Sustainable Food Laboratory

A new alliance of organizations, many of whom are active in the Food Lab, has launched to promote the growth of long-term looking (sustainable) markets by addressing one of the key barriers to growth: finance.

In Brazil, peasant families harvest a nutritious dark purple açaí berry (pronounced ah-sigh-EE) from palm trees that grow in the floodplains of the Amazon rainforest. Sambazon, a California based company, now sells this fruit throughout the U.S. in juice bars, fitness clubs, grocery stores and restaurants.

For years the açaí farmers scraped by with the prices they could get from their remote locations. Now they get a 25 percent premium over the market price and pre-harvest financing for designating areas as ecological reserve and managing the rest to protect the biodiversity of the rainforest.

In Sumatra, cinnamon farmers that used to clear-cut now harvest cassia cinnamon selectively from trees in the Kerinci Seblat Park Preserve, so named for its biological importance. The farmers commit to conservation-oriented practices including no hunting, logging or clear cutting in exchange for premium prices and more secure markets.

The concept of Sustainable Food includes conservation of critical ecosystems, and Food Lab partners recognize that conservation of ecosystems is tied to the economic well being of local communities.

In the US and Europe a growing number of international trading companies are creating a commercial vehicle to support enterprise activities, such as the two just described, that integrate conservation of biodiversity, natural resource management and grassroots development. The first was financed by Root Capital (formerly EcoLogic Finance). The second was co-founded by ForesTrade and World Wide Fund for Nature (WWF) Indonesia in 1993.

This type of economic activity, called “sustainable trade,” holds promise for mainstream markets but the key barrier, finance, holds the market back.

Food Lab member Thomas Fricke of ForesTrade spent years working with small-scale, indigenous farmers to improve livelihoods by using sustainable agricultural practices. It became increasingly clear that for this approach to succeed, the investment community would need to get on board.

He found that specialized financial intermediaries with a mandate to support sustainable producers had limited financial resources, and commercial lenders were mostly unwilling to participate. Meanwhile, the growing sector of “socially oriented” lenders attempting to fill the gap was fragmented, uncoordinated and inadequate to the demand.

In 2002, at the Specialty Coffee Association of America annual conference, Fricke presented the idea of an association for sustainable trade finance. By banding together he thought, the mission-driven lenders could increase capital, develop instruments to mitigate risk and streamline the lending process.

This past month, after years of development by a dedicated group of individuals, that idea came to fruition.

On March 6 in Long Beach, California, Jason Potts of the International Institute for Sustainable Development (IISD) and a core group of stakeholders, officially launched the “Finance Alliance for Sustainable Trade” (FAST) to facilitate lending for enterprise activities that lie at the nexus of responsible natural resource management, community-based development and international trade. ForesTrade and other members active in the Food Lab were involved.

Over a hundred stakeholders and beneficiaries gathered to celebrate the launch event held at the SCAA's annual conference. William Foote, President and Founder of Root Capital addressed the crowd.

"We're thrilled to see so many of our friends. The range of stakeholders who came from across the globe to show their support echo's the global desire to unify the sustainable trade finance industry."

Tedesse Meskela, General Manager of Oromi Coffee Farmers' Cooperative Union in Ethiopia, also spoke. Tedesse starred in the independent film, Black Gold.

FAST members include socially-oriented lending institutions, sustainable small and medium sized producer organizations (SME), development institutions and other stakeholders in the agriculture commodities supply chain.

The organization currently includes: Citigroup Foundation, Cooperative
Coffees, Conservation International, CORDAID, Ecologic Finance, Forestrade, Green Development Foundation, Green Mountain Coffee, International Institute of Sustainable Development, Rabobank, Shared Interest, Starbucks, Technoserve, Transfair USA, Calvert, UNCTAD and the World Bank.

Finance hasn’t kept pace with the market

Organizers explain that poverty is often at the root of environmental degradation.

Companies in the sustainable products market often buy directly from disadvantaged farming communities through rural co-ops. They offer more secure markets, price protection, technical assistance and other favorable terms to strengthen the case for viable economic alternatives to unsustainable practices.

