With little time to achieve the United Nations' Sustainable Development Goals (SDGs), the ASEAN [lags behind] its targets around Decent Work and Economic Growth (SDG 8), Climate Action (SDG 13), and Responsible Consumption and Production (SDG 12). The growth of sustainable finance offers a chance for investors to provide the capital needed to bring the SDG objectives within reach.
In ASEAN, the agriculture, forestry and fishery sectors are particularly lush with opportunities to reach multiple SDGs by supporting growth, raising livelihoods and protecting natural ecosystems. But it will require concerted action to do so at scale. Growth in sustainable finance can deliver the positive results without negatively impacting habitat and communities. But has Covid-19 adversely impacted opportunities? Arguably the pandemic has renewed the focus on thematic finance, giving yet another boost to opportunities available. There has never a better time than now to achieve the SDGs.
The Opportunity
Despite fluctuations in investment into the food, agriculture and forestry sectors in recent years, there is a steady increase among Asian investors. However, the growth has been fuelled by investments that rarely address the environmental and social issues targeted by the SDGs.
Nevertheless, private finance is increasingly assimilating these goals. For example, Asia ex-Japan investors comprised 42 per cent of orders in Japfa Comfeed, an Indonesian poultry producer's recent sustainability-linked bond.
Green, social and sustainability bonds have also gained in popularity. In 2020, US$12 billion worth of these were issued in ASEAN. The ASEAN Green, Social and Sustainability Bonds Principles laid the foundation for regulators to assure strong credentials for these securities. With a solid framework in place, private financiers see these bonds as a credible phenomenon.
Investors themselves are increasingly looking to the agriculture and forestry sectors in ASEAN to contribute towards environmental, social and governance (ESG) targets via sustainability-linked loans and bonds. In the seafood production process, Bank of Ayudhya, Mizuho and MUFG came together to arrange an inaugural sustainability-linked syndicated loan. The 12 billion baht (S$511 million) loan requires seafood production company Thai Union Group to maintain its rankings in the global ESG indices, achieve greenhouse-gas emission reduction targets, and maintain high standards of social compliance onboard tuna vessels.
In March 2021, Japfa Comfeed issued a sustainability-linked bond of US$350 million, receiving orders of US$1.5 billion from investors. The poultry company will deliver on key performance indicators (KPIs) related to water consumption and waste management. The issuance demonstrates its commitment to SDGs, especially goals to end hunger, achieve food security, improve nutrition, and promote sustainable agriculture.
Other investment opportunities that target SDGs focused on gender equality, decent work, quality education and reduced inequality, within the context of the green transition. The Women's Livelihood Bond (WLB) series arranged by the Impact Investment Exchange (IIX) based on SDG-linked metrics closed a third series in December 2020 with US$27.7 million to support 180,000 women in Asia-Pacific (APAC) in their response and recovery from Covid-19.
Challenges
The examples mentioned are exciting but remain anecdotal. Investors report significant challenges in structuring these finance mechanisms. Financial institutions also point to a lack of coordination on sustainability targets across their clients' many departments and operations. This leads to lack of clarity on how to design and measure meaningful social and environmental KPIs.
There is also reputational risk as watchdog organisations may label projects as "greenwashing" if the ambition does not meet certain thresholds. Other issues include lack of know-how among agribusiness clients on issuing green, social and sustainable bonds and loans. Some clients are limited by their own scope of thinking: bonds are generally geared towards large businesses, even as increasing anecdotal evidence shows that small to medium-sized enterprises (SMEs) can leverage and deliver on bonds through dedicated programmes.
Policy as an Enabling Factor
ASEAN nations are turning to policy to encourage financial institutions to offer sustainable finance solutions to rebuild economies without causing further environmental damage. However, these policies are piecemeal. Financial institutions are still required to set their own internal frameworks to evaluate investment opportunities, particularly in agriculture and forestry. Nevertheless, it is a positive development.
Regional cooperation is required to ensure emerging economy host states are not competing in a race to the bottom to attract capital. Such cooperation is starting to take shape. In 2018, Ministers of Agriculture and Forestry unanimously adopted the ASEAN Guidelines on Promoting Responsible Investment in Food, Agriculture and Forestry (ASEAN RAI) to promote investment fostering regional economic development, food and nutrition security, as well as the sustainable use of natural resources. The collective commitment made by Ministries of Agriculture will develop harmonised policies and standards to regulate home and host state investors' practices.
Investor Action
With government and regional policies taking more concrete shape, many institutions are ready to back green and social finance mechanisms in ASEAN, which could make huge strides in achieving SDGs. With the amount of capital available (Bain estimates US$205 billion per year till 2030), investors should seize the opportunity in the food, agriculture and forestry sectors.
There are three main pathways for investor action. This can be done by:
Leveraging on existing market and policy standards. There is ample room for a diverse pool of green, social, and sustainability bonds, guided by global and regional standards. Globally, investors can look to the Climate Bond Standard. Existing Climate Bonds Initiative criteria for agriculture and for forestry complement regional policy guidelines, such as the ASEAN RAI and related national-level regulations. Benefits are seen at the micro (return on investment) and macro (SDG achievement) scales through the harmonisation of the green bond market.
Lending to smaller players in agriculture, and designing innovative finance mechanisms that meet the needs of those players. SMEs can have a direct impact on the communities where they operate. Investments into SMEs to target one SDG objective can have a multiplier effect. For example, in 2019, the Bank of Ayudhya in Thailand issued a sustainability bond to expand credit lines for Thai women-led SMEs. The US$220 million bond was the first private-sector gender bond issuance in APAC. By closing the credit gap for women-owned SMEs, researchers reckon income per capita could rise 12 per cent by 2030.
Capturing a greater proportion of the US$128 trillion global bond market opportunity in the food, agriculture and forestry sectors. ASEAN investment opportunities in regenerative and urban agriculture, alternative proteins and agri-technology are projected at US$205 billion per year.
There is plenty of scope for investors to play a role. By accelerating responsible investments in ASEAN food, agriculture and forestry sectors, investors can help the region achieve its SDGs at the end of this decade.
This article was originally published in the Business Times and was written by Cedric Rimaud, CFA (ASEAN Commercial Manager, Climate Bonds Initiative) and Erin Sweeney (Lead, Sustainable Investment & Inclusion, Grow Asia).