There has been a recent and noticeable shift in the dialogue around climate change. COP26 sparked an increasing awareness about the severity of climate impacts on rural populations in the global south, and new commitments to helping these populations adapt.
However, as the climate adaptation challenge for smallholder farmers and agri-SMEs comes into greater focus and funding is mobilized, there has been a concurrent realization that the infrastructure to effectively channel this finance where it needs to go does not exist. In our latest State of the Sector report, we dove into how climate change is impacting agri-SMEs and how capital and financial service providers can fill the significant unmet need for climate finance.
Climate impacts on agri-SMEs
While food systems are responsible for about 30% of global greenhouse gas emissions, agri-SMEs in developing countries contribute very little to this total. The bulk of emissions are generated by large-scale, intensive commercial agriculture in Europe, the Americas, and China. Sub-Saharan Africa and Southeast Asia contribute 10% and 12.5% of global food systems emissions, respectively.
But climate risks and shocks disproportionately impact agri-SMEs in these same regions. These include extreme weather events like storms, floods, and droughts; emergence of new pests and diseases as a result of increased temperatures; declining productivity; and volatile supply and prices due to all of the above factors.
An emerging imperative in the market
There is little doubt that the climate crisis will significantly impact agri-SMEs in the coming years—in fact, the impacts are already felt by many. To face these risks, agri-SMEs need support in adapting their business models and operations, and adopting nature-based solutions.
Analysis of the latest data from the Climate Policy Initiative reveals that only 1.5% of global climate finance (about USD 10 billion) is channeled to small-scale agriculture. Of that, only 7% (about USD 700 million) goes to value chain actors. The vast majority of this funding (>95%) come from public capital providers. Additionally, review of the ISF Fund Database reveals that impact-oriented funds with a clear mandate to focus on both climate finance and agri-SMEs have an estimated USD 300 million in assets under management. Essentially, in comparison to the total articulated demand, current climate financing for agri-SMEs represents a drop in the ocean.
Many funders are scrambling to fill this gap, but without much analysis of what investments might have different effects on mitigation, adaptation, and nature-positive solutions. We believe that a foundational infrastructure must be quickly established within the next 3-5 years to greatly increase the financing available to agri-SMEs for climate-related investments.
Building the infrastructure around climate finance
Despite increasing attention, climate finance for agri-SMEs has yet to emerge as a strong channel of funding with appropriate products and services, particularly those focused on adaptation. The public sector funding that does exist primarily focuses on big-ticket initiatives and is mostly disbursed as grants and concessional debt.
Over the next five years, in order to build a stronger infrastructure around climate finance for agri-SMEs, we recommend that:
- New models and taxonomies are quickly developed and used for investment strategies and reporting. International models and standards should be research-led, and used as a foundation for the agri-SME finance community to establish common approaches to achieving climate mitigation, adaptation, and nature-based solution goals. International donors and DFIs, along with governments, must help develop these standards and sponsor the complex technical work of applying them to specific agendas, like agri-SME climate finance.
- Large donor investments create a viable pipeline at scale. Our research clearly reveals a need for more agri-SME product/service solutions within viable business models. Many of these solutions will be completely new technologies. While some agri-SMEs may be at the forefront of innovation, many others will be slow to adopt solutions. Donors can invest in both the early-stage development and commercialization of climate solutions, as well as the expensive new intermediation that will be needed to channel these agri-SMEs into the portfolios of funders.
- Climate finance is integrated into all channels of agri-SME finance. Different finance channels serve different segments of agri-SMEs with different products—but all have an important role to play in supporting climate mitigation, adaptation, and nature-positive responses. Yet few have the expertise to understand specific climate needs, design appropriate products, and channel the large volume of climate capital into viable financial offerings. Bridges must quickly be built between traditionally siloed communities of investment practitioners in order to introduce this critical climate lens.
In order to respond to the scale and urgency of the climate challenge, the larger ecosystem of intermediation, support, and monitoring and evaluation needs to be strengthened. This will help build more awareness and generate demand from agri-SMEs for climate financing products and services, effectively channel these funds, and measure their ultimate impact on climate mitigation and adaptation.
For more information, read the full report.
