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395. Root Capital responds to Coffeelands coverage

2014 March 6

Last month the pioneering fincial services provider Root Capital published an issue brief showing that its investment in social and environmental due diligence has generated financial returns by helping it avoid bad loans and make good ones.  It was so rich with insight that I felt compelled to publish three separate posts on the brief last week.

The first was a summary of what I considered to be the brief’s key points.

The second seized on a six-word passage that jumped off the page at me: the idea that folks who engage with coffee coops “typically interact only with the business,” and typically get a narrow view of the threats and opportunities at origin as a result.

In the third, where I found the footing considerably more slippery, I reflected on the relationship between active measurement of social and environmental performance and the active management of that information to drive improved social and environmental impacts at origin.  Root Capital sent the considered response below in reply, which I reprint here in full as part of the blog’s featured comment series.

- – - – -

Michael,

Many thanks for using your blog as a platform to advance discussion around social and environmental due diligence, performance management, and smallholder livelihoods. We are long-time ‘Coffeelands’ readers and inspired by your focus on improving farmer livelihoods.

Our goal for the issue brief was first, to engage financial institutions in a dialogue around the role of social and environmental factors in loan underwriting; and second, to generate broader discussion on these issues with other private and public actors in the agricultural industry. We looked through the lens of a financial institution; you wrote through the lens of a farmer organization and, in doing so, raised fresh insights:

First, you note that social and environmental due diligence for a lender is different than social performance management for a coop. We wholeheartedly agree and use due diligence data as the foundation for a social performance management system that guides our lending. We provide our loan officers with dashboards incorporating projected profitability, social impacts, and environmental impacts of each of their loans, and of their portfolio as a whole, so they can manage towards a “Balanced Portfolio” that incorporates all of these elements.

Second, you highlight the importance of social performance management at the coop level and observe that it is an under-utilized tool by producer organizations. Through our financial advisory services and impact studies, we are beginning to appreciate, as you already do, the potential for coffee coops and agricultural enterprises more generally to use social performance management to enhance their impact.

As you noted, our social and environmental scorecards primarily record observable practices that do not measure outcomes or impacts but rather are proxies for them. In 2011, we began to conduct impact studies with selected clients to verify and flesh out the findings emerging from our social and environmental due diligence data.

Once we began partnering with clients to implement surveys to learn more about producers’ farming practices and livelihoods, it became apparent how enhanced data collection and data management could help our clients improve both their financial performance and their impact – what we now call ‘client-centric’ data collection. We are currently experimenting with a range of approaches using mobile technology to embed data collection into pre-existing processes of agricultural business, such as farmer agronomic training and certification inspection, and to reduce the cost of data collection.

For instance, our recent impact study of the Nicaraguan coffee cooperative Coomprocom involved evaluating livelihood improvements associated with cooperative membership. The findings (available here) not only helped to answer Root Capital’s research questions, but also provided insights for cooperative management into what products and services (in this case, microloans during the lean months and agronomic training to improve productivity) that smallholder members value most.

Cost and bandwidth constraints dictate that we will only engage with a handful of our 200+ clients in such impact studies. Two of the questions we pose to ourselves, and invite comments on from you and others, are:

  • How to best to leverage the due diligence information we collect on each and every enterprise in order to support continuous improvement?
  • In those cases where we do partner with a client enterprise to collect producer-level data, how to increase the value of that data to the enterprise and to the producers, while continuing to whittle away at the costs of collection?

There are no easy answers, but as always, we’re grateful to be part of the community of practice that is emerging around these topics.

 

Jesse Last
Value Chain Relations Manager
Root Capital

Mike McCreless
Director of Strategy and Impact
Root Capital

One Response leave one →
  1. 2014 March 6
    Michael Sheridan permalink

    Jesse and Mike:

    Thank you for this generous comment.

    I would like to make a few observations on the conversation so far and be the first to take a crack at the questions you pose here.

    First, I want to congratulate Root Capital on the brief. I did not intend anything in the post as a critique of what the organization has done on social or environmental due diligence. In fact, I think you are cracking the toughest nut out there: showing that concern for social and environmental issues doesn’t make you more compassionate, it makes you more competitive. If the evidence you are building in this regard contributes to the movement of more financial institutions toward embrace of social and environmental measurement in their pursuit of profitability, it will be an enormous contribution. In my experience, pilot projects can put social and environmental issues on the table, but nothing can keep them there as effectively as profits.

    Second, I want to acknowledge that there were some serious mental gymnastics at work here. Your brief explored one issue—social and environmental due diligence—and my post another—social performance management. I tried to bridge some significant gaps between them—gaps in WHAT is being done, WHY and WHERE—but in the end, the degree of difficulty may have been too high for me to pull it off.

    And yet…I am stubbornly clinging to the idea that there is a “there there.”

    The Coomprocom case study you cite in your comment is part of the reason why.

    It clearly validates the “beyond the business” focus of your due diligence approach: if you weren’t measuring social or environmental indicators, you would not have generated these insights. It also validates, in my mind, the need for social performance management at the farmer enterprise level: if coops don’t have the systems in place to capture those insights and translate them into practice, household-level outcomes won’t improve. Or rather, they may improve, but only serendipitously, not systematically.

    That brings me to the questions you pose. You ask what Root can do to drive improved performance and outcomes based on due diligence information or data collected during deeper dives. It strikes me that in both cases what is needed for improved social and environmental management at the farmer enterprise level are the same things that are needed for effective financial and commercial management: strong social infrastructure, capable staff able to turn good information into improved decision-making, good strategy, shared objectives, clear performance targets and relentless sense of purpose. I have seen Root Capital deliver best-in-class advisory services on financial and commercial management. The question in my mind is who is positioned to deliver advisory services of similar quality in social and environmental management?

    In closing, I would say that I suspect you are already creating incentives for improved social and environmental performance just by including these dimensions in your credit scoring process and conditioning credit on certain minimum thresholds: if farmer associations want to qualify for credit, they need to manage natural resources and relate to their members in ways that are sustainable.

    THANK YOU for the issue brief, the continuous innovation and the discussion here.

    Michael

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