Andrey Raichev and Kancho Stoychev

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. “For the first time, we accepted the risk on a portfolio of very small farmers,” says Johan.

NKG wants to roll out the financing program to many coffee origin countries. Initially, to Mexico and Uganda, followed by Kenya. Finally to Honduras, Colombia, Peru, Indonesia, India and Vietnam. Targeting multiple countries reduces the risk. “If one harvest is lost, the whole portfolio could be wiped out,” explains Johan, describing the risk of financing small farmers in a single country.

The blended finance construction allows risks to be spread across four parties: coffee trader NKG, IDH, the office for international development of the United States USAID, and commercial banks Rabobank, ABN AMRO and BNP Paribas. The financing is available for investments in coffee plantations, working capital or replanting. The aim is to improve the living conditions of farmers and their families. “I think this is a movement that you may well see much more of in the future,” says Johan.

Measuring impact versus greenwashing

Blended finance deals face several challenges. When it comes to public/private funding, it is vital that the resulting impact is clear. “You have to know, for sure, that you are creating genuine impact,” says Johan. “But how do you measure this? How can you be certain, for example, that the trees that are being planted will be left to grow? Or that the drip irrigation system really is the best solution for an area where climate change is causing lower rainfall?”

If outcomes are not measured or assessed properly, there is a chance that the process will be seen as “greenwashing,” which can create reputational damage for the client and all of the financing partners.

It costs both time and money, however, to measure impact and monitor processes: time and money that must be proportionate to the benefits. Johan expects innovation, such as the use of geodata gathered from satellites, to reduce the costs of monitoring.

The development of standards is an important next step. “What is the best way to set up these deals? How can we most effectively work with all the various fund managers? What type of impact do they want to see and have measured? And how can we measure it? There are currently no standards for rolling out these types of financial deals on a large scale.”

Blended finance: the new normal?

Blended finance is only intended to be used for progressive projects, stresses Johan. Projects which deliver the biggest results and which would otherwise not be suitable for financing. “When can you use blended finance to ensure that you can do the deal? And when are you supporting the commercial bank when it could, in fact, do the deal on its own? This is always the first discussion that we have with fund managers. Why can’t Rabobank do it on its own?”

As far as Johan is concerned, building up an adequate track record with a particular type of financing should provide Rabobank with sufficient reassurance for reducing the risk distribution with an impact fund. These reassurances would make blended finance a progressive instrument, for continuously looking further ahead, but always focusing on transactions with an impact.