Increasingly, farmers compete internationally on something other than price. Their products carry an air of quality and moral high ground rather than thrift, as customers understand that the farmer’s production practices preserve their life-sustaining resource base and the critical ecosystems they call home.

The global market for sustainable production has grown significantly. Fairtrade, Rainforest Alliance, Utz Kapeh, Organic certifications of various kinds, Marine Stewardship Council and more comprise this growing sector. And interest is growing in mainstream markets to implement sustainable practices within non-specialty agricultural trade channels as well.

As markets for sustainability initiatives have grown, the availability of producer trade finance has not kept pace. Small-scale agriculture activities in low-income, indigenous communities bring in political stability as well as environmental conservation but local financial institutions consider them too poor or under-asseted to be regarded as bankable.

Credit sources fall to local moneylenders known as “coyotes” because of their exploitative practices. These middlemen use the geographical isolation and scarcity of credit to secure products at low prices or profit gauging interest rates. Where local commercial finance is available, producer groups are often quoted prohibitively high rates. The cycle of poverty, lack of credit-worthiness and environmental degradation continues.

According to their business plan, FAST lenders are different.

“An explicit goal of all socially focused lenders is to challenge high interest rates which are predicated on the illusion that sustainable producer groups are inherently risky (or riskier than less sustainable concerns). By lending to producer groups without experiencing significant levels of lending defaults, many of the socially focused lenders have been, and should be, able to prove to local commercial lenders that lending to cooperative producer groups is profitable and makes good business sense.”

Organizers say that conversations with sustainable trade producers, associated NGO’s, buyer organizations and international development organizations have clearly indicated that one of the largest barriers to growth for sustainable trade has been their inability to access affordable finance.

Though the number of “socially focused” organizations lending directly to producer groups in developing countries to now exceeds 20 and have estimated funds of USD 250-300 million, they say this barely scratches the surface both in amounts and in type of financing. Money tends to be available solely for the period of export and not for pre-harvest or long term investments in infrastructure.

Furthermore, no coordinated body exists to build momentum, create identity and streamline efforts.

FAST activities

Potts explained that a number of high leverage tools become available to FAST members when they band together as an alliance.

A consolidated information access point is the most obvious way in which cooperating can bring benefits for producers. Combining the application into a single format enables producers to fill out one application and apply it to many lenders. Producers wouldn’t have to process applications with lenders one by one.

A toolbox for financial literacy is another example. Producers and producer coops often need better understanding of how to use finance and lenders don’t have particular expertise teaching financial literacy. Nor do training materials need to be lender specific. A generic, industry-wide set will do.

Socially minded lenders also share the need for social impact assessment tools. Investors want to know about the social impact of their funds but finance institutions traditionally document only financial returns. Again, an industry-wide set is needed.

Finally, guarantees on socially-minded loans would enable lenders to go further in support of sustainable producers. This is another way in which FAST as a sustainable trade industry sector has leverage. Individual lenders aren’t in a position to implement loan guarantees but the sector as a whole maybe.

In general, Potts said that FAST as a voice for the industry has the potential to strengthen the call for more investment into sustainable social development.

“Having the institutions together represents more market share and more capital and provides multiple examples of success.” Potts said,

Potts also said that FAST has the potential to leverage the commercial banking sector towards sustainability by creating an identity for sustainability and making the case that finance for sustainable production is worth while.

“Given the response we’ve got from some of the conventional banks that have shown an interest it could mushroom by taking on conventional services and absorbing them within the FAST approach,” he said.

Potts said, “It amounts to increasing choice and livelihoods for producers which intern enables them to respond to the needs of the market and increase access to value added markets with higher returns which gets them out of the trade trap. And not just any market but the long-term looking (sustainable) market.”

For more information contact:

Roy Parizat ‐ FAST Project Coordinator
Email: rparizat@iisd.ca
Telephone: +44 191 281 7090
Web: www.fast‐international.org