of physical climate events, only 5% of climate finance goes to adaptation, and virtually all of this comes from the public sector. South Pole and WWF looked at this adaptation finance gap and saw a space where virtually no-one else was acting.”

 

Identifying Scope for Resilience

The LRF targets SMEs in Sub-Saharan Africa, South East Asia and Latin America, where findings show that climate change will have the greatest effect [2]. Dieterich says that the LRF chose to target SMEs as they have local ownership, local knowledge and are self-determined, making them essential in the process of building resiliency in their landscapes. Dieterich adds: “Adaptation is local, you have to consider communities first if you want to support truly effective adaptation.” The LRF works with SMEs that either employ farmers directly or have contracts with farmers. In each case, they must have influence over land use practices.

The LRF’s team utilises a Resilience Framework that helps to identify a vulnerable area, using both publicly available and locally collected data. This framework is iterated to include scientific findings, including the latest IPCC report. The LRF undertakes a top-down assessment of the area to further scope the ‘macro’ climate risks, such as drought, storm and flood risk. This helps the team understand what sustainable land use practices may increase resilience in a given business model. For example, in an area faced with frequent heat waves and torrential rains, planting shade trees on a coffee plantation may help control slope erosion and shield the coffee trees from heat.

Additionally, there is a bottom-up consultation with local organisations, such as NGOs and farmer cooperatives. Dieterich says that this is an essential part of the resilience scoping. Discussions cover observed changes to local weather patterns and possible future climate threats. The consultation also considers the socio-cultural context of the region, such as the nature of business ownership and the access women have to employment. These are included to maximise the chances of impact and scalability for the SMEs.

The LRF then searches for potential investees through its network of local connections, though in some cases the Fund is approached through its website. The LRF assesses the SMEs themselves on several factors. These SMEs must demonstrate a degree of innovation, have a credible business plan and a pathway to mobilising further capital. The SMEs must also have or be willing to develop an ESG policy that complies with international standards, such as the International Finance Corporation’s Performance Standards. To date, the LRF has made one investment since launching in July 2021 and has c.40 further SMEs in its pipeline.

 

Business Support

Once a potential investee has been identified, the LRF works across three pillars of support.

The Fund includes an ‘investment readiness’ pillar, which issues grants and direct services to help SMEs prepare for a potential LRF loan, as well as other possible investors. These are used to build capacity, such as book-keeping, ESG policy development, and business model planning. This is not always a necessary step, but Dieterich comments that many rural SMEs in the agriculture sector need help on the non-financial aspects of relationships with lenders. Activities in this pillar are financed by a grant from the Global Environment Facility.

The main pillar of support is the business loans. These are used for initiatives that increase the SMEs’ resilience and are designed to be flexible, predominantly through their tenor and interest rates. The loan tenor is expected to be three to six years, which is key for investments with no immediate returns. The interest rates are typically in the single digit range, and can be tied to sustainability outcomes. Most of LRF’s capital is allocated to these loans, which range in size from $500k to $2m.

Across both of these pillars, the LRF takes a ‘landscape development approach’ to support a holistic view of the SME’s operations in the context of the region. This approach is mainly driven by governance frameworks that exist in many rural landscapes that act as forums with representation of typically underserved groups. The frameworks allow for several benefits, for example, access to agricultural training for smallholder farmers, further insight for the Fund about the region and the chance to inform provincial government policy on climate resiliency.

Dieterich highlights the importance of the landscape approach for the Fund’s overall ambition: “For example, if we finance and scale one SME that consumes water to irrigate crops, or for processing, without understanding how much of this scarce resource is needed by other stakeholders in the landscape — today and in the future, that can put both our investment at risk as well as our intended outcome of fostering inclusive climate-resilient development. The landscape approach is an effective tool to mitigate this risk and create a rising tide that lifts all boats.”

 

 

SME Investment

Cocoa innovator Koa, recently secured the first investment from the LRF. The $3.5 million investment, made alongside co-investor IDH Farmfit Fund, will support Koa to set up a new processing facility in Ghana. Through this expansion of its operations, Koa will create additional income for 10,000 smallholder farmers. Koa has built a new value chain using the previously unused cocoa pulp. Cocoa pulp is traditionally viewed as waste, but Koa saw this as an opportunity to create a new range of products, such as cocoa juice. Koa proposed that the Fund provide a loan for the construction of a solar-powered factory to process the fresh pulp and allow Koa to locally produce its range.

