ImpactAlpha, May 16 – Beekeeping in Colombia. Greenhouses in Peru. Biogas stoves in Benin.
Small upgrades can increase resilience to climate change for the world’s 500 million smallholder farmers – if they can pay for them.
Software from a German startup is helping farmers get access to the financing they need to acquire the systems and skills to adapt to changes in weather, water and other conditions affecting the food supply and their livelihoods.
The startup, YAPU, works with financial institutions to underwrite and analyze loans to smallholder farmers to help them prepare for and address climate impacts. It has helped microfinance institutions shift $30 million into climate-focused lending. Loans have gone to helping farmers switch to organic agriculture and adopt regenerative practices like crop rotation and to purchase solar dehydrators and biomass stoves to recycle farm waste.
“Adaptation for the most vulnerable is so important in terms of food security,” YAPU’s Hannes Graef told ImpactAlpha. “Frankly, on a moral dimension, they contribute the least to climate change but are the most affected.”
YAPU wants to facilitate a climate-focused shift in the bigger climate-focused shift of the roughly $160 billion microfinance sector, as well as in small business financing and even retail lending.
U.N. Secretary General António Guterres has pressed for half of all climate financing to go to adaptation. Right now the level is something like 7%, with less than $500 million per year in private investment going to climate adaptation, according to the Climate Policy Initiative.
The impetus for YAPU’s software came from the concerns of Colombian farmers about the threat of climate change on their livelihoods. Those concerns spurred the U.N. Environment Programme and Germany’s Ministry for the Environment, Nature Conservation and Nuclear Safety in 2012 to launch Microfinance for Ecosystem-based Adaptation, or MEbA.
The farmers lacked access to capital to invest in farm upgrades and technical assistance to effectively implement new climate technologies and measures. MEbA sought to design digital tools to unlock billions in microfinance capital to help individuals and communities manage, conserve and restore natural ecosystems to foster climate resilience.
YAPU’s founding team members were responsible for helping microfinance institutions figure out how to integrate climate-resilient agriculture lending into their portfolios, and for building a methodology and software system to underpin the new lending programs.
“Microfinance institutions are in a good position to reach rural and vulnerable communities,” says Graef. “So the idea was to support and capacitate microfinance institutions to provide financial products connected to nature-based solutions.”
Solidaridad, Bancamia, and Fundecooperacion were among the 14 microfinance and banking partners using the software to pilot and deploy climate adaptation loans through MEbA.
In 2017, Graef co-founded YAPU with Christoph Jungfleisch, Davide Forcella, Alexander Ulbrich and Sven Volland to expand the software solution to a broader base of financial services providers. The founders chose the name as a tribute to Bolivia’s Yapuchiris, or traditional “leader” farmers, who help their communities blend ancestral farming practices with agroecological knowledge.
YAPU’s software enables financial institutions to digitize and automate their complete credit underwriting, disbursement, and performance and impact measurement with a climate-adaptation lens. YAPU’s software includes a digital form-builder and an app for field officers to reduce loan underwriting and origination costs and friction for staff.
The system provides details on the climate sensitivity of specific crops and farmers’ risk exposure levels, helping lenders determine which technologies or farming methods to finance for individual borrowers.
“What you get is automated loan analysis, with cash flows for different income activities, household information and climate indicators at the click of a button,” says Graef. “Because financial institutions get all of the data in a structured manner, they can learn in what contexts which solution works and which does not.”
The software also enables lenders to verify their loans as “green microcredit,” by logging images of the technologies and farming methods they’ve financed. YAPU’s team believes green verifications will help lenders attract more capital from climate-focused investors.
Soon after launch, YAPU onboarded MEbA as its first project, with the team providing both its software and consulting. MEbA facilitated more than 17,000 climate-adaptation loans to farmers in eight countries by the end of the eight-year initiative.
YAPU has expanded the work with MEbA’s partners, in partnership with the French bank BNP Paribas, so lenders can better track cash flow from agricultural activities in their portfolios and analyze biodiversity risks in the communities where they’re lending.
Its second project is with the Inter-American Development Bank’s IDB Lab. The YAPU team is working with 12 financial institutions to provide climate financing to farmers in Ecuador. YAPU’s software has facilitated more than $7 million in loans and analyzed the environmental credit risk on more than $27 million in investments.
The German Ministry of Finance has backed a feasibility study on YAPU’s integration of artificial intelligence and machine learning in its software. The company is gearing up for a pilot project in Latin America.
Traction is gaining, but slowly, concedes Graef. The COVID pandemic created “a lot of insecurity in the markets,” he says. Most institutions aren’t yet thinking about how climate adaptation fits into their portfolios.
“You have a few institutions that are motivated to go in that direction and they’re really championing it. But they’re the minority,” Graef says. “We’re doing a lot of market development, and we can see now that interest is trickling down from the political level down to more informal markets,” but traction in informal markets has not yet significantly materialized, he adds.
YAPU is behind several ecosystem-building initiatives to accelerate awareness and adoption of climate adaptation finance. The company is partnering with CGIAR and Madrid-based impact investor GAWA Capital on Scale for Resilience, which works to educate financial institutions on financing opportunities for nature-based solutions. The initiative is part of the UNFCCC Race to Resilience and launched after last year’s U.N. Climate Adaptation Summit–the first such convening–and now has a dozen members, including ProDesarrollo, a large microfinance network in Mexico. Scale for Resilience wants to impact three million smallholder farmers by 2030.
“These issues are still not yet getting the attention they deserve,” Graef says, “but they’re finally becoming a priority on the political agenda.”