(Illustration by Neil Webb)
The global food system is broken. Nutritious, safe food is simply not available in sufficient quantities and at affordable prices for most people.
About one-third of the world’s population suffers from some form of malnutrition. This burden falls particularly heavily on low- and middle-income countries. For example, 30 percent of young children in Africa and 23 percent of those in Asia are stunted (i.e., too short for their age). These countries are also grappling with high and rising rates of overweight and obesity. In Africa, about 41 percent of women and 26 percent of men are overweight, and the number of overweight or obese children nearly doubled from 1990 to 2014. The average African adult eats less than one-third of the daily recommended amount of fruit and vegetables.
Traditional government- and civil society-led nutrition programs tend to focus on preventing hunger by increasing the amount of food (particularly staple grains) available. These interventions are important, but not nearly enough attention is paid to increasing the nutritional quality of food produced or to changing agriculture and food systems to get more nutritious food from farm to fork—and to do it more sustainably.
Small- and medium-sized enterprises (SMEs)—defined by the International Finance Corporation (IFC) as having fewer than 300 employees and/or less than $10 million in annual sales—provide 70 percent of food consumed in low- and middle-income countries. As in other types of businesses, however, SMEs in the food system have to contend with a variety of barriers to successfully operate and grow, including access to credit.
The IFC estimates that the unmet financing need among SMEs globally is $4.5 trillion per year and the gap for microenterprises (those with fewer than 10 employees) is more than 10 times that amount. This shortfall directly affects food systems and nutrition: Without investment, SMEs cannot improve the production volume, quality, desirability, safety, or nutritional value of their products, nor can they work to expand their range to reach more underserved consumers.
How can this enormous funding gap be bridged so that food-related SMEs in low- and middle-income countries can grow and better serve their customers? SMEs generally have difficulty accessing capital because of their modest funding needs, limited collateral, short credit histories, and uncertain prospects. Mainstream investors and even many impact investors see them as too risky. This perception especially applies to the food and agriculture sector, where low productivity and profit margins and high exposure to climate risk continue to weigh on investor sentiment.
The Global Alliance for Improved Nutrition (GAIN) is a Swiss-based foundation launched at the United Nations in 2002 to tackle malnutrition by working with governments, businesses, and civil society to transform food systems to deliver more nutritious fare. We at GAIN believe that blended finance—finance that harnesses several different sources of capital—can play an important role in attracting more private investment into the global food sector by helping to lower the risk of investing in SMEs (e.g., by absorbing some losses or providing repayment guarantees). But for blended finance to work, the sector needs to do more to make it a favorable market for impact investing.
Nutritious Investing
Blended finance brings together three distinct groups—donors, development finance institutions (DFIs), and private impact investors. Donors are interested in improving nutrition and do not need to make a return on their investment. DFIs have a mandate that allows them to tolerate higher risk. Impact investors have capital to deploy and are seeking social impact, but are hesitant about risk.
Balancing these different needs and capacities can create a win-win for investment and development goals. Through blended finance, development funding can be used to mitigate investment risk in projects expected to have a positive social impact by deploying first-loss capital or other guarantees and insurance policies. Blended finance can also include direct investment through debt and equity in target enterprises, using concessional loans or grants, and tranched financing that allows other investors to realize higher returns.
Blended finance has the added appeal of including grant-funded technical assistance or business development services to help target companies overcome barriers to success. This help could include improving nutritional content through reformulation, putting in systems to minimize food loss, or addressing technical barriers associated with food safety.
To date, blended finance has mobilized approximately $100 billion with at least 300 blended-finance transactions closed in 2017 alone. Renewable energy, financial inclusion, and infrastructure have received the largest share of funding to date. Agriculture funds do exist, but such investments account for only 3 percent of the capital mobilized from 2000 to 2016.
