Original blog post: Sustainable Finance in Africa | Alliance Bioversity International – CIAT (alliancebioversityciat.org)
Reflecting on Africa’s Food System Forum, Godefroy Grosjean, CGIAR Hub for Sustainable Finance Co-lead, writes that entrepreneurs and investors have attractive opportunities in African food and ag sector by taking an ESG investment strategy.
Last week, more than 3,000 delegates, including several African presidents, ministers and CEOs, met in Dar Es Salaam, Tanzania’s largest city, for Africa’s Food System Forum (AGRF) to discuss Africa’s Solutions to build better and more inclusive food systems. I had the privilege to be one of them, representing the CGIAR Hub for Sustainable Finance (ImpactSF), which connects CGIAR‘s science with the needs of investors.
Here are key insights I gained from these high-level discussions.
One of the slogans visible during the conference was from the host country “The Land of Opportunities”. While this is certainly the case for the country, the week confirmed to me, as was also emphasized by various participants[1] , that Africa is the Region of Opportunities. I met inspiring entrepreneurs, leading companies, and businesses of all sizes ranging from agrifood firms, input providers, aggregators to agtech and fintech. The business scene in food and agriculture is bubbling across the continent, and investors would miss opportunities not to pay closer attention to it.
Harnessing these business opportunities requires, however, overcoming a few challenges: Africa is still import-dependent, despite having all it takes to achieve food sovereignty. Business growth is slowed down by insufficient access to finance, and more generally by a mismatch between capital supply and demand. Financiers and investors are increasingly interested in the African food sector but lack reliable data and clear frameworks to properly prioritize investments and assess potential Environmental, Social and Governance (ESG) risks and impacts. This is amplified by major barriers on the demand side of capital; for instance, there is a flagrant lack of bankable pipeline. As a result, African entrepreneurs pay a much higher costs of capital than their counterparts elsewhere. Is this fair. No. Is this hurting growth? Without any doubt.
What are the concrete solutions to this situation?
We need to invest at scale in clusters of value chain actors who are able to influence their entire value chain, especially smallholder farmers. Successful examples have shown that large scale partnerships bringing food processors, input providers, retail and holistic advisory services to farmers can be game changers. If actors across the value chain team up – in particular those who are able to absorb larger investments – they can attract capital and support farmers upstream increasing yields substantially and sustainably. Another green revolution – that is both sustainable and inclusive – needs to transform African food systems.
Blended finance instruments – using catalytic capital from public or philanthropic sources to increase private sector investments in sustainable development (Convergence, 2023) – are part of the solution. Yet, purely focusing on financial de-risking is insufficient as a response. Poor business models cannot be compensated by public guarantees. Evidence-based advisory will be essential to ensure that businesses are financially viable but also factor in ESG risks to build climate-smart business strategies. Market intelligence is likewise needed to make sure concessional capital is directed where it maximizes impact. Climate will certainly be a risk for many food-related investments but can also be an opportunity for entrepreneurs if they are able to articulate and quantify – based on sound evidence – the positive impacts they could generate. By aligning their strategies to global net zero and nature-positive targets, African entrepreneurs should be rewarded for their efforts and climate finance should be targeted to them.
Now, the green revolution should not come to the agrifood sector only. The African banking industry needs to launch its own green revolution supported by governments and donors. Without banks – agriculture growth in Africa is likely to remain disappointing and unsustainable. Why is this the case? The answer is clear: a large share of farmers and entrepreneurs in Africa have small scale operations, not part of integrated value chains. As a result, their first entry point for finance is often microfinance institutions or local banks. The African banking sector is innovating in many ways – bank branches on wheels and fintech are competing to provide access to financial services in underserved areas. While this is a good step, banks – and this is not only the case in Africa – desperately need systems to assess ESG risks and impacts, for example to evaluate how climate variability affects their customers’ ability to pay. More importantly, they are currently unable to advise their customers on how to mitigate climate-related risks and reflect farmers’ resilience in the cost of capital. Bank officers with the support of agtech solutions need to become the next generation of farmers and food entrepreneurs’ advisors. Agtech solutions are emerging – for instance apps integrating ESG risks and impacts into credit scoring – and need to be brought to scale to facilitate this transition towards sustainable food systems.
Finally, the right regulatory environment is needed for entrepreneurship to flourish. Inspiring examples exist; for instance, Rwanda has set itself the target to become a regional green financial center bringing stable, clear and predictable regulatory framework for investors on ESG. If effective, such success stories could be rapidly emulated. International organizations have a responsibility to support such initiatives: succeeding here can not only enable us to effectively respond to the climate crisis, but also address social crises. But this will only be possible with strong partnerships.