Green Bonds and Agriculture Project Finance

Green Bonds and Agriculture Project Finance

As we move forward in the 21st century, the global agriculture sector faces two immediate and very large challenges, the solutions to which can at times be at odds with each other. The first is to find a way to produce dramatically greater amounts of food to feed the world’s rapidly growing population. The second is that agriculture production and activity can at times cause significant negative impacts on the environment.

While successfully meeting these challenges will require a sustained combination of many political, financial and industry tools, green bonds are one way to both channel significant amounts of capital into the agriculture sector and at the same time support agriculture practices that have positive environmental consequences. These bonds could become an important complementary financing source, not only for governments and large corporations, but also for smaller agriculture companies that play a very important role in the global food chain.

Population Growth and Food Demand

The global demand for food, which is already very high, will rise dramatically in the years to come. According to a report by the United Nations, the world’s population will reach 9.8 billion by 2050, an increase of more than 2 billion.  This population increase will have a major impact on global demand for food. An article published by Maarten Elferink and Florian Schierhorn in the Harvard Business Review suggested that by 2050 the world’s demand for food could increase between 59% to 98%, a staggering amount.

Production Ramp-up Financial and Environmental Challenges

The goal of dramatically ramping up food production to meet food demand faces important hurdles. One of these hurdles is not only providing financing for food production initiatives but also providing that financing at a cost that agriculture projects can reasonably support.

Traditional agriculture project finance methods can be challenging to fit into simultaneously production-minded and environmentally friendly production strategies. From a credit perspective, the dependence of a great deal of agriculture finance on the use of land as loan security can limit the pace of production growth.

While private equity investments can provide large amounts of capital for agriculture projects that is based on project cash flows rather than land values, the effective cost of private equity capital can be extremely high. Further, meeting often high return requirements can lead to financing business plans which emphasize maximizing financial returns rather than sustainable agriculture initiatives.

A second hurdle is the potential negative impact of increased agriculture production on the environment. Agriculture practices can cause many harmful impacts on the environment, including the release of greenhouse gases, deforestation, massive amounts of water use and pollutants. This can cause situations where agriculture production takes one step forward but environmental protection takes two steps back.

Green Bonds and the Agriculture Sector

One financial product which has the potential to help bridge the gap between the need for increased agriculture production and concern for the environment is green bonds. While there are different types of green bonds, generally speaking green bonds are bonds whose proceeds are used, either wholly or in part, for projects that have a positive impact on the environment. “Labelled” green bonds are those which have been certified as green bonds by a qualified third-party certifying entity.

According to the standards set forth by the International Capital Markets Association, green bonds should meet four key criteria:

– They should be used for “green projects”;

-Green bond issuers must communicate several things to investors, including environmental sustainability objectives, the process by which projects are determined to be green projects and green project eligibility criteria;

-There must be a formal process for managing the funds that are invested in green projects;

-And there must be clear and detailed reporting procedures.

Under the International Capital Markets Association framework, agriculture projects expressly qualify as green projects. According to the International Capital Markets Association’s Green Bond Principles, qualifying projects include: “environmentally sustainable management of living natural resources and land use (including environmentally sustainable agriculture; environmentally sustainable animal husbandry; climate smart inputs such as biological crop protection or drip-irrigation; environmentally sustainable fishery and aquaculture; environmentally-sustainable forestry, including afforestation or reforestation, and preservation or restoration of natural landscapes).”

Potential of Green Bonds

Green bonds have the potential to have a significant impact on the financial and agriculture sector.    According to a report prepared by Nikko Asset Management in 2017, by the year 2020 the value of green bonds issued and outstanding could reach US $1.2 trillion.

An early green bond issuance was the issuance of bonds by the Agricultural Bank of China (“ABC”) in the amount of US $1 billion.  A majority of the ABC’s lending activity is related to the purchase of grains and cereal reserves. The ABC also provides large amounts of funding to  improve rural infrastructure that supports farming activities. At the end of 2017, the Agricultural Development of China issued over 3 billion yuan in green bonds (US $473 million).

Brazil, one of the world’s most important emerging markets with a population of about 208 million, has become an important issuer of green bonds. Brazil has already issued more than R $11 billion (US $3.4 billion) in green bonds.  Reportedly 24% of the funds from these bond issuance were used to finance forestry and agriculture projects.

Private Placement

While green bonds are often publicly traded, they can also be placed privately. This creates a very potentially interesting financing alternative for smaller companies that have strong projects that they wish to finance but who may not qualify for trading on public markets or who may want to tailor bond terms and conditions for specific investors.

 

 

Meeting the world’s growing food demands and ensuring future environmental security requires creative financing solutions. Green bonds have great potential to become an important financial tool in achieving food production and environmental objectives.

The photo for this article was taken by Adam Morse.

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