Incofin invests in Financiera FDL, a Nicaraguan microfinance institution, allowing smallholder farmers to build resilience to climate shocks.
Smallholder farmers in Nicaragua, like many others in the Global South, sit at the “sharp end” of the climate crisis. They are the most cut off from resources, yet need them most. The stakes can mean the difference between good livelihoods and poverty.
They face significant barriers to the adaptation measures necessary to become climate resilient. They need access to labor, capital, and technical knowledge – a challenge particularly acute for farms in remote areas. Farmers often struggle to find a financial institution that can provide a loan to upgrade technology and the know-how to guide implementation. Without financial inclusion and training, smallholder farmers may continue with practices that are environmentally unsustainable and exposed to climate risks.
Nicaragua faces unique climatic risks due to its geographical position and socioeconomic factors. In rural areas, for example, deforestation sets off a chain reaction of soil degradation, pollution, impact on water resources and other negative effects, all of which reach smallholder farmers. Overall, institutional resources to mitigate climate disaster risks and promote adaptation are scarce in Nicaragua. The majority of Nicaraguan smallholder farmers remain vulnerable to these challenges.
Recent investments from Incofin, through a new fund called the Incofin Climate-Smart Microfinance Fund, empower farmers to build climate resilience. The fund’s investment thesis makes an important distinction between its scope and that of other funds in the market: “Most climate financing to developing nations is going towards large projects that aim to reduce carbon emissions, overshadowing projects necessary for building the socioeconomic resilience of those hit hardest by climate change to enable them to overcome the burdens of growing food, dwindling resources, and recurring disasters.”
Climate resilience investments have the potential to impact farmers quickly, unlocking crucial ways farmers can protect their farms and their livelihoods. The enabler of these improvements is, in this case, microfinance.
Microfinance
For farmers, microfinance institutions (MFIs) step in where traditional financial partners cannot. MFIs provide financial services that let farmers make urgent improvements essential to functioning in a climate-uncertain world – everything from adaptation to climate-related disaster management.
Financiera FDL is the largest regulated MFI in Nicaragua. Founded in 1993, they operate 38 branches in the country, with a mission to serve micro, small and medium-sized enterprises. Because they have solid and resilient credit metrics – and because they know the on-the-ground needs of Nicaraguan farmers through deep experience – they were in a strong position to promote green finance tailored to climate mitigation and adaptation.
FDL’s mission for financial inclusion has shown results. They have reached 45.000 clients, of whom 76% are rural and 51% are women; 28% of FDL’s gross loan portfolio is concentrated in small-to-medium farmers, creating impact by addressing the concerns and intersectionality of variables such as financial inclusion, gender, climate change, rurality, and migration.
FDL has a suite of green financial products that help smallholder farmers. Their climate-smart offerings can be divided along the lines of financial and non-financial services:
- Financial: Green loans for sustainable agriculture, including water conservation, crop diversification, drip irrigation system, agroforestry, biodiversity conservation, and soil amelioration.
- Non-financial: Technical assistance on sustainable farming practices to improve yield, adapt to climate change, and protect biodiversity.
For this case, we’ll focus on the offerings connected to FDL’s “Green Finance in Climate Change Mitigation and Adaptation” project, launched in 2024. Three-year goals of the project include:
- Expand the coverage of clients with technical training by increasing the number of clients by 50% in 2024 and 25% in 2025 and 2026 for a total of 7,809 in three years.
- 6.248 producers adopt measures to adapt to climate change. 80% of clients with technical assistance adopt at least 1 climate-smart practice.
- At least 70% of all producers who adopt climate smart practices improve productivity.
- Create a green portfolio including green products with environmental incentives starting with a placed amount of USD 2.4M
- Use of clean energy in 3 branches of the network.
Incofin’s investment
Incofin launched Incofin Climate-Smart Microfinance Fund (ICMF) in early 2024, concurrent with FDL’s project. However, Incofin already had a longstanding investment relationship with FDL.
