SDG Impact Finance Initiative with the support of Convergence approved an expansion grant of USD 300,000 to the Responsible Commodities Facility (RCF) Cerrado Programme, designed to prevent deforestation and conversion of native vegetation by soy farmers. The grant will support SIM in scaling their programme from a fund size of USD 11 million to USD 100+ million.
The increasing global demand for soy is driving continuous expansion in cultivation areas across Brazil, which has been identified as a leading cause of deforestation. While initiatives like the Amazon Soy Moratorium have effectively reduced deforestation in the Amazon region, plenty of evidence has suggested that it has led to the displacement of deforestation activities to the Cerrado. With the area for soy in Brazil expected to increase by over 20 million hectares in the next decade, the current vegetation method, which is done through deforestation and conversion of native vegetation will lead to a loss of biodiversity and an increase in greenhouse gas (GHG) emissions.
One solution is to stop the conversion of native vegetation in the Cerrado and to produce deforestation- and conversion-free soy to meet the growing international demand for zero-deforestation supply chains. However, implementing this solution requires substantial financial incentives for farmers to refrain from clearing the land.
The RCF Cerrado Programme targets soy farmers in the Cerrado region and offers farmers incentives to preserve the native vegetation. Unlike other existing solutions to prevent deforestation and conversion by soy farmers, RCF’s solution is more sustainable, scalable and incentivizing to the soy farmers. Under the RCF, a financial facility funded by Green-CRAs (Agribusiness Receivables Certificates) will provide soy farmers who meet its eligibility criteria and agree to produce deforestation- and conversion-free soy with a low-interest credit line. The loans are given to the farmers at the start of the crop season and are only required to be repaid at the end through the sale of soy grown. For farmers that remain eligible, loans are then renewed.
The design and initial structuring of the project received seed funding from the Good Energies Foundation and grants from consumer goods companies through the Consumer Goods Forum’s Forest Positive Coalition. Major UK retailers, including Tesco, Sainsbury’s, and Waitrose, were among the initial commercial investors in the subordinated tranche of the fund. In the 2023/24 growing season, SIM further expanded the project with a USD 36.24 million investment from commercial banks Santander, Rabobank, and impact fund AGRI3, leveraging the initial investment made by the food retailers. With support from the SDG Impact Finance Initiative and various investors, RCF aims to expand its fund size to over USD 100 million by the end of 2024. This expansion will enable RCF to finance more than 300 farms and conserve an additional 150,000 hectares of native vegetation in the Cerrado region
Design question and learning potential for the market: How can an impact finance solution in mitigating deforestation and conversion of native vegetation help crowd in new investor segments?
The programme uses a debt capital structure to finance loans to farmers. Low-interest credit lines are offered to soy farmers who meet the eligibility criteria and agree to produce deforestation—and conversion-free soy. These loans are provided to soy farmers at the start of the crop season and are repaid at the end through the sale of the soy produced. Additionally, farmers who remain eligible can reapply for the loans. The interest from the loans is used to cover management costs and investor coupons.
The solution will be funded by Green-CRAs (Agribusiness Receivables Certificates), which provide an alternative method of financing for rural producers alongside the more traditional lines of credit provided by the bank. Green-CRAs also differ from traditional CRAs in that they require the farmer investees to commit to additional environmental criteria to be accepted.
By mitigating associated risks, the program utilizes blended finance to attract diverse investors, particularly from the commercial sector. Initial investors in the subordinate tranche of the fund include consumer goods companies whose supply chains are directly affected by soy-related deforestation. Notably, RCF has so far mobilized funds from large grocery chains, including Tesco and Waitrose. RCF is keen on extending its fund in the future, which demonstrates strong scalability potential. Additionally, SIM is also in active discussions with technical assistance (TA) facilities to explore the option of supplying sustainable agriculture packages to the farmer investors in the future to further increase positive environmental impact.