Smallholder farmers are uniquely vulnerable to a wide range of disruptive shocks, from volatile markets to climate change. In the face of healthcare and supply chain disruptions caused by COVID-19, building farmers’ resilience to such volatility is more important than ever. Advisory services—which provide farmers with knowledge, tools, and market linkages—help farmers adopt optimal practices that build their resilience to these kinds of shocks. Yet there’s a gap in understanding the different models of advisory services and the ways that donors and other stakeholders can enable them.
While most advisory services are provided through government-, donor-, or corporate-subsidized models, a growing number of commercially sustainable service providers are emerging—often with the help of digital technology. Alongside the broader trend toward sustainable and market-driven development interventions, these models have the potential to deliver advisory services sustainably, effectively, and at scale. This potential is particularly salient when it comes to advisory services focused on climate-smart agriculture.
To map out this opportunity, the Swiss Re Foundation and ISF Advisors have published an initial landscape analysis titled “Strategies for Supporting Sustainable and Climate-Smart Advisory Services.”
Overview of the market
In our landscape analysis, we catalogued and analyzed more than 70 advisory service providers to reveal seven distinct model types. Public extension (model 1) and donor-subsidized advisory services (model 2) are driven primarily by the desire to achieve improved farmer livelihoods and broader economic development objectives. These mission-driven models make up the majority of the market in terms of both farmers reached and funding allocation.
Corporate-led models—either by agricultural (model 3) or non-agricultural businesses (model 4)—deliver advisory services as a complement to their core business activities. While they may include a livelihoods-driven component, the main objective of these models is to indirectly generate revenue for a business’ bottom line. For instance, by providing or subsidizing advisory services, offtakers can increase farmer loyalty and improve the volume, security, and/or quality of their sourcing. Although less widespread than public and NGO-driven models, models 3 and 4 have provided advisory services to a substantial portion of the market. These models are mainly in cash crop and/or tight value chains, and are typically focused on a single crop.
However, there is an emerging segment of providers that seek to generate revenues directly from advisory services provision. These models (5-7) may generate their revenue from their farmer-customers (B2C models) or from business, development, or government partners (in B2B, B2D, or B2G models, respectively) that pay for service delivery or for information gathered through service delivery. In our analysis, we focused on models 5 through 7. These models have the potential to provide more durable, scalable, and sustainable support to farmers, without reliance on public/donor funding or internal cross-subsidization.
While we recognize that commercially-sustainable models may not be feasible for the entire market—for instance, a number of experts we spoke to believe that it may not be feasible to profitably serve subsistence farmers—we believe there is tremendous potential for innovation and scaling. The emergence of digital technologies can greatly reduce operating costs of such models, and can enable more efficiency, impact, reach, sophistication, and customization that will enhance the sustainability of these models. Digital advisory services can also offer a crucial information source for farmers during crises, such as the COVID-19 crisis, during which many governments have utilized digital technologies to distribute important agricultural as well as health and safety information.
We also believe that commercial advisory service models add value which is often not yet fully quantified or translated into revenues, and in particular see B2B revenues as representing significant untapped potential. For donors, such models represent an attractive opportunity to fund innovation, development, and growth of promising organizations, with an explicit aim of achieving sustainability following a finite period of support. This seed funding is critical—a recent report by CTA found that commercial service providers focused on digital advisory collectively generated $103M in revenues in sub-Saharan Africa during 2018, a small fraction of the estimated $1.7B spent on publicly funded extension services in the region in 2018.
Challenges for commercially sustainable advisory services
At the same time, our landscape analysis has revealed numerous challenges for the creation, growth, and scaling of commercially sustainable, climate-smart advisory service models.
- B2C revenues are hard to generate because many farmers often lack discretionary income and already have access to alternatives subsidized by governments, development organizations, or corporate actors. Additionally, the impact and value created by advisory services is inherently difficult to quantify, and service providers often have trouble translating their value proposition to potential customers. Positive farm outcomes depend on a variety of factors—such as weather, prices, and inputs—and the contribution of advisory services may be unclear.
- Generating sustainable B2B revenues is also challenging. Though many businesses understand the benefits of providing advisory services themselves (as we see in models 3 and 4), actual or perceived high levels of cost and complexity may prevent them from partnering with commercially driven service providers. As with farmers, there is limited publicly available evidence on the value proposition of commercial advisory services for businesses.
- Setting up digital advisory service models can be expensive. While technology can enhance advisory service provision, the set-up can be costly and time-consuming (though these models tend to be highly scalable, with per customer operating costs decreasing with scale and time). In order to scale, these models will also need to acquire or develop content, establish relationships with farmers, create delivery channels, and in some cases have physical infrastructure or human presence in the field.
