Jane: Hello, I'm Jane Goodland, and this is the LSEG Sustainable Growth Podcast, where we talk to leading experts on a wide range of issues which touch on both the worlds of sustainability and finance. This week, I had the pleasure of talking to Alvaro Lario, President of the International Fund for Rural Development, IFAD, which is both a specialized UN agency and an international financial institution that invests in rural communities in developing countries to increase food security and incomes, which is critically important in the context of global climate change and population growth. So, let's hear more from President Lario.
Jane: Hello, Alvaro. Thank you so much for joining us today. Now we've got lots to talk about, but let's start with you because you've had an incredible career. So, tell us a bit more about that. And what drew you to join IFAD.
Alvaro: Well, thank you very much for having me today. So, I moved to IFAD because of the impact of the organisation. Before this, I had been working in other institutions, in the private sector arm of the World Bank, in the private sector, in academia. But I really thought that this institution was really able to move people out of poverty, to change lives, to change and make people really have the opportunities that I had throughout my life. So, I think that's something that really drew me into it. I started as a CFO, and we were the first United Nations fund that entered the capital markets. We obtained two credit ratings, two double A+, which is a first for a United Nations agency. And we also started Co-investing with the private sector. So, I really thought that I could use a lot of my skills to really make an impact and change lives.
Jane: That's amazing. And I think IFAD is actually unique in that respect, that is it the only UN agency that's also got this capability to access capital markets? So, a fascinating organisation is IFAD. Now, the link between small scale rural agriculture in developing countries and global capital markets may not be immediately obvious to some people. So, help us understand the connection. How are these two things connected?
Alvaro: Well, after the crisis and the conflict, the war we have seen in Ukraine, it's very clear for all of us that food security is related many times to national security. It provides and prevents a lot of the conflicts and provides stability to the world. In the case of Africa, two thirds or 70% of the production of food is produced by small scale farmers. And it's very similar percentages in Asia. So actually, many of these small scale farmers, which is where IFAD focuses on, are really essential for food security. At the same time, we also know that poverty is very much located in the rural areas, which is also where IFAD is located. We are located in that last end mile. So how to connect the big major global savings to changing lives is what IFAD can do. We basically borrow from many of the impact investors pension funds, and we are able to lend it at very concessional rates to a lot of low income and low middle income countries, whereby we invest in this in last end mile rural areas where a lot of the poverty is.
Jane: And in terms of that poverty, I was struck by some information on your website, actually, that talked about 45% of the global population live in rural areas, in developing countries. That's an enormous chunk of our global population. And perhaps a number that we don't fully really realize because there's so much kind of a move towards urbanization and people moving to cities to pursue economic opportunities. But 45% is a really, really big figure of the global population living in those areas. So, I think that really does underscore why it's so important, the work that you're doing, and also in the context of, the projections of global population growth, right, in terms of we're heading for almost 10 billion by mid-century. So really, really interesting. So, I mentioned earlier, apart from the World Bank, IFAD's, the only UN agency that's actually able to issue financial instruments. So that makes you pretty unique. Tell us why it's so important for you to both provide grants, but also to be able to raise capital through capital markets, like, why is this so important that it's not just about philanthropy?
Alvaro: Well, as you said, it's important that we don't think of ourselves, as I would say, a grant provider or a concessional financing institution, we really believe that we are investing and we are investing in people, in changing people's lives by giving them the opportunities, the access to finance, the access to land, the access to water, the access to the technology many times to really drive their own development. Right now, we provide financing to 93 countries across all regions, and many of these countries receive many of these investments in the form of highly concessional loans, other semi concessional, and the ones that are highly indebted in the form of grants. So, our financing is really very concessional. At the same time, it's important that we do not add additional debt to those countries that are already in debt distress. And currently, as it is well known, 60% of the low income countries actually are in high debt distress. And we are seeing debt levels not only in the developed world, but especially in the developing world rising and rising. So, it's important that a lot of this development goes through grants, but also through very concessional financing. That does not add a burden to a lot of the already, I would say, government debt, but also to the expenses in a country. And this is particularly relevant at this moment of crisis because we are seeing in some of the low income countries that they are spending more in really being able to pay their interest in their debt than what they are spending in health or in education. So, the concessionailty and the level of debts become a major, major importance nowadays.
