Climate Bonds for Land Use – Opening the door to new financing opportunities 

by Sean Kidney

September 9, 2015 – Over the past year, a group of 16 leading academic and internationally recognised experts from the Agriculture, Forestry and Other Land Use (AFOLU) sectors have been meeting to draft a new set of eligibility criteria for the Climate Bonds Standard.  What´s more – another 30 people representing large global investors, banks and industry have been providing feedback on the practicality of the drafts.

These sector-specific criteria were released this week in Zurich for a 60-day period of public consultation and industry comment (look out for live commentary from the launch later today!)

Agriculture and forestry, including other land management practices, are incredibly susceptible to climate change – and the implications for human food, fiber and fuel supplies make for frightening reading.

Some climate scenarios show a 25% reduction in crop yields between 2030 and 2050. That’s a massive change, which could be underway in just 15 years. Tropical regions could see fish catches fall by 40–60%, as warming seas lead to a radical change in marine life. Already drought is having a major effect on food production, hitting big emerging markets like Nigeria and Indonesia very hard.

The pressures on food, fiber and fuel production caused by climate change, along with broader environmental degradation, come as demand surges thanks to the increasing global population.

As Tanja Havemann, Director of Clarmondial and AFOLU lead specialist states, “These factors explain why the Agriculture, Forestry and Other Land Use (AFOLU) sectors are receiving significant attention in the investment world.

AFOLU assets traditionally form an important part of many institutional investor allocations, such as forestry in the US and agriculture in Australia, and they are also priority investment areas for most emerging economies, where they are key contributors to national budgets, employment, and food security.”

Bonds are an important tool in the global arsenal of financial instruments needed for investors to deploy capital, at scale, including into the AFOLU sectors.

Significant investments are required throughout the supply chain, from primary production, to inputs, storage, processing and distribution and retail.

What constitutes as relevant investments under the Climate Bonds AFOLU Standard will vary according to sector and geography but there are some general themes. For example, investments will be needed to change production methods, switch to improved crop varieties, reduce fossil-fuel based inputs, or sometimes shift to another production system altogether.

Marc Sadler, Adviser in the Agriculture Global Practice at the World Bank says, “Increasingly, investments need to deliver multiple outcomes. This could not be more pertinent for AFOLU related investments, which must deliver on increased food security, enhanced resilience and reduced emissions.

The challenge for the global food system and the landscapes it operates in are real, immediate and critical. Success will be dependent on leveraging both public and private capital in the AFOLU space, which will be challenging for this emerging, but essential asset class.”

Investors are looking for standards 

Investors are becoming increasingly aware of the immense risks associated with unsustainable AFOLU management practices.

In this context, the Climate Bonds AFOLU Standard serves two important functions: first, it signals to investors what a green investment is within the AFOLU sectors, and second, creates a consistent, science-based framework to review and monitor relevant bond issuance to simplify this process for investors.

By doing this, the Climate Bonds AFOLU Standard aims to spur increased investment in both agriculture and sustainable forestry.

Christine Negra, Director of Research at EcoAgriculture Partners, says: “When companies and governments have adequate financing for cost-effective adaptation investments, they can ensure stable commodity sourcing and sustainable well-being.”

Members of the Technical and Industry expert committees who advised on development of the Climate Bond AFOLU standard believe that it is a meaningful signal to investors. It will also serve as a useful framework for companies and other intermediaries, attracting more issuers to the table in the sector.

Henry Neufeldt, Head of the Climate Change Unit at the World Agroforestry Centre (ICRAF), says, “Climate Bonds can help in providing the necessary framework to lower investment risks perceived by public and private investors, when it comes to engaging in a more sustainable way of managing land in developing countries.”

Many governments are also putting in place systems to inform and reward AFOLU asset managers that engage in sustainable practices. For example, the USDA has recently launched the Climate Hubs Tool Shed – an online, searchable database of tools that can assist land managers, land owners, and other relevant professionals in adapting working lands to the impacts of climate change.

Several emerging market governments are also putting in place relevant systems. These are being developed multilaterally through forums such as the Global LEDS Partnership, and Global Alliance for Climate-Smart Agriculture (GACSA) supported by organizations like the World Bank, IFC, and various UN-organizations. Governments are also developing their own climate smart land management strategies, including Vietnam,  Kenya and Brazil.

Leveraging existing standards and best practices

The Climate Bond Standard also acknowledges the important work done by other organisations, such as the Verified Carbon Standard (VCS), WWF and ECOM Trading, a global commodity trading and processing company. Many of these organisations were represented on the AFOLU standard technical and industry working groups.

Jason Green, Deputy CEO Coffee & Cocoa at ECOM Trading, says: “Within the ECOM cocoa supply chain we are working at both ends to establish how the cocoa and chocolate industry can engage to jointly provide the incentives required to facilitate our investments in climate smart production techniques at smallholder level. Education and communication tools will then also become key areas for broader investment across the sector.”

But this is only the beginning of the journey, as the sector is complex and the current information base and transparency around use of proceeds of bonds issued in these sectors is generally low.

We therefore invite interested parties to start a journey with us: to use the draft AFOLU Standard as a foundation on which to encourage more transparency around use of proceeds within the AFOLU sectors, and for consistent, scientifically-robust information to be collected and disseminated in order to steadily improve the information base for investors.

AFOLU STANDARD

• Executive summary
• Full document