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Emmanuel Benjamin, Ebele Maduekwe, Maarten Punt and Gertrud Buchenrieder

Climate change adversely affects agriculture and thus societal welfare in parts of developing countries. However, despite being credit constrained, some smallholder farmers in developing countries are adopting conservation agriculture or climate-smart agriculture involving agroforestry, which improves environmental quality and makes their agri-enterprise more climate resilient. These actions can be interpreted as corporate social responsibility (CSR), leading to corporate sustainability (CS), which is partly remunerated with payment for ecosystem services (PES). PES, CS, and CSR may have important implication for agriculture financing. This chapter extends the theoretical model set forth by Hediger in 2010 related to capital and welfare theories of CSR and CS. Our model is designed to capture the overlapping concepts of CSR, CS, and conservation agriculture. We express CSR and CS as constrained optimization problems, showing their relations and differences and their link with PES and the quality of land. We also incorporate important smallholder constraints such as arable land size. The theoretical results suggest that in the short term, CSR can be interpreted as a societal welfare constraint on the farmer’s profit maximization objective and that PES alone may not be enough to induce a farmer to observe this constraint. The fact that farmers still observe this constraint implies that they account for other things. In the long run, agri-enterprise CS (land productive capacity) is related to long-term profit maximization given the initial land endowment and land quality. These are important factors relevant to the credit risk management strategy of formal financial institutions in accordance with international banking standards. We argue that farmers who implement CSR and CS, and especially if they go beyond PES, account for more than just short-term profit maximization. They care about reputation and long-term profit maximization. Therefore, we speculate that PES, CSR, and CS can serve as important indicators for banks that they are dealing with responsible, trustworthy, and especially creditworthy individuals.