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Reconnaissance for a China Impact Investment Fund

Organic honey in Zhejiang

(An organic honey company in Zhejiang province.)

In October, Matthew McGarvey and I took a trip around China to meet with social entrepreneurs in food and agriculture. The meetings were part of a study we are conducting on the feasibility of using impact investing as a tool to support China’s transition to a greener, more equitable food system. We plan to begin raising capital for an impact fund in 2019, but want to first understand the needs of businesses in this sector.

We held listening sessions in Beijing, Lishui City (Zhejiang), Chengdu and Kunming, and attended a Village Reset event for investors and social entrepreneurs in the village of Maogong, in Guizhou Province. Over a two-week period, we identified at least a dozen farms and businesses that show strong potential to grow significantly while delivering positive impacts such as creating new markets for organic farmers, building soil health and sequestering carbon, improving wages of workers, strengthening rural community credit institutions, and providing healthy organic food to Chinese consumers. Altogether, we heard from close to one hundred farmers, food processors, marketers, retailers and restaurateurs, and several themes emerged:

  • The Market. The demand is there, but it is changing. Chinese consumers want “real” food, and this entails things like food safety and organic, but also local and traditional foods, as well as a sense of connection to the farmer and the land. And they are willing to pay more for better products, but they also have higher expectations in terms of the appearance and flavor of alternative foods. An organic label or heart-warming story is nice but ultimately people want products that look and taste good, and businesses that can meet this demand are in a good position to thrive.

  • Uneven playing field. The deck is stacked against small businesses in this sector. The people we spoke to had almost all started their businesses with their own funds, and said they were unable to obtain loans from commercial banks. Nor could they benefit from the huge logistics networks of companies like JD, due to the small volumes of their products. They also cited numerous regulatory challenges. Some of these are well-intentioned responses to the country’s terrible food safety situation that have gone too far, and some sound like rent-seeking by local government departments.

  • Mixed signals from government. Officially, there is a new recognition of the importance of increasing the supply of “green, high-quality foods,” but the overall direction of policy is to support rapid industrialization of farming. This is antithetical to the diversified, ecological farming systems that China desperately needs. (While we were in Beijing, one of the city’s oldest organic farms was forced to get rid of all of its animals, the local government having decided to eliminate animal agriculture even in the farthest suburban districts.) We will need to channel some of our investments into projects/businesses in localities where there is already a clear official mandate for innovation in support of sustainable agriculture.

  • Patient capital can help, but can’t solve everything. The people we spoke to had clear ideas of how they could use impact investment: to cover permit or certification costs, scale up production, improve staffing, develop new products and markets, or as operating capital to get their new business beyond the break-even point. But these alternative food and farming entrepreneurs stressed the need for more than just money. To really build this field and not just help individual businesses, the fund we are developing will need to support training and networks for knowledge-sharing and collaboration. (Some interesting models in other countries that we can learn from are Village Capital and Food System 6.) Because they are pioneers and out of the mainstream economy, information and connections are also especially important to China’s Real Food innovators.

We also had some illuminating and encouraging conversations with players in the Chinese development finance and impact investing sectors. We learned that there is really nothing out there like what we are hoping to create: a fund focused on small and medium food businesses with positive environmental and social impacts. Existing impact funds in the environment sector are investing in renewable energy and energy efficiency, not sustainable agriculture. Agriculture funds and incubators are focused on new technologies, not sustainability or social impacts. (Or they make naïve assumptions about the connection between innovation and positive impacts.) We see opportunities for complementarity or partnerships with these existing platforms and others outside of mainstream commercial finance. CFPA Microfinance, for instance, has a network of lenders at the local level in virtually all of China’s poor counties, most of which are rural, and much of their lending is for agricultural small businesses. Businesses that “graduate” from CPFA lending, which is capped at 400,000 RMB, and can demonstrate (or develop) positive social and environmental impacts may be good candidates for the fund we are developing, and CPFA signaled their interest in helping us identify such businesses.

In the next few months we will follow up on potential “pipeline” investments, clarify investment criteria, map out a possible fund structure and consult further with our advisory team. Stay tuned.

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