Getting climate finance right for smallholder farmers: lessons from the Philippines, Vietnam and India

As climate change gathers intensity, it threatens food security and, particularly, the livelihoods of smallholder farmers who cultivate small plots of land using traditional practices that depend on soil fertility and predictable rainfall for a good harvest.

In times of cash squeeze, many generations of smallholder farmers in Asia have relied on short-term loans, often from informal sources, to tide them over a difficult harvest or make small farm investments. While these loans offer immediate capital for essentials like seeds, livestock, and tools, farmers risk falling into a debt trap, especially when their crops fail and cannot meet the mounting high-interest payments and inflexible repayment schedules.

Climate finance aims to support developing countries’ transition to low-carbon, resilient economies. However, smallholder farmers often need help to access these funds, which often offer difficulties for farmers to access with their opaque application processes and perceived investment risks associated with smallholder agriculture. These difficulties are multiplied several times in complexity for women farmers.

Smallholder farmers in Asia need alternative modes of financing. One such approach being considered by many civil society groups is equity financing. This involves raising capital in exchange for ownership of a venture. By offering equity, investors become partners in the farmers’ success, sharing risks and rewards.

Equity finance can change smallholder farming livelihoods for the better

Equity financing fosters shared responsibility, knowledge transfer, and flexibility while promoting sustainable practices.

1. Shared risk and long-term commitment: Equity financing aligns the interests of investors and farmers, fostering a sense of shared responsibility. By sharing the risk, investors are motivated to support farmers adopting more climate-resilient agricultural practices.In the Philippines, the Mennonite Economic Development Associates (MEDA) implemented Resilience and Inclusion through Investment for Sustainable Agrikultura, where they provided investment to strengthen inclusive cacao markets.They supported smallholder farmers, particularly women farmers, through a market systems approach with cooperatives or small-medium enterprises (SMEs) connected with selected business service providers and financial intermediaries.Additionally, through the MEDA Risk Capital Fund, new investment capital was made available through selected financial institutions in the Philippines to promote the inclusion of women farmers, support the conservation of the environment and provide overall support to the cacao sector.
2. Capacity building and knowledge transfer: Equity financing extends beyond mere capital injection. Investors can provide technical expertise, mentorship, and network access, empowering farmers with the knowledge and skills to effectively navigate challenges and adapt to the changing climate.The IDH Sustainable Trade Initiative in Vietnam supports farmers and farmers’ groups to strengthen their capacity in the pepper supply chain. The initiative encompasses various aspects to enhance farmers’ capacity, including improved service delivery innovations, implementing technologies to boost productivity, income diversification, and increased climate resilience. These activities also serve as a platform for members to share lessons learned and experiences. This program has contributed to scaling up Vietnamese pepper production and trade and increasing smallholder farmers’ incomes.
3. Diversification and adaptability: Climate finance players need to understand various risks faced by smallholder farmers and adopt different portfolios to reduce farmers’ vulnerability against fluctuating market conditions. Moreover, equity investment offers farmers greater financial flexibility during periods of low yield or unforeseen circumstances.Private and public partnerships can offer appropriate financial products and services to support farmers in adopting practices to face climate risks, improving their livelihoods, and reducing environmental impacts. For example, to protect farmers against risk and uncertainties, private-public partnerships could offer crop insurance and build supportive financial ecosystems for farmers. Corteva Agriscience crop insurance allows farmers to repurchase discounts if storms damage crops.
4. Incentives for building climate resilience: With equity financing, investors are vested in promoting farming practices that can help build climate resilience. They can encourage the adoption of climate-smart techniques, resource conservation, and reduction of greenhouse gas emissions, contributing to broader environmental objectives.The Small Tea Grower Sustainability Program in India exemplifies how equity financing can cultivate practices to build long-term climate resilience. Through this initiative, an investment fund provided equity financing to smallholder tea farmers, helping them transition to organic and climate-smart tea production. The equity investment provides the capital for infrastructure improvements and training and incentivizes farmers to adopt practices that can build climate adaptation. The project promotes soil conservation, biodiversity preservation and water resource management, resulting in improved tea quality, higher market prices and reduced environmental impacts.

Some challenges for equity financing

While equity financing holds promising opportunities, it has several challenges that need to be addressed especially by governments in the region:

1. Ensuring fair distribution: Guaranteeing equitable access to equity financing for all smallholder farmers, regardless of their size, location or social background, is crucial to avoid exacerbating existing inequalities.
2. Governance and transparency: Establishing appropriate governance mechanisms and transparent reporting systems is essential to build trust between farmers and investors, ensuring fair treatment and accountability.
3. Regulatory frameworks: Developing supportive regulatory frameworks that encourage equity financing in agriculture is necessary. Governments should create an enabling environment that attracts investors while safeguarding the interests of farmers.

What we should do next

Equity financing has the potential to empower smallholder farmers by revolutionizing the agricultural sector through shared risk, knowledge transfer, flexibility and sustainable practices. However, addressing challenges and promoting innovative financial products and responsible investment will be crucial to unlocking its full potential and creating a resilient and inclusive agrifood system. Access to affordable financing instruments will enable farmers to adopt new technologies, resources and practices, contributing to the Sustainable Development Goals, inclusive economic growth, food security and resilience to climate change.