A Lifesaver for Agribusiness: the Financial Resiliency Clause

Exposed to phenomena such as El Niño, agribusinesses in Latin America and the Caribbean require protection by the financial system. One tool for this is the financial resiliency clause, developed to address the reality of climate change and the challenge posed by different natural disasters.

A Lifesaver for Agribusiness: the Financial Resiliency Clause

Agribusinesses are especially vulnerable to climate change. An abrupt variation in the environmental conditions inherent to an operation may harm them, especially if the measures required to mitigate its impact have not been implemented far enough in advance.

The region of Latin America and the Caribbean is much exposed to climate-related risks. The devastating effects of phenomena such as El Niño (temperature oscillations, torrential rains, hail, gale-force winds) have swept away companies that were ill equipped to face the challenges posed by these circumstances.

Moreover, these climate events act as a deterrent for entrepreneurs and possible investors, which explains the difficulties sometimes faced by agribusinesses in their search for resources to develop their projects.

A climate clause

Several instruments have been created over the last few years to help businesses prepare for adverse natural events, including one known as the “El Niño Phenomenon Clause”.

This clause was born of the Peruvian fisheries sector's overwhelming need to mitigate the dire consequences of warming waters on some Pacific marine species. It has already become a standard among local markets in several countries in the region.

Its mechanics are very simple. It allows companies to reschedule loan capital payments for the period in which operations are affected (due to the occurrence of a climate event with adverse effects on their repayment capacity), so that the company's operations can recover and return to normal.

The El Niño Phenomenon clause has obvious benefits for clients—who choose to activate it under the agreed conditions—as well as for financial institutions, given that it prevents defaults, which are always more costly for all the parties involved.


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A resiliency clause

Based on this experience, IDB Invest has incorporated the “financial resiliency clause” to its financial solutions portfolio. This clause has a greater coverage than the El Niño Phenomenon clause, since it seeks to expand its scope of action to other adverse climate events, such as La Niña, droughts, floods, troughs, or fires, to name a few.

Naturally, this clause is incorporated into the terms of a loan only after the corresponding analysis has been conducted of the environmental impacts the beneficiary may be subject to and the extent to which its project anticipates them and considers mechanisms to mitigate them.

Measures such as drip irrigation, which increases efficiency in the use of and decreases dependency on water, or biological pest control, which is less toxic than its agrochemical counterpart, are points in favor of clients subject to availing themselves of the financial resiliency clause.

Two of IDB Invest's projects currently have it in place: Agrícola Pampa Baja and Desdelsur.

  • Agrícola Pampa Baja is a family-owned enterprise, located in Peru, which produces milk from its own cows and produces and exports fresh fruit (avocadoes, grapes, tangerines, and pomegranates). IDB Invest granted the company a loan of up to $25 million with a 10-year term to plant an additional 600 hectares of avocado, develop an additional packaging line, and refinance its short- and medium-term debt.
  • Desdelsur is Argentina’s main pulse production, processing, and export company. It was granted up to $30 million with a 7-year term to make investments that enable it to grow in the industrial and livestock sectors. With this, it will develop one of the largest feedlots (intensive meat production system) in Argentina.

The financial resiliency clause is evidently an incentive for companies, which now have a new reason to behave responsibly and with a full understanding of the events that may affect them, bearing in mind that normally the clause may only be triggered a set number of times during the life of the loan.

IDB Invest does not abandon its clients in the task of understanding and mitigating the adverse effects of climate change; rather, it provides them with technical assistance that includes models, feasibility studies of alternatives, and risk management plans that they may need to combat climate-related impacts, which—in a nutshell-is what resilience means.

Examples of this help include the protocols to isolate the harmful banana fungus that recently penetrated the region, or the analysis of future water availability in basins where our clients are located, the results of which may affect the future productivity of both the company and its neighboring communities.

To ensure that this help is backed by the highest guarantees, IDB Invest relies on its agribusiness experts and on the most prestigious research centers on this matter in both Latin America and the Caribbean and in the United States. Due to all of the above, the financial resiliency clause is a genuine lifesaver for agribusiness companies exposed to climate disasters, both those that already work with us and those that aim to do so in the future, given that a tool designed to satisfy their needs will be available to them.■

Authors

Carlos Narváez

Carlos Narváez es oficial líder de inversiones en agronegocios en BID Invest. Es especialista en la estructuración de soluciones financieras, sostenib

Financial Institutions

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