- Complementary services are not always available. Advisory services are most valuable when provided alongside other complementary services—such as input provision and financing. In many contexts, these complementary services are not available or accessible; meaning advisory service providers must either build a sustainable business with a less than optimal value proposition or expand their service offering, making their model less specialized and more complex and costly.
When it comes to climate-smart advisory services, there are additional challenges. Climate-smart agriculture is increasingly important, as farmers are directly threatened by the impacts of climate change and require knowledge, tools, and capital to build their resilience in the face of this threat. Advisory services can help farmers reduce their greenhouse gas emissions—for example, through changes in input usage, reduced tillage, or planting of cover crops. They can also position farmers to increase productivity and incomes while adapting to climate impacts. However, commercial advisory service models are rarely explicitly climate-smart, due to limited demand from farmers and businesses, insufficient understanding of the link between advisory services and climate-smart outcomes, and the difficulty of translating impacts into mitigation-related revenues (in addition to the cost of providing these services).
In addition, there is limited ecosystem support for commercial providers to develop climate-smart advisory services. While there are knowledge and convening platforms for models 1-2 (e.g., the Developing Local Extension Capacity project, FAO’s Farmer Field Schools Platform) and models 3-4 (e.g., IDH Farmfit, Sustainable Food Lab), similar platforms don’t yet exist for commercially sustainable advisory service models. The same goes for climate-smart agriculture, where a lot of the impetus is coming from governments and donors, and is still not widely adopted in more commercially oriented models. In general, research, learning, and evidence on commercial advisory services is limited. As a result, funders and enablers have little information or evidence with which to design their strategic interventions. This results in fragmented efforts—and, in some cases, distortionary impacts as grant funding for advisory services may reduce the competitiveness of other commercial service providers.
A call to action for funders and enablers of advisory services
Based on this research, we believe there is a vital opportunity to grow the market for commercially sustainable and climate-smart advisory service provision. For this market to be successful, donors, convening platforms, and ecosystem builders must:
- Support emerging, sustainable advisory service models. In order to build and scale sustainable business models—and more efficiently allocate grant-based support—funders and enablers must engage directly with commercial providers. Activities could include brokering relationships between advisory service providers and businesses to build B2B revenue streams, driving growth investment to high-potential models, and using targeted grants to support innovation and experimentation (while being careful not to distort the market).
- Stimulate the availability of public goods and shared infrastructure. This investment would enhance the ability of commercial advisory service providers to build sustainable models without having to develop their own infrastructure. Activities could include sharing knowledge and tools, creating platforms for complementary service delivery, and supporting specialized (model 7) service providers to more efficiently create necessary infrastructure and allow providers to focus on their core strengths.
- Improve coordination, collaboration, and knowledge sharing among funders and practitioners. Aligning action among funders and ecosystem enablers will drive more coordinated and effective research, learning, funding, and support. Activities may include developing knowledge around advisory services and climate-smart agriculture, agreeing to common frameworks, aggregating evidence on sustainable service models, and building a shared learning agenda.
Informed by this study, the Swiss Re Foundation plans to explore opportunities for engaging with partners around a shared learning agenda, benchmarking database, and/or other learning infrastructure and methodology. The Swiss Re Foundation also seeks opportunities to set up and support service provider platforms, and provide targeted support to individual providers focused on commercially sustainable and climate-smart advisory services. The Swiss Re Foundation will continue to share sector-relevant insights, such as this landscape report—and invite collaboration and reactions to these findings.
ISF Advisors seeks to continue to support these models as a “design catalyst” by disseminating research and advising on business models and investment opportunities for replication and scaling of promising models.
We believe a common understanding of the landscape of commercially sustainable advisory service providers is critical to our shared understanding of the potential, needs, key research areas, and funding of the advisory services market.
Most of us have gotten caught in the rain without an umbrella or spent a morning commute sweltering in a heat wave. But for the millions of smallholder farmers around the world, the stakes run much higher than a soaked shirt. Weather is just one of many disruptive shocks that have the potential to destroy a crop and ruin a farmer’s season.
