Indicators: crucial for comprehensive analysis

Indicators are an important ingredient of a financial analysis. They help to inform financial institutions in their risk analysis of a given loan about factors which influence crucial components like repayment capacity or whether the financing of a particular good actually makes sense for a given loan applicant.

This becomes particularly visible when we think of small producers which are affected by multiple threats, like climate change and biodiversity losses, that undermine their livelihood and productivity. To understand the productive reality especially in small scale agriculture, but also in other contexts, it is necessary to measure climate effects affecting a given loan recipient, but also his readiness to use the loan in the intended manner. In agriculture this knowledge can be of key importance to decide whether a given Climate Solution (or Nature-based Solution), e.g. a drip irrigation or a Silvopastoril system should be financed or – once it has been financed – understand whether it was put in place correct and supports the small scale producers in the intended way.

Since financial institutions are not necessarily experts in agriculture, green energy and the interpretation of climate events, indicators offer a way to systematically measure such influencing factors and include them in credit decisions. Through indicators they become measurable and manageable. Indicators are tools that allow to understand the present status and plan activities to improve.

In YAPU we use a set of indicators that aim to understand the vulnerability of smallholders to threats such as climate change and biodiversity losses, as well to assess the possibility to cope with such threats by implementing nature-based solutions. They are included individually or combined in the credit process through our software.

Sensitivity indicator

Measure the sensitivity of crops towards different climatic conditions. Based on FAO data, it assesses how sensitive the various crops are to changes in:

• Temperature
• Rain patter
• Soil quality

The sensitivity of the crops produced, allows to have a first understanding of the intrinsic risk of a small producer. It also allows to formulate an informed policy for portfolio allocation in different crops in terms of their potential risk to climate change.

Adaptive capacity indicator

Measures the capacity of smallholders to adapt to changing climate conditions. It assesses the practices, and technologies used by small producers along various axis among which:

• Crops management
• Ecosystems management
• Pest management
• Soil management
• Water management
• …

The combination of the adaptive capacity indicator and the sensitivity indicator allows to have a first understanding of the climate vulnerability of a given small producer: A high sensitivity and a low adaptive capacity indicate a high climate vulnerability.

One of the most effective way to compensate for a high climate vulnerability of small-scale producers is to support her/him to implement nature-based solutions (NBS). NBS are practices or technologies that support smallholders to increase production or quality of production (which translates into revenues), decrease her/his pressure on ecosystems, and reduce climate vulnerability.

Verification of green credits

The verification index assesses to which extent nature-based solutions financed by financial institutions are implemented correctly by small-scale producers and can leverage their full potential to protect ecosystems, generate resiliencies and increase production.

On a portfolio level, this indicator allows to assess if the practices or technologies financed can be classified as “green” and report them as such. It enables financial institutions to report internally and externally on the impact of their portfolio. It allows them to systematically report along the so-called triple-bottom line (people, planet profit) by including the dimension of environmental impact.

Biodiversity risk indicator

The Biodiversity risk indicator assesses the potential impacts of small-scale producers on local (agri-)biodiversity. The assessment can be done on the individual loan level or the portfolio level and includes the 5 main pressure points of biodiversity:

• Change in land use
• Overexploitation
• Pollution
• Climate change
• Invasive alien species

Biodiversity promotion

Biodiversity promotion assesses the possible degree of promotion of biodiversity through given nature-based solutions implemented by small-scale producers.

The inclusion of this indicator in the credit assessment allows our partner institutions to decrease their climatic and biodiversity risks, support the financing of nature-based solutions and climate change adaptation of small-scale producers in general.