01 / SUSTAINABLE, DEFORESTATION-FREE COFFEE SUPPLY CHAIN
Mercon B.V.
&Green is partnering with Mercon for the establishment of a sustainable, climate-resilient, deforestation-free coffee supply chain in Vietnam, the second-largest coffee-producing nation in the world, with over 80% of contributions sourced from smallholders. With the support of &Green's loan, Mercon will create a blueprint of a climate-resilient, deforestation-free coffee production landscape in the country, with improved livelihood opportunities for smallholders and greater capacity to run efficient farm management.
Project summary
| COUNTRY | Vietnam |
| INVESTEE COMPANY | Mercon B.V. |
| SUPPLY CHAIN | Coffee |
| TOTAL &GREEN INVESTMENT | USD 20 million |
| EFFECTIVE DATE | December 2022 |
| LOAN TERMS | 8-year tenor |
| CO-INVESTORS | N/A |
02 / blended finance
INVESTMENT RATIONALE
In Vietnam coffee production is largely driven by smallholder production; however, decades of intensive cultivation and expansion into marginal land have degraded the soil quality and left smallholders less resilient to climate change and vulnerable to fluctuations in the price of coffee. ca. 50% of suitable lands for coffee are expected to be lost by 2050, with production areas moving to higher altitudes. This deforestation risk will likely worsen as increasing amounts of forested land become suitable for coffee growing.
With this investment, &Green aims to showcase models combining farm-level capacity building and compliance management into a holistic landscape approach focused on climate resilience and forest conservation. This will involve the development of a blueprint for a deforestation-free sustainable coffee production landscape, integrated into Vietnam operations of the LIFT platform. The LIFT platform is a landscape model and preexisting Mercon program, it will be scaled to transform the current fragmented farm-level capacity in Vietnam to a holistic, wholesale LIFT Landscape model involving over 4,000 hectares of productive areas and 15,000 participating coffee suppliers. LIFT is an ideal tool for this operation as it has all the necessary features and components that allow for the “incubation” of a pilot deforestation-free coffee production landscape. The initial pilot of LIFT Landscapes will involve over 400 hectares and the participation of at least 300 local farmers.
Mercon will upgrade the current system of compliance checks into a holistic landscape approach spearheading the design of a pilot landscape monitoring program and the verification of larger landscape impacts, in comparison to the typical farm-level scope used by certification programs. Thereby ensuring that &Green will not only support Mercon in complying with the tightened EU legislation but also ensure the continued supply of EU-compliant coffee from climate-resilient terrains.
The commitments undertaken by Mercon will drive the transformation of farming practices in its vertical supply chains and risk mitigation in its export chains. The deforestation-free coffee production landscape blueprint, designed and tested in Lam Dong province, is expected to be further applied in other jurisdictions where Mercon operates or plans to implement its LIFT program.
03 / the action plan
ENVIRONMENTAL RETURN & SOCIAL INCLUSION
Mercon aims to gradually roll out an NDPE* policy in its export businesses with the goal of sourcing coffee for its Vietnam-based business from deforestation-free coffee supply chains by 2027.
To this end, two documents have been developed outlining how this transformational change will come about. The Landscape Protection Plan (“LPP”) describes Mercon’s landscape and the context of its operations in Vietnam, providing an overview of the strategies needed to achieve the expected environmental and social (“E&S”) impacts over the loan term. The Environmental and Social Action Plan (“ESAP”), a contractually binding part of the LPP, sets specific targets for the on-the-ground implementation of strategies, as well as performance indicators for the E&S impacts.
Mercon’s environmental and social targets include:
- mitigation of deforestation risks and the implementation of NDPE-compliant landscapes;
- transforming coffee supply chains and designing LIFT Landscapes;
- reaching full compliance with International Finance Corporation Performance Standards (“IFC PS”) by the end of the third year of the loan tenure;
* NDPE stands for No Deforestation, No development of Peatlands, and No Exploitation and is a policy commonly used to ensure sustainable operations.
ENVIRONMENTAL RETURN
Forest protection and the transformation of farming practices are key components of this transaction.
Arabica in the vertical segment of Mercon’s Vietnam operations will be assessed against NDPE policy by the end of 2023, assuring compliance of these supply chains by 2025 when the first NDPE verification will occur. Regarding exports, by the end of 2025 Mercon will procure all Arabica from deforestation and exploitation-free landscapes. A similar policy will be extended to Robusta exports by the end of 2027.
Mercon is committed to purchasing and sourcing coffee produced from NDPE Landscapes and implementing climate adaptation measures via the LIFT program. By 2030 it will source all its coffee in vertical supply chains from LIFT landscapes.
The estimate* of the environmental targets of this project include:
- 63,000 hectares of forest conserved;
- 4,000 hectares of LIFT Landscapes implementing climate adaptation measures;
- 63,400 hectares of ecosystems with improved resilience;
- 15,000 participating coffee suppliers.
* The final targets will be set during 2023, based on detailed studies.
SOCIAL INCLUSION
Through Mercon’s efforts, up to 15,000 coffee suppliers will benefit through their participation in the LIFT Landscapes.
04 / ASSESSING RISKS
ENVIRONMENTAL & SOCIAL RISK ASSESSMENT
According to an IFC assessment this transaction is classified as category B, a finding which was corroborated by the Environmental Risk Management (“ERM”) due diligence assessment. The E&S risks and impacts associated with this project are limited, site-specific, and can be readily addressed through generally accepted mitigation measures.
IFC’s biodiversity review confirmed that in general coffee production and sourcing is in consolidated agricultural lands rather than recently deforested areas, although Vietnam is considered “high-risk” for future deforestation. In-house forest and biodiversity screening indicated that roughly 25% of the landscape area has confirmed or potential critical habitats. The size of the farms and IFC’s assessment of land use change at farms suggest a medium-level risk (B).
As a part of the ESAP during the first year of the loan, Mercon will create the concept of LIFT Landscapes, using the Forest & Biodiversity framework of &Green as guidelines for understanding and managing biodiversity impacts to assure compliance with IFC PS. The assessment will include the classification of the remaining forests in terms of their biodiversity value. Net Gain is not applicable in this situation as Mercon does not have its own coffee production assets.
