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Sustainable investments make good business sense. Investing in sustainable production reduces the risk of supply chain disruptions. Incorporating environmental, social and governance (ESG) factors into investment decisions contributes to improved corporate financial performance and risk-adjusted returns on medium to long term.
- Pioneering companies and financial institutions are taking a lead in sustainable agriculture and forestry investment, yet progress has been slow and their lead is not being followed.
- USAID Green Invest Asia works with mid-growth enterprises and links them with investors to scale up profitable and sustainable agriculture and forestry practices.
- Businesses and financial institutions are crucial to promoting sustainable landscapes, including reduction in greenhouse gas emissions and commodity-driven deforestation.
At the AVPN Conference 2018 in Singapore, USAID Green Invest Asia participated in a panel on Social Investment in Forest Ecosystem Services. The discussion emphasized the role of businesses and investors in deforestation-free commodities and supply chains by scaling up regional investments in sustainable practices.
Commodity-driven deforestation remains a critical challenge for forestry and agri-businesses looking to improve their supply chains. While some leading enterprises are improving practices, a 2016 report from the Global Canopy Programme found that the rate of progress by most companies, including those in Asia, is inadequate to reach the 2020 targets of removing deforestation from global commodity supply chains.
Companies committed to eliminating commodity-driven deforestation have called for more ESG investments into sustainable, low-carbon agricultural and forestry practices. However, while a number of premier financial institutions paving the way, uptake has been slow.
Engagement from businesses and private finance is crucial
For decades, investments in sustainable land use practices have faced uphill challenges. A proportion of “business-as-usual” investments have continuously been directed towards unsustainable and sometimes illegal logging practices. Forestland is now degraded beyond recovery and used for plantation-scale agri-business. In Southeast Asia, palm oil and pulp crops dominate these sectors due to short-term profit incentives and offer little to promote long-term ecosystem services essential for sustainable agriculture and land use.
On the other hand, investment streams from ESG funds and other sources into sustainable agri-business are relatively limited. For example, the Climate Bond Initiative highlights that only 3% of green bonds raised worldwide in 2017 were allocated to sustainable land use.
To protect landscapes essential for local livelihoods and ecologies, capital has to be directed not only towards conservation-aware companies, but also into ESG focused companies to benefit both business and the environment.
Sustainable investment makes business sense
ESG compliant companies have demonstrated to have lower stock return volatility, and lower overall volatility, than other companies. Businesses leading the way in ESG also tend to financially outperform their less sustainable peers.
Investors are paying attention to these trends, examining agricultural supply chain risks and corporate responses to make more informed investment decisions. Across Asia, ESG investing is becoming increasingly entrenched in portfolio management. Research commissioned by BNP Paribas showed that 84% of portfolio managers in Asia currently incorporate ESG factors into their investment decisions, exceeding the 70% recorded in the North America.
International banks are also experimenting with new models for financing, such as rewarding agri-companies with lower interest rate loans based on their sustainability performance. Recent examples of sustainable loans 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 what is ahead.
The market conditions within Asia are ripe with opportunity; the Development Bank of Singapore recently identified a $400 billion demand within Association of Southeast Asia Nations for additional investment in sustainable agriculture and land use. Hence, there is now a need to find strategies to connect profitable, investment-ready sustainable enterprises with financial institutions and investors looking to grow their ESG portfolios.
Connecting private finance with sustainable enterprises
USAID Green Invest Asia aims to be part of that solution by linking profitable, mid-growth companies with sustainable financing. These enterprises form the foundation of global supply chains, but often lack access to finance.
Working in Vietnam, Indonesia, Cambodia and the Philippines, USAID Green Invest Asia provides technical assistance to help companies improve the sustainability of their supply chain, enhance commodity production through good agriculture practices, and achieve standards for sustainability certification. The group also works with companies and their supply chains, often smallholders, to prepare them for investment and match them with green financing sources.
Furthermore, USAID Green Invest Asia supports private financial institutions by matching investors to a pipeline of profitable and investment-ready low-emissions businesses.
Business and production models of food and forestry companies are profoundly entwined with some of today’s most pressing global challenges – food insecurity, water scarcity and resource depletion – many of which are complicated by rapid population growth and climate change. These factors are expected to play out strongly in the agricultural and forestry supply chains where companies source their commodities.
By making greater investments in sustainable agri-businesses, we can change “business as usual” and contribute to the economic growth of the region, while ensuring that the land and forests on which we depend remain healthy for future generations.