The U.N. Sustainable Development Goals (SDGs) can sometimes be seen as those high-level objectives where the immediate value on the ground and in people’s lives is not immediately obvious. However, an innovative financial deal unveiled recently is showing how strong environmental and social targets embedded in a solid commercial product could act as a “blueprint” to realizing the SDGs on the ground.
What is the deal about?
The Tropical Landscapes Finance Facility (TLFF) – a partnership between UN Environment, BNP Paribas, ADM Capital and World Agroforestry Centre (ICRAF) – announced on Feb. 26 its inaugural transaction: a landmark $95 million sustainability bond to help finance a sustainable natural rubber plantation on heavily degraded land in two provinces in Indonesia.
The main income-generating activity underpinning this bond is the production and sale of rubber from the extended plantation. The project incorporates extensive social and environmental objectives and safeguards in partnership with World Wildlife Fund (WWF). Planted areas will serve as a buffer zone to protect the threatened national park Bukit Tiga Puluh from encroachment – one of the last places in Indonesia where elephants, tigers and orangutans co-exist.
Roughly 50 percent of the concession area will be set aside for community partnership programmes and conservation. The borrower and company in question, PT Royal Lestari Utuma (RLU) – an Indonesian joint venture between France’s Michelin and Indonesia’s Barito Pacific Group – will employ and train several thousands of employees in its plantations providing stable incomes, while also creating value for local farmers through technical assistance on rubber tapping, and protecting valuable tropical rainforest on the plantation (i.e. high-conservation value and high-carbon stock forests).
Why is this significant?
The global financial sector provides a huge – yet untapped – source of funds that could be redirected into sustainable land use projects. The value of all listed companies globally, for example, is about $65-70 trillion.
Bonds in particular are a way of directing significant resources to sustainable development. The Climate Bonds Initiative estimated that about $155 billion in green bonds were issued in 2017. While it sounds impressive there are two caveats: first, compared to the total outstanding bonds (around $120 trillion) the green bond markets is still small. Second, most of these bonds are issued to finance sustainable transport, low carbon buildings and renewable energy. Very little is directed towards the land use space. The few land use-related green bonds that have been captured by the Climate Bonds Initiative underpin timberland management in developed countries.
However, with agriculture being the main driver of deforestation, responsible for about 80 percent of tropical forest loss across Africa, Asia and Latin America, there is an urgent need to find a new business model for the industry. It is estimated that about $1.7 trillion is invested by banks, insurance companies, pension funds and sovereign wealth funds in the production of agricultural commodities. The novel $95 million sustainable land use bond by the TLFF balances the need for enhanced agricultural output with job creation and climate benefits. This could also be a new channel through which private capital can be directed to support the SDGs.
Part of a bigger picture…
This initiative is part of a broader effort under the UN-REDD Programme to work with public and private sector partners to unlock and scale up private capital for sustainable land use, where economic and productive activities are “decoupled” from negative forest impacts. The work stream supports UN-REDD Partner Countries with identifying and addressing deforestation and forest degradation by systematically engaging a variety of private sector actors.