Client
Expertise
Finance
Impact
Boosting financial inclusion to support the transition of Mexico’s rural farmers.
CHALLENGE
How can smallholder farmers transition to more sustainable practices?
From declining yields to soil erosion, record droughts across Mexico are leaving their mark on farmers’ crops and herds. It puts farmers under growing pressure to adapt to climate change.
The agricultural transition requires finance. Nevertheless, most smallholder farmers, especially Indigenous farmers, are based in rural areas where poverty is perpetuated by a lack of access to finance. Already deemed risky borrowers, farmers’ access to credit is compounded by climate change as Mexico’s land suitability declines, further restricting the uptake of climate-smart agriculture.
Mexico’s government, international banks and development agencies are working to expand financial access in line with a just transition. Among them are the Agence Française de Développement (AFD) and the Latin American Investment Facility from the European Union. The group sought to fund a dedicated loan programme by Mexico’s Trust Funds for Rural Development (FIRA), a second-tier development bank that offers credit and guarantees, training, technical assistance and technology-transfer support to the agriculture, livestock, fishing, forestry and agribusiness sectors in Mexico. Such a programme aims to help smallholder farmers adopt climate smart practices, protecting their land and livelihoods.
Just transition
There is currently no universally agreed definition for a just transition. Its application will also vary across contexts. At the Carbon Trust, we follow the International Labour Organisation’s definition. They describe a just transition as a process that decarbonises the economy in a way that is as fair and inclusive as possible. A just transition prioritises local socioeconomic opportunities and decent livelihoods while minimising the risks to affected groups. It requires inclusive and transparent social dialogue, robust governance, and support for impacted workers and communities.
SOLUTION
Expanding access to sustainable loans
With financial inclusion as a key driver, FIRA’s programme seeks to provide loans to farmers across agriculture, livestock, forestry, and fisheries. To ensure finance flows into projects that generate a positive impact, FIRA and AFD needed a global climate partner who understands the strict funding requirements from the Global North but can balance it with both the operations of Mexico’s financial institutions and the country’s agricultural practices and sustainability challenges. Amid the need to show the additionality of the loans and reach the right people, we:
Assessed and shortlisted 55 eligible technologies and practices that will be most beneficial to the adversities Mexico’s farmers face. Technologies were divided across four categories: sustainable agriculture to improve agricultural productivity while reducing environmental impacts; energy efficiency; renewable energy, capitalising on Mexico’s abundant sunlight and strong wind resources; and efficient water use given the country’s prolonged dry spells.
Introduced incentives for marginalised groups to attract applications from Indigenous Peoples, women and farmers from municipalities that are more susceptible to climate change. These groups would receive further financial aid through interest rate subsidies up to 4 percentage points.
Promoted the programme to financial intermediaries, private banks and beneficiaries to reach farmers in rural, remote areas directly.
Set up a digital platform to streamline the loan application and evaluation process in one single space. The platform features a tool with which farmers can assess their eligibility before applying in order to increase success rates.
Introduced indicators and tools to assess the programme’s financial inclusion alongside its environmental impact to report this back to funders. Indicators included estimated emissions reduction per year, volume of treated water, percentage of loans towards women, Indigenous Peoples, and communities vulnerable to climate change.
Upskilled FIRA’s internal teams on the application platform and assessment criteria. This way FIRA could continue to run the programme independently and integrate the monitoring and reporting systems into existing and future portfolios.
IMPACT
Supporting Mexico’s farmers in a time of transformation
Through this partnership, FIRA was able to meet the loan expectations of the Global North and ultimately strengthen its relationship with EU funders. Indeed the €4 million in investment grants by the European Union have already been disbursed to support a just transition for Mexico’s rural, small-scale farmers.
FIRA's programme itself tackles Mexico’s financial inclusion first-hand by lending to those traditionally seen as risky borrowers. In the long run, programmes like this will help break down lending barriers and provide financial support to farmers who endure the impact of climate change. As of April 2024, the programme:
Approved 535 projects, across 22 Mexican states. Of these, nearly half of the approved applications received their loans with a total value of €48.15 million.1 A women’s organisation in Chiapas, for example, received several loans to maintain shade-grown coffee plantations, benefitting the 97 female partners and their families.
Nearly two thirds of all loans went to projects with women as partners, half were disbursed to Indigenous Peoples and over a third went to vulnerable areas.
In the states of Chiapas and Oaxaca alone 3,770 producers from the Zoque, Tzotzil, Tzeltal and Zapotec Indigenous Peoples benefitted from the programme; 30% comprised of women.
The sustainable finance programme has had a ripple effect across FIRA’s operations and beyond. It has strengthened FIRA’s sustainability credentials on a national and international level, enabling FIRA to:
Become a financial catalyst for the agricultural sector in Mexico. The 55 shortlisted technologies and practices subsequently featured as part of Mexico’s sustainable finance taxonomy.
Adopt the defined key performance indicators more widely. FIRA now uses these indicators to assess its sustainability loans across its operations and wider sustainability portfolio. This allows for consistency across the board. It also helps FIRA build a larger and stronger portfolio of sustainable projects.
Support farmer-led investments and innovation. This type of direct investment can be replicated and will be more sustainable in the long run.
As we strive to expand our sustainable finance programme, we rely on expert voices such as the Carbon Trust’s to guide us. We especially valued the team’s ability to be that bridge between us and our finance partners, AFD and the European Union. We can now prove the robustness and impact of our loans, which further solidifies our commitment to Mexico’s agricultural transition.
The Carbon Trust has helped us strengthen our long-term relationship with Mexico’s agricultural development bank. The team was very constructive in applying the international funding requirements we need to abide by as funders to Mexico’s agricultural context and FIRA’s operations as a second-tier financial institution.
1 The remaining approved applications could not proceed for various reasons. These include applicants not meeting the financial requirements or choosing to discontinue.
