Corporate sustainability and social responsibility of smallholder farmers: Implication for agriculture financing Ebele Maduekwe*, Emmanuel Benjamin*, Maarten Punt+, Gertrud Buchenrieder*° *Technische Universität München,Germany +University of Southern Denmark, Denmark °Martin-Luther-University Halle-Wittenberg, Germany

Introduction Majority of sub-Saharan African population live in rural areas 70 per cent depend on (rain-fed) agriculture for their livelihood Climate change effects reduces environmental quality Huge effects on sub-Saharan smallholder farmers and on Sub- Saharan African economies 2 Cropper & Griffiths (1994), IFAD (2011 & 2013), IPCC (2007), UNEP (2008), FAO (2014) Introduction → Theoretical framework → Empirical research → Conclusion Climate change  Warmer sub-Saharan Africa  Nutrient stress  Water stress  Decrease in output  up to 90% output loss by 2100

3 Introduction Potential solution to smallholder climate change vulnerability –Climate smart agriculture and/or conservation agriculture Agri-environmental schemes –Voluntary measures –Environmentally friendly farming techniques –Provision of ecosystem services Introduction → Theoretical framework → Empirical research → Conclusion PES farmer Payment for Ecosystem Services (PES) Agroforestry with PES

4 Introduction → Theoretical framework → Empirical research → Conclusion Agroforestry with PES, Carbon sequestration 1 Positive signaling to financial institutions 6 Corporate sustainability (CS) 5 Corporate social responsibility (CSR) 4 Societal welfare 3 Environmental quality 2 Linking agri-environmental schemes with PES to signaling financial institutions Theoretical Framework

5 Introduction → Theoretical framework → Empirical research → Conclusion Theoretical Framework Corporate social reponsibility- “the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large” Corporate sustainability – “business approach that creates long-term shareholder value by […]managing risks[…] from economic, environmental and social developments” Dow Jones Sustainability Index (2015), World Business Council for Sustainable Development (1999)

Theoretical Framework Profit maximizing PES farmers Theoretical model: Capital and welfare theories of corporate social responsibility (CSR) and corporate sustainability (CS) Extended to: –… account for PES and social welfare –… account for land availability and quality 6 Introduction → Theoretical framework → Empirical research → Conclusion Hediger (2010) PES farmer Assumptions underlying are:  Corporate social responsibility (CSR)  Improved societal welfare  Pareto improvement (above a certain threshold)  Corporate sustainability (CS)  Stable income over time  Positive signal to financial institutions (less risky)

7 Theoretical Framework Short term profit maximization of a smallholder farmer in agroforestry agri-environmental schemes with PES involving CSR Introduction → Theoretical framework →Empirical research → Conclusion … a constraint on minimum welfare (W) to be retained (CSR)

Theoretical Framework Long term profit maximization of a smallholder farmer in agroforestry agri-environmental schemes with PES involving CSR and CS Important capital asset : the fertility and quality of farmland  All the variables are time dependent 8 Corporate Sustainability (CS) Corporate Social Responsibility (CSR) Introduction → Theoretical framework → Empirical research → Conclusion

Empirical Research 9 Introduction → Theoretical framework → Empirical research → Conclusion Non-governmental agroforestry program with PES Implementation countriesIndia, Kenya, Tanzania & Uganda Total number of planted trees in Kenya 7,370,638 Number of farmers in Kenya59,553 Amount of Carbon dioxide (CO 2 ) sequestrated in Kenya 250,000 tons (2012) Year of survey2013 Number of observations 210 (TIST and non-TIST farmers) Areas surveyedEmbu, Meru and Nanyuki (Kenya) The International Small Group and Tree Planting Program (TIST) Kenya Benjamin (2013)

Empirical Research 10 Introduction → Theoretical framework → Empirical research → Conclusion The International Small Group and Tree Planting Program (TIST) Kenya

Empirical Research 11 Benjamin (2013) Introduction → Theoretical framework → Empirical research → Conclusion The International Small Group and Tree Planting Program (TIST) Kenya

Empirical Research 12 Hediger (2010); Benjamin (2013) Introduction → Theoretical framework → Empirical research → Conclusion The International Small Group and Tree Planting Program (TIST) Kenya PES farmer’s CSR and CS … … improve agricultural output and profit … protect against reputational risk … build up reputational capital  credit risk evaluation (adverse selection and moral hazard) … produce positive observable signals to financial institutions. This is important considering that the lending portfolio … -… of commercial banks to smallholder farmers is less than 10% -… of rural microfinance institutions is about 49%

13 Sustainable agriculture in the static and intertemporal sphere Corporate social responsibility Corporate sustainability Reputational capital Access to agricultural financing Positive signaling to financial institutions Payment for Ecosystem Services Environmental quality and social welfare Stable income – trust and creditworthy Farm training and investment Smallholder farmer in agroforestry with PES Introduction → Theoretical framework → Empirical research → Conclusion Empirical Research The International Small Group and Tree Planting Program (TIST) Kenya Farmers in Kenya were less likely to be credit constrained if they participated in PES scheme!! Benjamin (2013)

Conclusion Climate resilient practices benefit the society and smallholder farmers  stable income flow through PES Huge implications for farmers (CS), societal welfare (CSR) and agricultural financing This signaling can make PES farmers attractive as potential borrowers for financial institutions PES revenue, reputation, human and social capital knowledge transfer associated with PES programs improve smallholder’s livelihoods Important indicators for financial institutions’ credit risk management 14 Introduction → Theoretical framework → Empirical research → Conclusion

Thank you 15

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