Note: Last month, Root Capital published our inaugural issue brief on the emerging business case for financial institutions to conduct due diligence on the social and environmental practices of their borrowers and investees. The issue brief has inspired a robust conversation around environmental due diligence, performance management and smallholder livelihoods on the CRS Coffeelands Blog.
Today’s post marks the beginning of a series that goes deeper on that social and environmental due diligence, addressing questions such as: What do we look for in the businesses we lend to, and why? How do we go about it? And how do small-scale producers and agricultural businesses in Africa and Latin America benefit, as well as upstream exporters, processors, retailers, and consumers worldwide?
As a mission-driven lender, Root Capital provides credit and financial training to small and growing businesses with the goal of supporting rural livelihoods and sustaining the natural environment. To ensure that our loans further our mission, we conduct due diligence not only on the financial health of the businesses we lend to, but also the health of their relationships with the producers and with the ecosystems that underpin sustainable livelihoods.
On-Site Due Diligence
Our loan officers evaluate businesses’ social and environmental practices primarily during on-site due diligence visits with each prospective and renewal client. Site visits offer an opportunity for the loan officer to get to know the management team, observe operations, meet producers, and spot-check social and environmental practices. They also provide the opportunity to build the trust and alignment that serve as the foundation our long-term client relationships. Based on the site visit and the information provided by each client in their loan application, loan officers then complete a Credit Memo using our credit evaluation template. This template includes our social and environmental scorecards.
Site visits provide an opportunity to look for several negative practices that would automatically disqualify a business from receiving Root Capital financing, such as clear-cutting rainforest to convert it into farmland. Beyond screening out negative practices, site visits give loan officers a chance to build (or disprove) a case for why a loan to this business will ultimately benefit producers and the environment – a case they are called upon to make in the social and environmental scorecards that our Credit Committee reviews before each loan is approved.
Our Evolving Approach
As Root Capital has evolved from our early days as a small start-up to a more sophisticated agricultural lender that reaches 200+ businesses annually, our approach to social and environmental due diligence has also evolved. In our first years, we had few formal tools or methodologies. Willy Foote, our founder, hired loan officers who, as he likes to say, just “knew how to pick ‘em” – that is, had an intuitive sense for identifying agricultural businesses that benefitted smallholder farmers, often because they had grown up in farming communities or came out of the finance function of an agricultural business themselves. Moreover, when the team and the portfolio were small, members of the lending team knew the details of every client and judgments about social and environmental issues were generally based on third-party certifications.
As Root Capital grew, it became necessary to standardize our social and environmental due diligence, both to train new staff and to set common standards across a growing portfolio. Our current social and environmental due diligence approach formalizes the intuitions of our most experienced loan officers and is complemented by our review of the relevant literature, feedback from third-party experts, and direct surveys of smallholder farmers. Of equal importance is that we hire loan officers who share our mission and values, and that we reinforce those values through ongoing training and perhaps most importantly, our culture.
In the next part of our series, we will introduce the “mutually beneficial cycle” framework that we use to describe the kind of well-functioning relationship between business, farmer, and environment, which we look for in our due diligence.