Jane: And I think, you know, obviously it's kind of relevant to go back to the Sustainable Development Goals and remember that one of the goals is really about kind of tackling hunger. And we can't do that if we're focusing all the money on repaying debt. So, it's a really good point to reinforce. Now, IFAD's, been issuing bonds on the London Stock Exchange Sustainable bond market. I think there's four of them thus far. Can you tell us a bit more about those? So, help our listeners to understand where this money goes from raising the capital through the whole cycle.
Alvaro: We entered the capital markets in 2022, right at the moment of a lot of volatility and uncertainty. However, we have seen that it has attracted a big number of investors. And basically, this is the case because we have a sustainable development finance framework by which we are showing how all of our projects are linked to specific SDGs. So, we can show investors what type of SDGs they are supporting. And we could I mean, as you know, there's lots of labels in capital markets. So, you could argue that IFAD that bonds can be blue bonds, green bonds, social bonds, ESG bonds, SDG bonds, basically because of the type of impact we are having in the world where we could be labeled in any of this general framework. So, this is very important to show where the money is going and how it's changing lives. In general, I would say that our projects support most of the sustainable goals. We could argue 16 out of the 17, but the reality is that our focus is SDG 2 and SDG 1, poverty and hunger, and that's where we can really make a difference. Up to now, we have been listing, as you mentioned, some of our bonds in various exchanges, and we will be also now listing them in the London Stock Exchange sustainable bond market at the end of this month.
Jane: How much have you raised so far through those bonds?
Alvaro: Well, in total, we had first two of a total of around 150 million. Now another two of 180 million. But in general, we are aiming to approximately at least to have issued around a billion in the next year.
Jane: So, I mean, I suppose in the grand scheme of things that number is not huge, but obviously translate that into projects on the ground helping people in rural communities. That's massive. You know, that's really life changing in terms of, how that capital can change people's lives. Can you tell me more about IFAD's sustainable finance framework, just so that we can understand a bit more about how the capital is directed.
Alvaro: Yes. And as you said, I mean, this is just one part of the money we deploy, we are a replenishment fund, so we also receive capital from our members every three years. Now we will be having the last replenishment session actually in Paris this December with President Macron from France and President Lorenzo from Angola leading the replenishment. We also receive Reflows from our own concessional loans. We also have a lot of co-financiers, the Green Climate Fund, the green global environmental facility, as well as governments themselves. So, I mean, the overall program of work is much bigger than just this issuance of bonds. And as you mentioned, the most important part is the impact. And for us, we measured this in our projects by showing, for example, the restoration and maintenance of natural resources, the improvement of agricultural production and how it's limiting post-harvest losses, enabling rural populations to access finance, both banking and financial services, or just access to markets. Many times, the small scale farmers are not able to sell what they are actually producing or at the right price. And we also support them in a lot of this access to markets. At the same time, many of these projects also have environmental components, but we are supporting biodiversity, promoting gender equality by also supporting female small scale farmers, creating jobs and rural jobs many times in places where there are no other opportunities. Improving rural people's nutrition. So, there's a number, I would say, of real impacts that we are measuring in many of these projects.
Jane: And then in terms of just to give us a sense of the geographical scale of your work, I think you mentioned earlier that you're working, in many, many countries. Tell us a bit more about how you decide where to invest.
Alvaro: So we operate, as you mentioned, in the five continents. 60% of our current core resources, the ones we receive from the replenishment go to Africa and to sub-Saharan Africa. At the same time, we also around one third of the overall goes to Asia. We also operate in the Middle East in Latin America. So, the most important part for us, whether this is a low income country or whether it's a low-middle income or a middle income country, the most important part is that we get enrich the last mile. That means where the real rural poor live and where they have no other opportunities. Whether we're talking about women, youth, indigenous peoples, those are the target populations that we really want to change their lives.
