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Could Agriculture And Forestry Be The New Frontier For Green Bonds?

S&P Global Ratings believes that investment in sustainable land use is critical in mitigating climate change and bridging the gap between the need for increased agricultural production and a concern for the environment. However, unlike the transition to clean energy--which has to date been a focus of the $744 billion green bond market--sustainable land use is still a comparatively nascent green bond financing objective.

Though land use, which includes categories such as forest land, cropland, grassland and wetlands, currently only has a small presence in the green bond market, demand for sustainably produced agricultural and forestry commodities is set to increase. Moreover, green bonds could be instrumental in enabling this growth. According to estimates by the Climate Bonds Initiative (CBI), financing from green bonds for sustainable agriculture and forestry has already grown to $7.4 billion in 2018 from $208 million in 2013. To support this part of the green bond market, the CBI launched its Forest Criteria in 2018, and is due to launch its Agriculture Criteria in January 2020.

As the green bond market continues to develop, we believe it is vital that the focus on transaction transparency and impact assessment--which distinguishes green bonds from conventional bonds--remains robust to encourage further market scaling. We used our Green Evaluation analytical approach--newly expanded to include land use projects--to gauge the potential environmental contribution of two green bonds issued by Fibria Celulose S.A. and Klabin S.A., targeting sustainable land use in Brazil. The results show that green bond issuers and purchasers could view land use projects as making a positive environmental contribution.

As the green bond market continues to expand, and pressure on the agricultural and forestry sectors to sustainably increase production grows, green bonds targeting land use could become a larger feature in the market. However, there are challenges to overcome--not least, the scale of greenhouse gas (GHG) emissions from the sector (see infographic below).



Proceeds From Land Use Green Bonds Are Skewed Toward Forestry Projects In Brazil

According to the CBI, a total of $744 billion of green bonds have been issued since the market's inception in 2007. Despite this overall market expansion, allocation of proceeds to land use projects has been relatively small. Only 3.3% of the total market, or just over $24 billion, has been allocated to land use initiatives, with renewable energy, building energy efficiency, and clean transport initiatives being the key eligible green projects financed by green bonds (see chart 1).

Chart 1


The CBI has three categories for land use bonds, based on the percentage of bond proceeds allocated to land use projects. Among bonds with more than 95% allocation of proceeds to land use, there are two notable trends: a preference for forestry projects, and a geographic emphasis on Brazil (see chart 2).

Chart 2


Preference for forestry projects

The first trend, higher allocation to forestry than agriculture, is driven by a number of factors. First, investors consider forestry as a hedge to financial markets--trees grow irrespective of macroeconomic conditions. Second, large forestry companies have dominated the issuance of land use green bonds. This trend is less a reflection of the financial merits of forestry relative to agriculture, and more a symptom of the difficulty in aggregating farming projects. The UN's Food and Agriculture Organization (FAO) estimates that 83% of the world's farms are less than two hectares in size. Third, the global market for sustainable timber is more developed than sustainable agricultural commodities, as legislative frameworks, such as the EU's Timber Regulation, prohibits the sale of illegally logged timber or timber products in Europe.

This market focus on forestry is not without its issues. A criticism leveled at land use green bonds is that forestry companies are using the proceeds of their green bonds to grow business-as-usual industrial plantations. The fear of greenwashing--the misrepresentation of a company's products as environmentally sound--in forestry green bonds is understandable, and forestry issuers may need to consider making more concerted efforts to allay investor fears through improved transaction transparency (on proceeds allocation and impact reporting) and governance (on proceeds allocation). This could mean demonstrating how green bonds are being used to finance projects that fall outside general business purposes, such as Fibria Celulose's $700 million green bond issuance in 2017--which we assess below--that allocated some of the proceeds to the conservation of native forests.