ICMF aims to strengthen end-clients’ resilience to climate change impacts through financial and non-financial products that build their adaptive capacity, strengthen their ability to manage climate-related disasters, transition to new livelihoods, and/or drive mitigation. ICMF is an SFDR Article 9 Fund, with robust measurement systems; we track social, gender and climate impact indicators and aim to improve resilience to climate change of 1.5 million people in emerging markets in 5 years.
The launch of ICMF was informed by our track record in both climate-smart and financial inclusion-focused investments. We have invested more than USD 3.5 bn in financial inclusion through more than 1.500 transactions across 61 countries. Part of our recipe for success is strong capabilities on the ground, where our investees are located; sourcing, structuring, and monitoring takes place in proximity to them, as is the case in Nicaragua.
ICMF applies a climate lens to the entire investment process: eligibility, due diligence and monitoring, a methodology also applied to other longstanding funds, featured in our 2024 Impact Report.
Financial inclusion is driven by the fund’s sustainable debt investments in MFIs. The fund targets micro, small and medium enterprises, and low-income households, located in emerging economies. Smallholder farmers in Nicaragua cross these categories. Goals of ICMF include:
- Benefit at least 50 micro-finance institutions with direct support and capacity-building initiatives
- Increase the climate resilience of at least 200.000 households, with special focus on women as drivers of climate resilience
- Generate mitigation co-benefits from a more efficient use of resources and ecosystem protection
- Establish a knowledge centre to finance global courses, white-papers, market studies, impact surveys, and more.
The last point touches on something that sets ICMF apart: technical assistance. Climate-smart financial solutions need to be accompanied with education and awareness-building, access to information, expert technical advice, and comprehensive planning to guarantee their effectiveness. This fits with the second pillar of FDL’s climate-focused offering and their proven track record for technical assistance. So far, FDL has trained over 6.000 farmers, making them not just an investee but an on-the-ground partner aligned with ICMF’s goals.
Training and access to knowledge resources makes a difference for farmers. To show this principle in action, consider a coffee farmer’s story.
Otilio
Otilio Sánchez lives in a mountainous region of Nicaragua – 1.300 meters above sea level. During the peak coffee harvest season, one of the main issues Otilio faced was the drying process. Before the investment, Otilio lacked the infrastructure and the know-how to store and process coffee pulp and wastewater. Drying coffee wasn’t yet a part of his operations, and this bore a cost at the market.
“One of the key objectives of implementing climate-smart practices was to promote diversified agroforestry systems, reduce negative environmental impacts, and improve waste management from wet coffee processing,” said Cecilia Delgado, Senior Investment Manager, Incofin Investment Management, a key stakeholder in the FDL investment. “Another goal was to minimize economic losses caused by delivering wet coffee due to the lack of proper drying conditions.”
A transformation in knowledge, capabilities, and problem-solving was necessary for Otilio’s farm. The improvements he made, thanks to FDL’s support, addressed critical needs and enabled better decision-making, encouraging Otilio to invest in infrastructure upgrades for his wet processing facility. Otilio now benefits from:
- Lower production costs for dried coffee in less time, maximizing profits at the collection center.
- Improved infrastructure for processing raw materials, such as coffee pulp, which is now composted and reused in coffee plantations.
- Reduced environmental risks, minimizing contamination on farms and protecting water sources.
All of this allows Otilio to diversify — he’s now growing oranges and lemons in addition to coffee — and invests in better farm management practices and technology.
Next steps
By launching ICMF, Incofin has made a conscious decision to place climate finance at the core of our business. To quote our 2024 Impact Report, “The pursuit of climate justice necessitates a re-evaluation of climate finance. It requires a more equitable distribution of resources, with a stronger emphasis on grassroots resilience building. Financial institutions, with their capacity to drive change, are well-positioned to lead the way.”
Otilio’s story typifies early successes of ICMF’s investments. The fund is only one year old, but shows promising results so far. And its portfolio is expanding: in December 2024, ICMF added a new investment in Vietnam. According to the fund’s stakeholders, “The pipeline is well diversified and supports the fund’s impact mission in empowering communities to adapt, build resilience, and mitigate the impact of climate change. Potential new investments include opportunities in India, Guatemala and Ecuador.” That means more access to finance for smallholder farmers and other SMEs across the globe.