This investment has generated several benefits, many of which the LRF tracks as part of the loan agreement. The SME’s business model has reduced food waste in the cocoa production process by 40% and gives the farmers a 20-30% increase in their income, paid via mobile on the day the farmers bring the pulp. Koa currently works with 1800 farmers, but plans to scale to 10,000 farmers by 2026 with the obtained investment.

Koa’s ambition also includes sustainable land management to improve climate resilience, as climate change is expected to increase challenges to traditional cocoa growing methods. The company has hired an agricultural practices manager to promote sustainable agricultural techniques through trainings and pilots. Methods such as cover crops usage, agroforestry and water conservation will be used to increase the resiliency of the company and the region.

 

Investors

The LRF has one private investor, luxury brand Chanel that has committed $25m. Chanel has committed to goals that align with the Paris Climate Agreement in its ‘CHANEL Mission 1.5’, which includes the financing of climate adaptation projects. The Fund does not currently offer a financial return to Chanel, and any loans repaid to the Fund are reinvested into further projects. Dieterich says that this revolving structure allows the Fund’s team to take calculated risks in areas with strong innovation and potential impact, where investors with fixed return requirements may be reluctant to invest.

The LRF wants its SME investees to develop a track record to a point where they become attractive to other investors and scale further. “Large companies are recognising the fact that they need to do more to protect our planet, but those that learn about climate adaptation finance now will be better prepared when climate change affects their own supply chains,” says Dieterich.

 

Impact

The LRF tracks the impacts of its lending on three levels: across the portfolio, individual clients, and across the landscapes where these clients are located. At the portfolio level, LRF has five KPIs with public targets set for 2026:

    • Number of hectares under sustainable land management: 200,000 hectares by 2026
    • Number of additional hectares under conservation: 10-20,000 hectares by 2026
    • Reduction of metric tonnes of CO2: 2,080,000 tonnes by 2026
    • Number of people with increased resilience and improved incomes within vulnerable landscapes: 500,000 people by 2026, of which 50% will be women
    • Additional finance in SMEs from commercial investors: $3m for every $1m invested

The landscape and SME indicators are set as part of the identification and onboarding phase of the SMEs. For example, Koa’s KPIs include:

    • Total number of farmers reached and additional income paid to farmers for upcycled cocoa fruit
    • Reduction in food waste within the cocoa production process
    • Number of farmers trained in good agricultural practices (GAP) as part of the Koa training, and number of farmers trained adopting GAP.

For the Kakum landscape in the Central Region of Ghana, where Koa is based, KPIs include:

    • Number of farmers receiving Climate Smart Cocoa (CSC) training
    • Rate of adoption of prescribed CSC practices
    • Number of farmers receiving financial services to support adoption of CSC practices
    • Number of cases reported of child labour

Impact indicators will be measured and reported on a quarterly, semi-annual, and annual basis. An independent third party is chosen to review processes and verify outcomes.

 

Challenges

Dieterich says that finding ways to track impact that are fit for purpose and not overly burdensome to the SMEs is a challenging aspect. South Pole worked with WWF to develop the Fund’s impact measurement strategy, including its resiliency framework, and will review this periodically as the LRF issues further lending. Additionally, the scientific basis of measuring climate adaptation within a region is both location specific and evolving with new findings. “We need to prove in the longer run that resilience to climate change can be properly measured and reported across our portfolio… Investors will only commit further capital if we can show that we create mission-aligned change,” comments Dieterich.

 

What comes next?

As the Fund has a pipeline of SME opportunities and an anchor investment from Chanel, it is starting a fundraising round to engage with more companies, governments and philanthropic organisations, supporting its target of mobilising $100m by 2026. Dieterich states: “If we are successful with this ambition, it will be a clear signal to the market that there is interest by major funders on this topic, which will allow the issue of climate adaptation to step into the limelight and to be recognized as essential for the health of our global economy.”  

 

Sources

  1. https://www.unep.org/resources/adaptation-gap-report-2021
  2. https://www.worldbank.org/en/news/feature/2013/06/19/what-climate-change-means-africa-asia-coastal-poor
  3. Interview with Urs Dieterich, Managing Director, Landscape Resilience Fund, and Land Use Fund Manager at South Pole.