Climate-Smart Technologies MERCY CORPS VENTURES RESILIENT FUTURE THESIS

The Challenge

While the economies of all emerging markets are different, many have similar features. Firstly, they have access to large amounts of natural resources and land, and the extraction of raw materials is an important part of the economy. However, much of the value added to these resources occurs outside the country. For example, coffee beans grown in Colombia are often roasted, packaged, and sold in the US—the steps where most of the value is generated. As a result, the original producer of the beans often earns less than 1 cent of income per cup of coffee sold in developed markets. Additionally, this means that emerging markets are net importers of finished goods and food for consumption, relying heavily on supply chains, last-mile distribution, and micro-, small-, and medium-sized enterprises (MSMEs) for their populations to access basic necessities.

The systems underpinning these two key features of emerging market economies—natural resource extraction and use, and the need for supply chains to access goods and food—have been exposed in recent years as vulnerable to disruption and extractive, inequitable use.

“How we measure wealth determines how we seek it and what we reward. The conventional approach of using GDP to measure wealth has spurred significant growth, but at the expense of the environment and the quality of life. Nobody breathes or eats GDP. We must change our wealth construct to take nature into account.”

Dr. Akinwumi Adesina, President of the African Development Bank Group

Natural resources and land use are often the greatest asset of emerging market economies and provide critical input for economic growth, while also being a fundamental foundation for human life. For example, the Democratic Republic of Congo (DRC) is a large exporter of oil and lithium. These resources are valuable fuel for multiple sectors and the production of batteries globally. However, the DRC is also home to vast rainforests and some of the world’s last mountain gorillas, both of which are being impacted by the unsustainable and extractive nature of accessing oil and lithium. Similarly, the Amazon region in Brazil is an important economic driver for the country, contributing an estimated 9% of the country’s GDP through farming. However, farming practices in the region are heavy contributors to deforestation of the Amazon rainforest—a place with half of all tropical rainforest globally, and home to 20 million indigenous people that rely on it directly for food, income generation, and cultural practices. Similar stories are playing out across the globe, and as a result, one-third of all land and one-fifth of all forest cover is already severely degraded due to human extraction, consumption, or unsustainable stewardship.

Human activity means that many natural resource systems have reached their limit. The longevity of natural resources relies on the incentives for local communities and landowners at the forefront of decision-making on how our forests, fisheries, oceans, and wildlife are used and managed. Yet these communities are extremely under-resourced and underserved, with approximately 80% of the world’s poor living in rural areas and depending on natural resources for their well-being and livelihoods. This makes these groups vulnerable to mal incentives of immediate production and degradation for income, with no option to steward their lands profitably while maintaining, or increasing ecological value.

Our current economies reward the extraction and depletion of critical natural resources by local communities that immediately depend on them.

One of the most important effects of resource degradation and climate change is mass urbanization. Rural people have few alternative livelihood options, so with degraded natural resources, migration to cities will become the only option for income generation. As a result, the number of urban dwellers is projected to reach 2.5 billion by 2050, with 90% of this growth set to occur in the sprawling cities of Africa and Asia. Mass urbanization and overpopulation of informal settlements will lead to increasingly fragile cities—a trend that will continue unless we fundamentally change how ecosystem management and land use decisions are incentivized. This knock-on effect of natural resource degradation is important because it means that no member of society is immune from the effects of unsustainable stewardship: cities far from the resources themselves will feel pressure on their ability to sustain growing populations. Many of the conflicts, pressures, and knock-on effects of resource degradation, such as urbanization, will gain velocity.

After being extracted, natural resources leave emerging markets for value addition in other countries, then re-enter supply chains back to emerging markets which are generally net importers of these goods. To date, global supply chains have been designed for efficiency rather than resilience. The lack of local supply of basic goods and foods in emerging markets leaves them exposed to disruptions in these fragile, global supply chains.

Supply chains often produce one or a limited number of goods, with a lack of diversification and redundancy. For example, in food systems, wheat, rice, and maize represent two-thirds of calories consumed globally—leaving many populations at risk of food insecurity should any of these crops see large-scale failure in a given season. Another example comes from global freight, where in 2021 the Ever Given ship blocked the Suez Canal halting 12% of global shipping for almost a week.

The vast majority of supply chains are also analog and lack any sort of digitization. This means there is no data available on the condition, location, or handlers of products as they move through the value chain. Those who rely on the final products of supply chains—often MSMEs and consumers in the emerging markets context—lack transparency over risks or failure in delivery.

Once finished goods and food reach emerging markets, their journey isn’t over: last mile distribution is inefficient and more complex in these markets. Inadequate physical infrastructure, such as limited road networks into rural areas, or poor road conditions are easily disrupted by physical damage due to extreme weather events, such as floods or storms. Paired with notoriously heavy traffic in cities such as Lagos or Sao Paulo, and/or lack of street names in sprawling informal settlements, means significant inefficiencies in last-mile distribution, driving up the prices of end goods to consumers. Coupled with lower overall income levels this leads to emerging market consumers paying a higher “share of wallet” for basic necessities.