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OPINION: To improve diets and tackle climate change, support SMEs in low-income countries

by Sofia Condes & Stella Nordhagen | Global Alliance for Improved Nutrition (GAIN)
Thursday, 30 January 2020 12:13 GMT

* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.

Investors and lenders currently see SMEs as too risky and too hard to finance but they are essential to transform eating habits

Sofia Condes is programme lead on nutritious foods financing & Stella Nordhagen is implementation research advisor for GAIN (Global Alliance for Improved Nutrition). 

We know where we need to get to. To feed the world sustainably, we need a food system that provides healthy, nutritious food in a way that is affordable and accessible to all and protective of our fragile planet.

We also know that we’re not there yet. Not even close. Despite huge advances in agricultural production over the last century and more, hundreds of millions of people remain under-nourished and millions more are overweight. As the global population grows, so will the size of the challenge.

Complicating the scenario further is today’s unfolding climate emergency. Agriculture and food production are inextricably linked to dramatic changes in the earth’s climate.  World food production currently contributes an estimated nearly one third (30%) of greenhouse gas emissions. And along with habitat loss and other well-documented effects of climate change, a warming planet will make it ever harder to produce nutrient-rich diets.

Take wheat. If changes to regional temperatures and rainfall patterns continue as at present, wheat harvests in Africa could reduce by 17% by mid-century. This isn’t all about the future either. In 2017 alone, climate events led directly to food insecurity for 59 million Africans.

SMEs need to be at the heart of transforming the food system in low-income countries

Feeding a population of 10 billion people with a healthy diet within planetary boundaries is possible, according to the ground-breaking EAT-Lancet Commission on Food, Planet, Health’s report.  But, the report authors warn, it is going to take a transformation in eating habits and food production.   

In low-income countries, Small and Medium-Sized Enterprises (SMEs) need to be at the heart of this transformation because most food is produced and sourced from them, particularly fruit and vegetables.  In addition to providing large quantities of food, they are essential for driving the innovative solutions needed to make nutritious food more available and affordable.

One such example is Twiga Foods. Launched in 2014, this Nairobi-based innovator operates its own digital, end-to-end food distribution system. Via a tailormade mobile platform, Twiga provides an efficient, fair (payment is within 48 hours) market to more than 17,000 fresh food producers in Kenya, as well as a cashless procurement point for over 8,000 retailers. By re-engineering the local supply chain, Twiga is helping to increase access to fresh and nutritious foods. 

Another stand-out example is Cold Hubs, a small Nigerian company that provides solar-powered walk-in cold rooms for 24/7 storage and preservation of perishable foods, which farmers can use on a pay-as-you-go basis. Small farmers in Africa currently lose an estimated 45% of their vegetable harvests and 35% of their fruit harvests according to the Rockefeller Foundation.

However, despite their vital role, many SMEs struggle to grow because they lack finance and skills.  Without these key ingredients for success, SMEs are unable to enhance the nutritional value of their products, improve their food safety standards or reach local markets.

Blended finance: achieving shared impact 

At present, investors and lenders see SMEs as simply too risky and too hard to finance, especially in the agricultural sector given uncertain yields and climate-related challenges, even for more impact-minded investors.  Where investment is secured, it often flows into export-orientated sectors, such as coffee and tea. This helps to improve incomes for a select number of farmers but does little to increase the domestic supply of nutritious foods.

Without more investment flowing into small, nutritious food businesses, examples like Twiga Foods and Cold Hubs will remain the exception rather than the rule.

Resolving this financing stalemate is vital. At GAIN, we believe a viable way forward exists. It involves reducing the risk profile of SMEs by ‘blending’ capital from across the funding spectrum: philanthropic donors, development banks, government donors, impact investors, domestic financial institutions and international commercial lenders.

As laid out in detail in our recent discussion paper, this blended approach to finance would be structured in ways that enable investors to meet their own risk thresholds and impact mandates. For example, a grant-making donor or development finance institution would make the first move, with impact investors and other lenders following their lead.

By de-risking the process of investing in small food companies, it promises to get money flowing to where it is needed most. And, once that happens, innovative food enterprises in the Global South will have the kickstart they need to build a food system that is good for the planet, good for the health of consumers and good for investors.