That’s where agricultural insurance comes in. By paying out after ‘occasional events with large economic impacts’, such as extreme weather and pest activity, agricultural insurance offers two potential benefits. First, it helps farmers avoid devastating financial losses in the event of a disruptive shock. Second, it limits the downside risk for smallholders investing in their own productive capacity. After all, if there is a good chance that new improved seeds won’t germinate because of drought, it can be hard to validate the extra expense. Insurance can ease farmers’ concerns about investing in technologies and improvements that are crucial for advancing their economic standing over time.
Sounds good, right? We think so too. ISF believes that agricultural insurance is an important financial service that both protects farmers and can help improve their productivity over time. And we’re not alone. In response to increasing market interest, and with the support of the Syngenta Foundation for Sustainable Agriculture, ISF developed a report entitled, “Protecting growing prosperity: Agricultural insurance in the developing world.” Now, six months later, we revisit the findings and provide an update on some of the recent developments in agricultural insurance since the report’s initial release.
Market overview: Agricultural insurance for smallholder farmers
ISF estimates that globally less than 20% of smallholder farmers currently have agricultural insurance coverage, a number that is less than 3% in sub-Saharan Africa. Further, we estimate that ~270 million smallholder farmers in developing countries require USD 60-80 billion in agricultural insured value coverage. This amount of coverage represents an annual premium value of roughly USD 8–15 billion.
This coverage gap results from both low demand for and low supply of agricultural insurance products in developing nations. Smallholder farmers generally have low levels of understanding and trust in complex financial products. After all, the cost of insurance can be high and the payout mechanisms can be convoluted, slow, and divorced from the reality of a farmer’s actual losses. Meanwhile, developing, distributing, and servicing agricultural insurance policies in developing countries is complex and expensive for financial service providers.
Despite the challenges, agricultural insurance for smallholders represents a compelling market opportunity, from both a business and a social impact perspective. Accordingly, there is an increasing number of insurance products and schemes around the world trying to fill the coverage gap.
ISF conducted an inventory exercise classifying and examining ~100 agricultural insurance schemes in developing nations around the world. We found that traditional indemnity-based products are most prevalent in regions that have a history of strong public welfare systems, such as Latin America, Eastern Europe, and Central Asia. However, these products have been difficult to implement in other regions. In the past ten years, advances in weather stations, satellite imagery, and risk modelling have driven a rise in index-based products, especially in Africa and South and Southeast Asia. These new insurance products track proxy data, such as rainfall or vegetation levels, to determine when a payout should be issued. Without a cumbersome claim assessment, these products can be offered at lower cost but have higher basis risk and rely on technology and skills that are currently lacking in many geographies.
ISF believes that another 5-10 years of product and business model innovation is required to develop a robust, locally-tailored product class that meets the needs of both smallholder farmers and financial service providers.
Looking for leverage: How to move the market forward
Overall, our agricultural insurance landscape assessment paints a picture of an industry that shows great potential but is struggling to achieve the required scale and product-level refinements to graduate from the donor funding that has carried it to this point. The industry ‘ecosystem’ is complex, with many different actors facing systemic challenges. And while there is an emerging global agenda to develop this market, the solutions are highly dependent on national, or even subnational, context.
Our report identified four primary ‘leverage points’ that could accelerate the development of this crucial market:
- Leverage Point 1: Governments engaged and equipped to drive the agenda
- Leverage Point 2: A new step change in product effectiveness
- Leverage Point 3: Product linkages that change the distribution and adoption game
- Leverage Point 4: Coordinated global action
Market update: Big moves in agricultural insurance for smallholder farmers
Agricultural insurance for smallholder farmers is a complex market, and no single actor will be able to ‘solve’ the market constraints. Rather, we believe a more coordinated global agenda has strong potential to build momentum around early successes and innovate new approaches. A strong first step in that direction was taken in September 2018, when Syngenta Foundation for Sustainable Agriculture hosted a conference to bring together over 100 key stakeholders in the agricultural insurance ecosystem
Since that time, the industry continues to announce new initiatives and product innovations that are important steps forward in taking agricultural micro-insurance towards a tipping point. In Nicaragua, Incofin Investment Management (Incofin) is supporting two local microfinance institutions (MFIs) – Fundenuse and Micrédito – to implement the country’s first ever meso-model agricultural index insurance product. Meanwhile, in Uganda satellite-based drought insurance is expanding, and the ILO Impact Insurance Facility celebrated their 10-year anniversary by releasing a brief to share ten years of learnings regarding the successful provision of agricultural insurance in developing countries.