How to Finance a Transition to Low-carbon Coffee?
USAID, Global Coffee Platform Analyze Finance Opportunities, Challenges
February 17, 2022 –The United States Agency for International Development (USAID) Green Invest Asia and Global Coffee Platform (GCP) convened coffee producers and investors on February 10, 2022 to discuss climate finance opportunities and platforms available to lower carbon emissions across Southeast Asia’s coffee value chain.
Global coffee demand is expected to triple by 2050, raising pressure on forests and other habitats in tropical regions where it is grown as farmers look for new land to cultivate, including in Southeast Asia, which accounts for nearly one-quarter of global coffee supply.
USAID Green Invest Asia shared case studies of past investments to manage environmental risks in the coffee sector. From green bonds, to working capital loans, to the global carbon market, the longstanding challenge remains: how to extend these sources of finance to tens of millions of farmers cultivating on small plots of land?
For example, Vietnam is the world’s leading producer of the Robusta coffee variety. A 2021 carbon assessment of Robusta coffee production in Vietnam supported by USAID and conducted by Agri-Logic showed farmers reduced carbon emissions and increased their income over five years of climate-smart coffee cultivation. But even with such research, the cost to transition to low-carbon cultivation is still considered “too high” for farmers, said Le Duc Huy, General Director of SIMEXCO, one of Vietnam’s leading coffee exporters. SIMEXCO had contributed data for thousands of its farmers to the USAID-led carbon assessment, but is struggling to access finance to scale climate-smart interventions. “When we show them the P&L [profit and loss statements], farmers lose interest,” said Le.
Potential sources of funding that help farmers defray costs of climate-smart practices like intercropping (planting more than one crop in one area), improving soil management with cover crops and organic fertilizer, or conducting carbon footprint measurements, include local finance institutions that on-lend capital from regional investors. For example, International Finance Corporation provided $212.5 million to Vietnam Prosperity Joint Stock Commercial Bank (VPBank) to help VPBank expand its lending to small and medium enterprises (SMEs) and boost financing especially for climate-friendly projects in Vietnam. VPBank has coffee companies as current clients, said its green finance specialist, Tran Minh Hoang.
Green bonds –investments in companies and projects committed to protecting natural resources – are another possible source of financing, but public bonds are typically issued for a minimum size of $100 million, said Cedric Rimaud, Fund Manager of the Earthwake Green Impact Fund VCC at First Degree Global Asset Management. To cater to smaller companies and ticket sizes, Earthwake’s fund focuses on Southeast Asia and can issue green or social bonds in the $10 million to $50 million range. “We are proceeding relatively fast to try to identify new projects, especially in agriculture, which we believe is an area where there could be a lot of expansion for green bonds. This is not an area that globally represents a big share of the green bond market,” said Rimaud.
Justin Archer, the head of sustainability at the Swiss-headquartered coffee trader, SUCAFINA, said: “There’s a tremendous willingness to tackle these [sustainability] projects in a way that we’ve never seen before. I think if we can really identify the right ecosystem of partnerships and identify the investable projects, then I think…we’re going to open the taps and these things are going to start happening.”
Another financing option is “blended-finance” facilities where public sector funding, financing instruments and other assets are used to attract commercial private capital. The United States Development Finance Corporation (DFC) provides both direct loan and loan guarantees to support climate change transition in the coffee sector.
“Being able to crowd-in both private and public financing is critical to creating the right balance of risk allocation,” said Maria Goravanchi, DFC’s Regional Managing Director, Lower Mekong. As part of DFC’s current five-year development strategy to support food security and agriculture, it seeks to invest $500 million to promote agriculture value chains, with 75 percent of committed projects in low and lower middle income countries, she said.
The global carbon marketplace can encourage smallholder producers to pivot to climate-smart agriculture, where companies seeking to decrease their carbon emissions pay farmers per unit of additional carbon they are able to sequester (capture and store) in trees.
Rabobank is developing an on-line platform that has onboarded 10,000 farmers called Project Acorn, a smallholder-focused marketplace. The platform has sold carbon removal units (CRUs) to Microsoft and Standard Chartered Bank in the range of 20 euros ($23 USD) for one ton of carbon dioxide equivalent. Farmers receive 80 percent of CRU proceeds. The source of each CRU is linked to a registered plot of land, and the carbon that additional trees planted on that land have removed from the atmosphere. Rabobank developed its own accounting framework and methodology, both approved by Plan Vivo, a standard for smallholder and community-forestry projects. All projects adhering to these standards are certified.
This climate finance webinar is the third in a seven-part Sustainable Coffee Dialogue series to catalyze joint corporate action to reduce greenhouse gas emissions in the coffee sector, and is supported by USAID as part of the U.S. government’s regional strategy to work through the private sector to achieve sustainable supply chains. The next webinar on April 28, 2022 will focus remote-sensing solutions to carbon monitoring.
All event recordings are available here.