WRI Indonesia and Singapore Institute of International Affairs, with support from Tropical Forest Alliance 2020, hosted a workshop called “Making Green Finance Count: Impact Investing for Indonesia's Agricultural Sector” on Friday, October 20th, 2017 at the Ritz Carlton Jakarta. The event brought together more than 90 attendees from a diverse crowd of representatives from various NGOs, agribusiness companies, banks and the Indonesian government. As one speaker put it, “the world of green financing is moving very fast” and issues of agricultural sustainability have been increasingly emphasized in international forums such as G20. Moreover, the intersections of these issues are becoming clearer. This workshop highlighted that green financing is not only an environmental issue, but a developmental one as well. Impact investing in smallholder farms presents a means to not only create more sustainable supply chains, but to also improve the welfare of the farmers.
This workshop addressed how to create programs and partnerships to “green” supply chains at the independent smallholder level, while also benefitting both big and small players. The problem arises in that independent smallholders don’t have the same support as larger-scale operations. They thus don’t have as much education on sustainability, tenurial and legality issues. One speaker highlighted how they don’t understand the legality of the land, and often start growing their crops on illegal, conserved or protected areas. This creates a problem for the environment, as this leads to many forest fires, as well as for the smallholders, as it prevents them from getting access to financial support.
Many other speakers highlighted that access to credit is extremely hard for independent smallholders, partially because they are considered risky investments, and financial institutions are usually risk-averse. And when they do get credit, the interest rates can be very high (up to 11% from a rural bank).
The panel first discussed why we should be motivated to help smallholders. One speaker listed two main reasons: 1) productivity and outcome and 2) compliance to sustainability standards. “Many commodities in Indonesia are being produced by independent smallholders not tied to large companies,” said the speaker. For palm oil, over 40% of the cultivation area are managed or owned by smallholders. However, companies have indicated that smallholders usually produce crops of lower quality and yield. If smallholders are properly trained and have access to credit, it would improve their productivity and income and also increase revenues of agribusiness companies. Furthermore, companies have to comply with sustainability standards and smallholders’ limited access to knowledge often prevents them from being sustainable. Another speaker added that “low yields lead to unnecessary expansion of smallholder activities, leading to deforestation.”
The panel and moderated discussions then moved on to discussing ways of alleviating these issues and the importance of education was emphasized. Certain programs have been implemented to train smallholders in sustainable practices, legality issues, and financial literacy. These programs have been quite successful in increasing productivity and adhering to sustainability standards; one of these programs evens won an award for preventing forest fires.
Another solution discussed was the sharing and collection of data. Smallholder farms can be geospatially mapped to ensure they aren’t sitting on protected areas. And credit-scoring tools have been developed by some companies to make bankability more visible and to identify the planting and financing needs of a community.
In terms of the actual financing, one speaker highlighted the benefit of concessional financing, which blends public and commercial money together. This allows financial institutions to take more risk. Furthermore, there was also the idea of supplying un-bankable farmers with inputs such as seeds and fertilizers instead of cash to reduce risk.
Finally, the need for effective communication and collaboration was also stressed. This manifests in the form of farmer groups and co-operatives, public-private partnerships, and forums such as LTKL, which gathers the heads of preservation districts to discuss their challenges and needs. The exchange of knowledge is clearly central in promoting sustainable development, and different ideas were definitely shared in this workshop. At WRI, we hope to keep collaborating with our partners towards the mission of improving Indonesia’s environment and the welfare of its people.