Jane: That's amazing. I think I'm in awe of the work that you do. I'm keen to move a little bit now towards climate and the role of climate change and what you do. Now, a key message at COP28 will be the need for adaptation finance. And I know that 80% of IFAD's climate financing is for adaptation. I'm curious to really dig into that a bit more about why it's so important to think about and fund climate adaptation for rural communities and agriculture. So, what sort of projects are you enabling there?
Alvaro: Yes, indeed. Climate adaptation is essential for the small scale farmers. If you are living in a remote area and you are seeing the droughts, the floods, the cyclones, the sea rising, it's obvious that it's threatening your existence. And currently, these small scale farmers are receiving less than 1% of the global climate finance. For us, it's a big priority. I would say it's even higher than 80%. I would say it's 90 to 95% of our climate finance goes to adaptation. And when we talk about adaptation, which seems very theoretical, well, what does it mean? Well, it means using drought resistant seeds. It means also irrigation systems, drip irrigation systems, water harvesting systems, submergible roads, agroforestry, soil management, early warning systems, planting mangroves so that you can also protect some of the small state islands from the sea rises. So, all of this is really preparing a lot of these small scale farmers to continue thriving and having a decent living. Otherwise, the alternative many times is just to migrate forcefully because they cannot really produce, or they cannot really have a decent livelihood.
Jane: Yeah, I think migration because of climate change is obviously like a massive, massive issue that globally, I think we need to get our heads around. And adaptation is critical to perhaps stemming the flow of that. Can you talk to me just a little bit about the role of IFAD in terms of not just provision of finance for adaptation projects, but also helping those communities with the knowhow around some of these techniques or tools or infrastructure.
Alvaro: Yes. I mean, let me put you an example. Right now, we co-financed and co-invested with the Brazilian public development bank, BNDES, which is many times bigger than the World Bank itself. And we supported the northeast region of Brazil, which is where all poverty or most of the poverty is located in a semi-arid region where they have a specific biome. It's not the Amazon, it's called caatinga, the only specific biome of Brazil. And we support many of these small scale farmers basically to adapt by, as I mentioned before, through water tanks, through water irrigation systems, through the ability many times of having specific plants that are adapted to the soil that they have. And all of that enables them many times to create businesses. I was visiting one, it was about goat milk, now they had 500 members in the cooperatives and many of them didn't have a livelihood before. And now they were able to produce different products, yogurts, goat milk and selling them now also to the private market. So, this is changing lives. We're talking about 1 million people, which now will be able and benefit from these investments.
Jane: Yeah. That's amazing. So, one of IFAD's core themes is youth. And I'm really curious to understand a bit more about why that's so important in the context of your work thinking about rural communities.
Alvaro: We all are seeing. I mean, the images of the young population growing fast, especially in the poorest nations and in particular in Africa. And this is creating a challenge for the governments themselves, but also for the world. We are seeing a lot of forced migration. We are seeing every year 10 to 12 million young people joining the labor force in Africa. At the same time, the continent is only able to create 3 or 4 million jobs every year. So, this means that by 2035, more young people will be entering Africa's workforce every year than in the rest of the world combined. This unless we create the right opportunities and we create the ability for many of these people to have a decent livelihood, we know what type of challenges we will be having, and it's important, therefore, that we very much focus on how we can create jobs and provide income to many of these younger population. The reality right now, because of the level of industrialization and the level of development, is that in many of the African rural areas, the best way of having a decent life and a decent income is through creating, what we could call small scale agriculture enterprises, micro SMEs. And this will enable many of them to have decent income and also to provide education and provide food for their own families. So a big priority for IFAD is actually how to develop value chains and how to support many of these small micro and small medium enterprises, not only in the processing but also in the transportation, in the marketing, in the storage, in the services to the food economy, because a lot of the jobs are not only in the production or on the field, but across these value chains. And the more we can make sure that these jobs remain in Africa and are localized, the more we will see these populations and especially the rural populations, thriving.