Geographic emphasis on Brazil

The second trend, of financing land use initiatives in Brazil, is understandable, given its prominence in the global agricultural and forestry sectors. The FAO estimates that Brazil produces 26% of the total global soy crop, and is the second largest producer of beef. As a result of this, Brazil has seen wide-scale agricultural expansion in its natural ecosystems, and, depending on how it addresses Amazonian deforestation, will be a key player in determining the severity of global warming. Recent headlines highlight the plight of the Amazon rainforest, and experts warn that the Amazon is near a tipping point, as 15%-17% has been deforested. Scientists from George Mason University and the World Resources Institute estimate that should this figure reach 20%-25%, then the rainforest will no longer be able to create enough water to sustain itself. According to scientists, it is vital that Brazil's natural ecosystems are protected, and green bonds could be a pecuniary solution to enable these efforts.

Green Bonds Could Help Curb Deforestation In Brazil

Brazil is at a sustainability crossroads. From 2005 to 2013, Brazil lowered the rate of deforestation in the Amazon by 70%. Since then, however, deforestation rates have been increasing. This year has seen a record number of forest fires, and an 83% increase in the rate of deforestation until October compared to the same period in 2018. Much of this deforestation has been attributed to agricultural expansion. The growth of agriculture has been especially notable in the Cerrado--a 200-million-hectare tropical savannah famed for its biodiversity. The Cerrado's destruction has enabled Brazil to become the world's largest exporter of soy. With the Organization for Economic Co-operation and Development and the FAO forecasting growth in the global demand for soy of 1.6% per year, concerned investors are using green bonds to enable the sustainable management of land, and the sustainable intensification of agricultural production (see the box below).

Brazil is also among the world's largest producers of pulp. Two key producers, Klabin and Fibria Celulose (which merged with Suzano Papel e Celulose S.A. in 2019 to form the world's largest producer of pulp, Suzano S.A.), have targeted the proceeds from their green bonds primarily at the sustainable production of eucalyptus--a key feedstock for global pulp production.

We Assess Two Land Use Green Bond Issuances As Having A Positive Environmental Impact

As the majority of green bonds targeting sustainable land use focus on Brazilian forestry projects, we used publically available information to apply our newly expanded Green Evaluation analytical approach to two green bonds in this space: Fibria Celulose (issued on Jan. 17, 2017) and Klabin (issued on Sept. 19, 2017). We only evaluated the proceeds that were allocated to forestry activities and in scope of our Green Evaluation analytical approach.

Our analysis shows that these green bonds would likely fall into the top half of our scoring range (the E1 or E2 category, on a scale of E1 to E4, with E1 being the best and E4 the worst). These positive environmental scores are a function of measures the issuers have taken to restore degraded land and reestablish native forest cover, among other things.

Table 1

Examples Of Green Bonds In The Forestry Sectors
Company name Fibria Celulose S.A. (now Suzano S.A.) Klabin S.A.
Issue date Jan. 17, 2017 Sept. 19, 2017
Company information Fibria Celulose produces, sells, and exports short-fiber pulp in Brazil and internationally. It manufactures and sells bleached eucalyptus kraft pulp. It also exports its products to approximately 35 countries for educational, health, hygiene, and cleaning products. As of Jan. 14, 2019, Fibria Celulose operates as a subsidiary of Suzano S.A. Klabin, together with its subsidiaries, operates in the paper and pulp industry in Brazil. It operates through forestry, paper, conversion, and pulp segments. The company also manufactures phytotherapic products; provides finance and reforestation services; and operates hotels. In addition, it exports its products.
Country of risk Brazil Brazil
Amount issued/to be issued $700 million $500 million
Description of proceeds use Sustainable forest management; restoration of native forests and conservation of biodiversity; waste management; sustainable water management; water usage efficiency; renewable energy; generation of energy from renewable sources Sustainable forestry; restoration of native forests and conservation of biodiversity; renewable energy; clean transportation; energy efficiency; waste management; sustainable water management; eco-efficient and/or circular economy-adapted products, production technologies, and processes; climate change adaptation
Evaluated proceeds use Forest maintenance; forest protection and management; and forest restoration Sustainable forestry and climate change adaptation
Source Final offering memorandum Final offering memorandum

What Does The Future Look Like For Land Use Projects In The Green Bond Market?

