It is no secret that our future supply of chocolate is coming under threat from climate change. With increasing temperatures and more severe periods of drought and rainfall, cacao farmers are struggling to produce the yields they need to supply chocolate’s main ingredient. In the southern Philippines, farmers in the cacao-growing hotspot of Mindanao are increasingly confronting this reality.
With all eyes on the 2023 United Nations Climate Change Conference, COP28, you might be wondering what is the COP28 connection with chocolate? It all boils down to climate finance.
The case of food, climate change, and financing
In acknowledgment of the significant impact food and agriculture have on climate change, more than 130 countries signed up to the Leaders Declaration on Sustainable Agriculture, Resilient Food Systems and Climate Action at the start of COP28. The declaration calls for nations to include emissions generated from food – which currently contribute to one-third of greenhouse gas emissions – in their Nationally Determined Contributions to tackle climate change.
Yet smallholder farmers like those in Mindanao, who produce one-third of all food globally, only produce around five percent of these emissions. The impact of climate change on their lives and livelihoods, however, is much greater. In response, there are calls from across the sector for more climate finance to be targeted towards these smallholder farmers.
New food-related climate finance commitments responded to this call in an impressive way in the first days of COP28. The Gates Foundation and United Arab Emirates, for example, announced a commitment of US$200 million towards accelerating climate innovations for smallholder farmers. Yet the climate financing gap still looms large, especially when it comes to adaptation financing for countries in the global south. The question then remains, how do we make sure funds that are targeted towards smallholder farmers are best translated into meaningful interventions?
Leveraging climate finance to support agricultural adaptation
Throughout its 70 years of creating business solutions to poverty in the agriculture sector, MEDA has developed key lessons learned on leveraging finance in a way that best supports the climate adaptation capabilities of smallholder farmers and enterprises. These lessons are being applied to the Philippines’ cacao sector and beyond. They offer important considerations for other organizations looking to translate the declarations coming out of COP28 into practical realities.
Our first critical learning has been that the best climate finance initiatives are led by market demand.
Across agricultural value chains, small and medium-sized enterprises (SMEs), buyers, and processors need to be positioned to stimulate climate-friendly agricultural production among smallholder farmers. De-risking, technical support, and incentives can all play a role in breaking down systemic barriers to SME and farmer financing. In the Philippines’ cacao sector, for example, MEDA is using an integrated market systems approach to de-risk and mobilize environmental, social, and governance (ESG)- focused investment for both cacao SMEs and financial intermediaries.
Following this approach, we should be scaling up mechanisms that channel carbon revenues to smallholder farmers.
Acorn, for instance, is providing certified carbon credits that ensure smallholder farmers receive 80 percent of total revenue generated. MEDA has also initiated a carbon credit pilot for the cacao sector in partnership with a carbon trading company and cacao cooperative. This setup works to incentivize participating cacao farmers in Mindanao to adopt sustainable agricultural practices by opening the possibility of shared carbon revenues that can diversify their income streams.
Third, we need to focus on more comprehensive investment approaches for agricultural SMEs and the smallholder farmers they work with.
Making impact investments in platform builds – such as investment funds – and “program plus investment” initiatives – that combine investments with technical support – increases outreach and impact. Investment funds can boost diversification, leverage local investment expertise, and decrease transaction fees. These benefits help to improve the risk-return profile of the portfolio. They also support the development of local financial ecosystems for climate financing. Similarly, “program plus investments” provide technical expertise that strengthens the capacities of smallholder farmers and enterprises for continued impact beyond the initial investment window. The technical assistance component of such investments can additionally tackle some of the underlying inequalities and climate issues facing smallholder farmers and enterprises. For the cacao sector in Mindanao, this means combining investments from MEDA’s Risk Capital Fund (focusing on investees that increase the inclusion of women and men smallholder farmers and integrate sustainability) with technical assistance to strengthen farmer and enterprise capacity.
Finally, we need to tailor climate finance solutions to unique customer segments and contexts.
Most small farms are incredibly diverse, meaning cashflows are often erratic and varied. Women farmers and enterprise owners face additional barriers due to social or cultural norms that exclude them from access to finance, tenure rights, property ownership, information, and markets. Customer segmentation should be conducted to ensure that climate finance best meets the unique needs of each segment to maximize impact, especially for women-led farms and enterprises. In the Philippines, MEDA is using a segmentation approach to tailor solutions to women, youth, and indigenous participants in the cacao value chain. A new partnership with the PLDT Group in the Philippines is expanding a Digital Farmers Program to cacao farming communities to increase their access to digital tools that will boost their productivity and response to changing climatic conditions.
Moving beyond COP28
Taking these lessons learned forward and outside the confines of COP28’s walls will help to ensure climate funding is targeted in a way that best supports the adaptation capabilities of small farmers and enterprises globally. It will also ensure that climate financing is used effectively. How we choose to tailor climate finance will have wide-reaching impacts – among these, on the future of cacao and therefore chocolate in the Philippines and beyond.