Sowing the seeds for a just transition
Our ‘Insights’ series highlights strategies to link business and sustainability. Our latest case study looks at how investors can ensure that food and agriculture investments support fairer contracting and better outcomes for smallholders.
Increased investment in the food and agriculture sector is central to achieving many Sustainable Development Goals (SDGs), including the goals on gender equality, reduced inequalities and climate action.
Yet IIED research shows that contracts and contracting processes used by companies operating in the food and agriculture sector in low- and middle-income countries can adversely impact the lives and livelihoods of smallholder farmers.
For development finance institutions and impact investors, contracts and contracting processes represent an opportunity to contribute to a just transition and corporate sustainability by considering investee business activities along supply chains from a social and environmental perspective.
A new IIED Insight case study explains how investors can manage contracting risks and support sustainable development.
Insights for investors
- Investments in the food and agriculture sector are central to the eradication of poverty, hunger and gender inequality.
- Contracts and contracting processes in agricultural value chains can link development finance institutions and impact investors to adverse social and environmental impacts, either via their own investment or the activities of their investees.
- Investors should systematically review their contracts and contracting processes and also those of their investees to identify the risk of unfair outcomes.
- By addressing unfair contract terms and contracting processes, investors can contribute to better outcomes for smallholders, helping to achieve the SDGs and a just transition to a green and sustainable society.
Working for a just transition
The concept of a just transition – ensuring that nobody is left behind in the shift to green and sustainable economies – has gained wide acceptance among policymakers and investors. The G20 has highlighted the role of the financial sector in supporting a just transition through the Sustainable Finance Roadmap and the Sustainable Finance Working Group.
Development finance institutions, impact investors and their investees can support a just transition by supporting smallholder-focused investments.
Investing in the food and agriculture sector can contribute to multiple SDGs, including gender equality, action on climate and reducing inequalities.
Smallholder farmers and contract processes
Smallholder farmers are vital to the world's food systems: one-third of the world's food is produced by smallholders. At the same time, smallholders – of which as many as 43-50% in Africa and Asia are women – face numerous challenges.
Crises such as climate change, the COVID-19 pandemic and the war in Ukraine disproportionately impact rural livelihoods – but the individuals and communities that may be most affected are least able to respond.
The challenges of global shocks can be compounded by the architecture of international trade and investment, which those living in poverty have little or no prospect of influencing.
A large chunk of trade and investment uses policies and contracts with standard terms and conditions and contracting processes. IIED research shows that standard terms found in sale and purchase and supply agreements can have implications that affect smallholders' human rights and compound pre-existing vulnerabilities.
Contracting often does not consider producers’ (particularly women’s) priorities and social contexts. Contract clauses can:
- Overburden producers with obligations on price and other risks that are unreasonable or unachievable, given their resources
- Disproportionately shift risks to the contractual parties less equipped to bear them (for example, stakeholders in developing countries), and
- Impose strict provisions on rejection of produce or termination, with limited opportunity for farmers to negotiate when unforeseen events occur. These strict contract termination clauses can result in food insecurity for smallholders.
Generally, smallholder farmers are contract takers; they must accept the contract terms. Importantly, some contract terms originate in end-buyer contracts and cascade down the contracting chain. Such cascading contract terms further prevent smallholders from voicing their concerns.
Smallholder farmers' lack of influence can limit their ability to enter equitable trading arrangements and develop sustainable livelihoods. This, in turn, limits the potential for investments in smallholder-linked supply chains to support a just transition.
Risks and solutions
IIED has identified risks and potential solutions to improve the equity of standard sale, purchase and supply agreements. These include:
|Strict payment and delivery terms may not consider local contexts||Consider longer payment grace periods and flexibility in delivery terms, as well as non-financial actions for late payment or non-delivery|
|Default interest rates cascading through contracts can increase debt, poverty||Draft model clauses that remove default interest|
|Standardised buyer requirements on environmental, social, and corporate governance and human rights disproportionately shift responsibility to communities||Conduct enhanced due diligence of supply chain contracts, explore more equitable smallholder model contract terms, and include a budget for training farmers’ associations on locally appropriate environmental, social, and corporate governance and human rights risks|
|Standard intellectual property clauses require licensing of traditional or Indigenous knowledge or processes||Explore exceptions in model clauses; conduct enhanced due diligence of supply chain|
Risks for investors
Unequal contracts and their negative social and environmental impacts can expose investors to risks.
The contracts and contracting processes used along a supply chain form part of investors’ downstream business activities over which investors have a direct or indirect influence.
As such, they constitute business relationships that can connect a company to adverse social and environmental impacts, creating risks for a company and its investors.
Risks to investors may include:
- Legal risks, including human rights and hardening reputational risks
- Regulatory risks, including penalties for noncompliance with regulations and requirements, such as mandatory due diligence laws
- Labour risks, including failing to consider vulnerable groups
- Reputational risks, such as negative development impact ratings, poor corporate culture, green- and purpose-washing claims, and
- Financial risks, including shareholder dissent, bad publicity, potential fines and legal costs.
Three proposals for action
Addressing contracting processes and contract terms is only one – albeit important – solution. Ultimately, we will need to see changes to global trade and investment architecture.
For investors who want to contribute to a just transition and ensure that smallholders can exercise agency, build resilience and counter burdensome contractual obligations, we propose the following actions:
1. Raise awareness
Enlightened investors can raise awareness about why investors should examine contractual terms and processes to manage risk within their own and their investees’ business operations and ensure they are contributing to a just transition.
2. Develop more equitable model clauses
Investors can partner with peers, civil society and producer organisations to explore how best to systemically eradicate or counter unjust contract features.
3. Support a smallholder just transition platform specialising in contracts and contracting
Existing responsible investor platforms may lack expertise in contracting agricultural investments from a just transition perspective. A new or strengthened existing platform focussing on how contracts in food and agriculture investments can drive a just transition could generate dialogue, tools, guidance and best practices to improve outcomes for smaller producers.
Such a platform could also provide a measurable way for investors and other actors to design farmer-centred and farmer-knowledge-based agricultural programmes and outputs that support fair agriculture contracts and a just transition. This can contribute to investors’ corporate sustainability commitments for the sector.
Sowing the seeds for a just transition, Kinnari Bhatt (2023), Briefing
Contracts in commercial agriculture: Enhancing rural producer agency, Lorenzo Cotula, Emma Blackmore, Thierry Berger (2021), Research report
How contracts affect the agency of rural producers, Lorenzo Cotula, Emma Blackmore, Thierry Berger (2021), Briefing