Yet mainstream and impact-investor interest in agriculture and food is growing quickly. Between 2005 and 2013, the number of funds focused on food and agriculture investments increased from 38 to 446, with $73 billion managed. However, most of this finance is devoted to North America and Europe. Only 4 percent of available investment in food and agriculture makes it to Africa, despite the estimated $155-265 billion to be made in meeting the increasing food requirements of those emerging out of extreme poverty globally.
Moreover, the majority of food and agriculture funds do not focus on nutritious foods. A recent analysis of such funds in sub-Saharan Africa found that few had an explicit mandate to improve nutrition, none had clear definitions of how they determined what foods were nutritious, and some invested in foods of questionable nutritional value. Our research shows that SMEs receiving the most funding from international investors are primarily involved in the production of nonnutritious foods. For example, almost 60 percent of the financing provided by members of the Council on Smallholder Finance goes into cocoa and coffee for export, bringing little direct nutritional benefit to local populations. Such patterns of investing must change for everyone worldwide to gain access to nutritious food.
Plowing the Field
If blended finance offers such a promising option, what is holding back its investment into nutritious food? We believe that there are two challenges that must be addressed.
First, no sector can claim to be a viable target for blended finance if it cannot clearly define its social goal and how to measure progress toward achieving it. A 2019 GAIN assessment revealed considerable inconsistency among investors about what investing in nutrition actually means. For example, some investment funds that explicitly aimed to improve nutrition included in their portfolios sugar cane companies and violators of the World Health Organization International Code of Marketing of Breast-milk Substitutes. GAIN has thus taken on the task of establishing clear definitions and metrics that can present nutritious foods as a compelling investment and enable investors to track the social benefits of their investments.
Classifying individual foods as nutritious is not easy: What counts as a healthy diet varies by age, life stage, and activity level, and the nutritional value of any food can be altered for better or worse during processing. No single definition of “nutritious” can navigate this complexity. We thus need criteria to help differentiate the spectrum from what is certainly negative for nutrition (highly processed meats, trans fats, sugar-sweetened beverages) to what is invariably positive (fruits, vegetables, legumes) and everything in between. GAIN has thus been working to develop clear inclusion and exclusion criteria to help guide investors, allowing them to support foods rich in beneficial nutrients, avoid those high in harmful ones, and target investments towards those foods most likely to reach the nutritionally vulnerable.
Defining and measuring impact requires the creation of agreed-upon metrics and measurement approaches that capture changes in the availability, affordability, accessibility, and desirability of safe and nutritious foods. Such metrics must also balance the needs of investors and evaluators, and be harmonized with existing impact-measurement platforms, like that of the Global Impact Investing Network (GIIN), to enable investors to more readily assess potential impact in the sector and to simplify investee reporting. GAIN is working on the development of relevant metrics and seeks to collaborate with other groups, such as GIIN or the United Nations Development Programme, to bring them into more widespread use.
Second, the sector also needs to develop more ways of identifying and brokering investable deals and connecting potential investors with SMEs in nutritious food value chains. GAIN recently designed a blended finance mechanism to address this shortfall: The Nutritious Foods Financing Facility (N3F) is a novel, flexible platform that aims to demonstrate how investment in SMEs can increase the supply and consumption of safe and nutritious foods in sub-Saharan Africa. The platform will support target SMEs by bundling investments with technical assistance to improve financial performance, sustainability, and the nutritional content of their products. GAIN will help identify eligible companies and measure impact potential via its nutrition-focused criteria and tools.
Shifting markets and directing more capital into nutritious foods is not the work of one fund, nor can these goals be accomplished with innovative financing instruments alone. They will also require adding a nutrition lens to other agri-food investments and obtaining greater commitments from donors and investors to support them. GAIN aims to set up N3F to demonstrate the value of food SMEs to the investment world, bring significant new resources to a currently neglected area, and provide more nutritious, sustainable foods consumed by those who need them most.
Read more stories by Stella Nordhagen & Sofía Condés.