Our analysis shows that green bond issuers and purchasers could view land use projects as making positive environmental contributions. As the green bond market continues to expand, and as the pressure on agricultural and forestry production grows, land use could become a greater feature of the green bond market. However, there are concerns that green bonds targeting land use projects might be at a disadvantage relative to more seasoned eligible categories, such as renewable energy and clean transport.

To date, the adoption of green bonds targeting land use has been slow. A key obstacle limiting investor interest in such bonds has been the absence of a direct and immediate revenue stream, as clean energy infrastructure investments, such as wind farms, tend to generate. The RCF proposal targeting sustainable agriculture could overcome this hurdle. Its revolving credit facility structure, and the annual harvesting of soy, could allow it to garner an almost immediate, and certainly regular, revenue stream to repay its coupon. Equally, should binding legislation on sustainable agricultural commodities, or a market for sustainably produced soy, such as what is being proposed with the RCF, gather momentum, then this could be a catalyst for the expansion of land use green bonds. Further, there is now a political and financial momentum building behind sustainability targets and initiatives, which could help to spur allocation to green bonds targeting land use.

Green Financial Instruments Have Policy Support

Financing sustainable practices in agriculture and forestry is a topic being addressed at the highest political levels. Among the most notable international initiatives are the UN's Sustainable Development Goals (SDGs), a collection of 17 global goals designed to "achieve a better and more sustainable future for all". SDG 15, Life on Land, for instance, advocates greater investment in, and awareness of, the sustainable management of forestry and agricultural resources.

Land use is also referenced as one of the main areas for climate mitigation in the Paris Agreement--a landmark multilateral agreement in 2015 to limit global warming to well below 2°C above preindustrial temperatures. Moreover, the European Commission has put agriculture and forestry in its "taxonomy" of green activities, therefore highlighting them as sectors eligible for sustainable financing (see "Credit FAQ: The EU Green Taxonomy: What's In A Name?," published Sept. 11, 2019).

There is, therefore, a convergence of political and market interest in reducing the negative environmental effects associated with land use activities. As the IPCC makes clear, GHG emissions from land use must be curbed if climate change is to be arrested. Much like how the green bond market is financing the decarbonization of the energy system--another vital element in tackling climate change--green bonds may help to reduce the environmental impact of agriculture and forestry, and therefore play a meaningful role in limiting the effects of climate change.

Related Research

  • Green Evaluation Analytical Approach, Dec. 4, 2019
  • Climate Change and Land, IPCC, Aug. 8, 2019
  • OECD-FAO Agricultural Outlook 2019-2028, July 8, 2019
  • Amazon Tipping Point, Thomas E. Lovejoy and Carlos Nobre, Science, Feb. 2, 2018
  • Business as usual: a resurgence of deforestation in the Brazilian Amazon, Philip Fearnside, Yale Environment 360, April 18, 2017
  • Moment of truth for the Cerrado hotspot, Bernardo B. N. Strassburg, Thomas Brooks, Rafael Feltran-Barbieri, Alvaro Iribarrem, Renato Crouzeilles, Rafael Loyola, Agnieszka E. Latawiec, Francisco J. B. Oliveira Filho, Carlos A. de M. Scaramuzza, Fabio R. Scarano, Britaldo Soares-Filho and Andrew Balmford, Nature, March 23, 2017
  • Agriculture in 2050: Recalibrating Targets for Sustainable Intensification, Mitchell C. Hunter, Richard G. Smith, Meagan E. Schipanski, Lesley W. Atwood, David A. Mortensen, BioScience, Feb. 22, 2017

This report does not constitute a rating action.

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