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Editor’s Note: Led by contributors from NextBillion’s Managing Partner, New Ventures, this is the latest in a series of articles highlighting insights from impact investing leaders on how to further scale environmental enterprises in emerging economies. This article explores the ways in which an organization such as Root Capital can prepare small-and-medium enterprises (SMEs) to link up with multinational organizations seeking to expand their green supply chains, and how these multinationals are becoming more engaged with these companies as they seek to expand these supply chains. See additional related stories below.

Globally, demand for sustainably-sourced products continues to grow at a staggering pace. Last year alone, consumers spent $6.6 billion on fair trade products. Companies from Mars to Wal-Mart to Unilever are responding to this demand by making pledges to source all, or some portions of, their inputs from more sustainable sources.

In order to meet these pledges, companies are changing the very way they do business. “Companies, looking to attract and retain enlightened consumers, are evolving the way they source agricultural products. They are also making new investments to forge value chains that are sustainable in the face of increasingly unpredictable weather and wild swings in food, energy and commodity prices,” observes Liam Brody, the senior vice president of Value Chain Relations at Root Capital. These new, lower-risk value chains frequently rely on SMEs.

Root Capital, a nonprofit social investment fund, is one organization indirectly helping companies meet their growing demand for sustainable products by providing the tools—including loans and financial training—that enable SMEs in Latin America and sub-Saharan Africa to access global markets. As better run, more efficient businesses with access to capital, Root Capital clients are able to procure, process, and sell greater volumes while also improving product quality and consistency, and thereby becoming more reliable suppliers. While this helps grow rural prosperity for farm families at the base of agricultural value chains, it also generates economic value by creating more resilient suppliers and lowering costs, which ultimately improves returns for global buyers.

Moving beyond traditional capacity building

Though capacity-building initiatives are widely recognized as crucial to the success of SMEs, funding and resource constraints often limit their availability (see a NextBillion article on this subject here). Root Capital’s model of providing loans, coupled with financial training, is a novel approach for meeting SME needs while also reducing financial risks to investors.

By linking capacity-development directly with the lending process, Root Capital provides SMEs with the tools they need to successfully manage their finances, grow their operations and increase their revenues along with their social and environmental impact.

Brody shares, “I have a colleague in Uganda who tells our clients that credit is only a good servant if its master has the tools to be able to control it. Without these tools—like the financial management training Root provides— the servant becomes the master.” And providing SMEs with the tools for success reduces Root Capital’s own lending risk. This is reflected in Root Capital’s historic loan repayment rate of 98 percent.

(Left: Kilicafe, a Root Captial client in Tanzania, invests in water-efficient, climate-smart processing equipment).

Working to achieve scale

In order to scale this innovative model, and prove its viability, Root Capital plans to achieve operational self-sufficiency of its core lending by 2016. However, the fund also wants to leverage its experience and help create an entire financial sector serving agricultural SMEs. To this end, it is working with peer organizations to establish public standards and best practices for these lenders.

Root Capital is also working to convince larger, more mainstream impact investors that sustainable farmers, and the businesses that aggregate them, are a good bet. Brody explains: “There are 500 million farm households marginalized from the global economy. Root Capital and other social financers together can’t reach them alone; we must be pathologically collaborative in order to catalyze a thriving financial market that serves their needs.”

Building relationships with multinationals

And the collaboration extends beyond financiers. Root Capital also works with companies that purchase from the SMEs it finances, such as Starbucks. For example, Root Capital and Starbucks have a common interest in increasing coffee farmers’ adaptation to climate change. To this end, Root Capital is in discussion with Starbucks about investments the coffee retailer could make to help small-scale farmers become more resilient suppliers, Brody says. In complementing Root Capital’s financial services with Starbuck’s extension services, the two organizations are uniting to fill gaps in the support ecosystem for SMEs in a way that could prepare more SMEs for investment and ultimately bring more successful deals into the pipeline.

The types of partnerships that Root Capital is building demonstrate how lines can blur between the financial, capacity-building, and global purchaser aspects of the deal pipeline. These partnerships provide an example of the collaboration the impact sector needs to reduce risk, create value and ultimately scale.

(Above: Roseline Jean, a member of Root Capital client COOPCAB in Haiti, sorts coffee for export).

Related Articles

Tools of the Trade: Building a Robust Deal Pipeline of Impact Companies in Emerging Economies Part 1

Tools of the Trade: Building a Robust Deal Pipeline of Impact Companies in Emerging Economies – Part 2

Tools of the Trade: Building a Robust Deal Pipeline of Impact Companies in Emerging Economies – Part 3