Jane: Yeah. So really important. I mean, I think some key messages there about job security, economic opportunities and keeping people, presumably where they want to be near to their communities and their families and creating jobs and value chains to support that ambition. So incredible work you're doing. IFAD's work is, undoubtedly very impressive, but clearly more capital is needed to prepare for the consequences of climate change and the impacts on agriculture and everything else we've talked about in this conversation. So, from your perspective, how can more capital be mobilized and targeted to where it's needed beyond what IFAD's doing?
Alvaro: That's a very good question indeed. I would say the second part is even more important than the first one, the targeted, because capital. We know there's capital, we know there's tens of trillions of savings. But actually, how to make sure that that capital is also supporting the poor or the ones who are left behind. I think that's the key issue. If you think about just the flows of official development assistance, the flows are around 200 billion per year. That's really very, very small. If you compare it with the private local flows of the private sector, for example, in the countries. It's also small if you even compare it to the public development banks, which actually their disbursements are around 10% of the GDP. If you compare it with foreign direct inflow, which is around 400 500 billion, it's also relatively small. So official development assistance or multilaterals like ourselves or the World Bank, I think it's important that we actually try to mobilize and catalyse private sector and other financing where we talk about risk mitigation, where we talk about guarantees, blended finance. So, I think that's our role. Then the role of governments is also to make sure that the environment and the regulations enable for the investments of the private sector. It's very clear that governments alone will not make it, official development assistance will not make it, and that we need to make sure also that we provide investable assets for all of the trillions that are out there. And for that, in many cases, we need to provide this type of blended mechanisms, blended finance, or guarantees that can unlock a lot of that private capital, which is in the trillions, rather than even on the hundreds of billions.
Jane: Yeah. I mean, I think we started this conversation talking about impact investors, but I get the sense that actually we need to just make this far more widespread, right, in terms of it can't simply be about people who are investing with a specific impact of mind. This has to be much more widespread and open up and tap into those kind of very huge pools of private capital. But in order to do that, we need to have the right infrastructure in place and, like you say, investable, so that investors can get comfortable investing in some markets that perhaps have in the past have been just without outside of their risk appetite. Right. So, really interested to sort of see what more can be done on, on that. Can we just finally talk about the risk of talking about these markets, which are beyond appetite sometimes for traditional investors, and that's because of, obviously the risk or the perceived risk of corruption. So can you just talk us a little bit about kind of IFAD's experience of tackling that type of risk, because, you know, you're very much doing this already in these markets.
Alvaro: Thank you. Yeah, indeed. I mean, that's governance. And as you mentioned, how the money is used is a very important part of what we need to pay attention to. Now that we are a rated institution that has become even more important than before, if anything, any time that, for example, there's any potential misuse of the funds for what was not intended in the project, we always just stop any of the disbursements until we are reimbursed. If that continues or if that doesn't happen, we stop the programs in the country. So, we need to be very strict on how the money is used. In the case of IFAD, because we work very much with the people and in many cases in that last end mile, we are not always talking about big amounts of hard infrastructure. So, in this case, I would say the limits to corruption or misuse are not the same as when you're building an airport or building a number of bridges or many roads. We do build tertiary roads, we do build water systems, but most of them are in a smaller scale, really impacting the small scale farmers. So, this enables us to really be very vigilant. And as I said, this is a priority to make sure that the taxpayers’ money, but also the investors’ money is really used to what it was meant to.
Jane: Great. Thank you so much. This has been an absolutely eye opening conversation, and I've certainly learned a lot. And I'm sure our listeners will be equally fascinated by the conversation. So, thank you so much for your time. I know you're a very, very busy gentleman, so I do really appreciate it and it's been a brilliant conversation. Thank you so much, indeed.
Alvaro: Thank you very much. Thank you for having us.
Jane: So that's it for this week's episode of the LSEG Sustainable Growth Podcast. The next episode will cover reflections from COP28 with some of the LSEG delegation. Now, if you're not already following us, then please do. And don't forget to rate us on Spotify, Apple Podcasts, or any other platform. If you've got questions, comments, or someone you'd like us to talk to, then do get in touch by email at
[email protected]. I've been your host, Jane Goodland. That's all from me but watch out for the next episode very soon.
