Incentivizing and scaling private investment for sustainable land use in Asia
This article was originally published by Responsible Business Forum and is republished with permission.
By Yohann Formont and Natcha Tulyasuwan (USAID Green Invest Asia).
Right now, all across Asia, there is a growing interest how financial institutions can help incentivize and scale up private investment in sustainable land use. A recent report produced by Asian financial services group DBS and the United Nations Environment Program highlights that between 2016 and 2030 the demand within the Association of Southeast Asian Nations (ASEAN) for additional investment in sustainable agriculture and land use practices is an estimated $400 billion.
Looking at the conditions globally, it is not hard to understand why channeling more private funding into environmentally and socially responsible production is critical for solving some of the world’s most pressing issues. Our planet faces a limited availability of natural resources, increasing greenhouse gas emissions from conventional agricultural practices, and a rising demand for food to feed a population that could increase to 9.7 billion by 2050.
Despite the relative availability of private funding to address social and environmental challenges, gaining access to finance remains a barrier for many businesses. It is also hard for financial institutions to identify and channel private funding towards companies aimed at promoting sustainable land use practices.
At the recent Responsible Business Forum on Food and Agriculture hosted in Jakarta, which attracted more than 400 participants from the world of agribusiness and finance, USAID Green Invest Asia led a session on increasing private finance towards sustainable land use. Financiers from BNP Paribas, ING and Lestari Capital discussed how investment and commercial banks, as well as impact funds, could provide the right incentives and structures to shift the flow of capital into sustainable businesses.
What is clear is that there is no foreseeable shortage of private capital in Asia. While public and donor funds are increasingly constrained, the availability of private funds is growing every year. Drawing on their knowledge and experience, here are three concepts raised at the session to increase the flow of private capital towards sustainable land use.
1. Support the development of ESG loans to sustainable businesses
Today’s financial institutions are eager to explore new models for sustainable financing. One idea that is gaining traction among commercial and investment banks are loans linked to sustainability performance, where the interest rate of a loan to a company is reduced when the business starts to meet its sustainability targets. The concept ensures buy-in from both sides, offering a financial incentive for companies and risk mitigation for financiers.
From the perspective of investors, two challenges need to be addressed for sustainable loans to reach their full potential. First, financial institutions must enhance technical expertise and resources in environment, social and governance (ESG) to achieve sufficient visibility in the agricultural supply chain. Importantly, financial institutions need partners to assess their clients’ supply chains and address environmental risks. The second challenge is identifying companies that have committed to high social and environmental standards within their supply chain either through high profile pledges like zero deforestation, or contributions to Sustainable Development Goal targets. Currently, the pool of sustainable and investment-ready businesses in Asia that are ready to scale is limited.
Recent examples of sustainable loans in Asia between ING and Wilmar International Limited, or the $500 million deal between Singapore food giant Olam and a “club” of 15 banks, are signs of a growing trend. These kinds of loans have so far been offered primarily to multinational companies; expanding this instrument to small to medium-sized enterprises (SMEs) could potentially scale up sustainable production in the agriculture value chain.
2. Encourage cooperation to facilitate private investment
Despite the interest of investors to fund climate smart agriculture ventures, directly financing small landholders in ASEAN is simply too costly. Financiers often require a minimum transaction size that can only be reached if small producers collaborate and seek financing together. This can be done through institutions, such as associations or cooperatives, as well as through value chain linkages, such as contract farming or input suppliers. These concepts are not new in the agriculture sector, but can be used by businesses seeking to improve their sustainability targets to form collectives – for example producers with similar market access, premium selling prices, and lower risk levels.
On the investor side, financial cooperation creates an opportunity to blend commercial and non-commercial interests around a single transaction. By diversifying the risk profile of investors and blending different financial instruments together, it’s possible to enable financing that may not be viable for individual investors. For example, the USAID Development Credit Authority guarantee that was pivotal in enabling the landmark $95 million sustainability bond to finance a sustainable natural rubber plantation on degraded land in two Indonesian provinces.
3. Leverage the power of offtake agreements
When trying to access financing, not having enough collateral is a major limitation for small landholders and SMEs. External guarantees can provide a solution to this problem, but these guarantees are difficult to implement for small transactions and rarely designed to provide incentives for sustainable producers.
An alternative to financial guarantees is to leverage offtake agreements between producers and buyers. Offtake agreements are widely used in the agriculture sector and are particularly relevant for sustainable producers. Producers with sustainability certification tend to use specific market channels to distribute their products. This situation enables producers and buyers to become more dependent on each another, and creates a favorable condition for reliable and long-term offtake agreements. Such offtake agreements, though they don’t replace collateral, can reduce the amount of assets a company needs for a loan guarantee.
