Blended finance unlocks tricky investments
The transition to a future-proof agricultural system requires investments – risky investments. Can new financing models help? “Blended finance can be used to finance things not typically viable for commercial banks,” explains Rabobank’s Agnes Johan.
Nitrogen emissions, biodiversity loss, the burning Amazon: the media is full of negative news about the agricultural sector. But that doesn’t mean that the sector has been sitting on its hands in recent years. The Dutch agricultural sector, for example, reduced its nitrogen and phosphate surpluses by 32 and 94 percent respectively between 1990 and 2017. But despite steps in the right direction, we are still a long way from a sustainable system.
Put simply: the task is too substantial and efforts so far have fallen short. Large-scale changes are necessary. These changes also require investments, but when it comes to innovation and sector-wide transformation, or financing smaller players, the risks tend to be too big or the amounts too small for commercial banks. That’s where blended finance comes in.
What is Blended Finance?
Blended finance involves using a combination of money from various types of investors in order to create a desired impact. These investors could be governments, banks, so-called “impact investors” or philanthropic organizations. Crucially, one of the investors must be a public body. “By definition, all of the blended finance team’s deals are transactions which have a positive impact,” says Agnes Johan, head of Rabobank’s blended finance team. “Otherwise we would not be able to use public money.” Intended impacts can be social or environmental. Sometimes, but not always, participants deposit money into a collective fund.
Rabobank has had a blended finance team since 2017. “The added value of public investors’ commitments is that their contribution creates leverage; by supporting the distribution of risk with a relatively small amount, they enable banks to make more significant amounts available,” explains Johan.
"Public investors create leverage and distribute risk."
Agnes Johan, Rabobank
There are some investments that a bank cannot typically make because they are too risky, like loans with excessively long terms. Here, Johan also believes that Rabobank can play a specific role. “Because we are a large food and agricultural bank, we have a much bigger network and can accommodate these risks on a much larger scale. Scale is key to the agricultural sector.”
Rabobank is one of the biggest financiers of the agri-food sector globally, encompassing tens of billions in financing. Johan: “For us, it is strategically important to facilitate the transition to sustainable production methods in the agricultural sector.”
Investment in reforestation
A key example of blended finance is the AGRI3 Fund, an initiative between Rabobank, UN Environment, development bank FMO and Initiatief Duurzame Handel (the Sustainable Trade Initiative, or IDH). Among other things, this fund makes investments in sustainable agriculture and enables farmers to engage in reforestation.
Reforestation costs money but does not deliver any additional income for farmers. In some countries, farmers are obliged to reforest or preserve a portion of their land. A blended finance construction makes loans with longer terms possible, so that farmers gain greater flexibility to pay it back. “This creates a stimulus,” Johan explains. “You can help people break through the barrier with an investment that, despite the long-term benefits, wouldn't otherwise go ahead as they would not be feasible in the shorter term.”
For Rabobank, the provision of this type of long-term loan would normally be too risky. The blended finance construction, however, means the risk can be borne by Rabobank for the first few years. The AGRI3 Fund can then assume the risk for the last few years of the loan term.
Financing smallholder farmers
Another example is Neumann Coffee’s facility to support the livelihood of smallholder farmers. Neumann Kaffee Gruppe (NKG) realized that really small coffee farmers who supply their coffee were unable to access financing. Financing they desperately needed. NKG asked banks (Rabobank and ABN AMRO) whether they could set up a financing structure to provide pre-financing for farmers, whereby the risk was not only borne by NKG. The banks initially rejected the idea due to the size of the amount and the risk inherent in financing smaller farmers. A blended finance construction offered a solution. “F