USAID Green Invest Asia Releases Bank Guidelines for Sustainable Land Use Investments
BANGKOK, November 11, 2019 – The United States Agency for International Development (USAID) Green Invest Asia, a platform leveraging blended finance to increase investment in sustainable agribusinesses and forestry companies in Southeast Asia, has released two guidelines for banks to pilot and progressively mainstream agriculture/forestry sustainability-linked loans to small and medium-sized companies into their portfolios, and to conduct environmental and social (E&S) assessments of agriculture/forestry companies in the loan appraisal process.
Lenders have long considered land use investments―including agriculture, forestry and wetlands―as high-risk given borrowers’ potential difficulties securing land tenure, as well as increasingly erratic weather which can mean unpredictable yields.
Sustainability-linked loans are a growing sustainable finance mechanism that incentivize borrowers with interest rate reductions or increases depending on companies’ ability to meet pre-set environmental, social and governance (known as ESG) performance targets. Such loans issued globally topped $36 billion in 2018, led by large European companies, according to Moody’s, a global credit rating agency.
A number of large sustainability-linked agribusiness deals announced since last year in Asia include Olam club loans with a consortium of banks, BNP Paribas/Danone, OCBC Bank/Wilmar that total $3.5 billion.
Increasing access for SMEs
While sustainability-linked loans are growing for large companies, it remains a challenge for banks to cover the cost of third-party verification and required performance monitoring for smaller loans, making this product still largely unavailable to smaller and medium-sized companies (SMEs). Incentivizing SMEs to reduce carbon emissions is strategic: SMEs make up almost the entire business sector in Asia, where at least 40 percent of greenhouse gas emissions come from commercial agriculture and forestry.
USAID Green Invest Asia’s guidelines offer a practical approach for banks to develop a low-transaction cost methodology to issue sustainability loans for smaller companies. Topics addressed include integrating the new loan methodology into a bank’s existing loan process chain; requirements for ESG assessments and choosing indicators; assessing a loan’s environmental performance, and; developing a pricing system for sustainability-linked loans that builds on a bank’s existing pricing system.
“These guidelines help our sector focus on small and medium-sized enterprises and land-use companies, which are both underrepresented in sustainable banking,” said Octavio Peralta, secretary-general of the Manila-based Association of Development Financing Institutions in Asia and the Pacific. “Emerging financing instruments like sustainability-linked loans offer an opportunity for our members to guide clients in their journey toward green growth.”
The second guideline―a practical primer for banks to assess the environmental and social performance of agriculture/forestry loans―covers managing common environmental and social risks and integrating such risks into credit cycles; this includes checklists for risk assessments, due diligence templates, a sample Environmental and Social Action Plan and monitoring report among other implementation tools.
“It has become more difficult for companies up the value chain to profit from dwindling cultivable land – whether for food or forestry – if those working on the land aren’t incentivized, and capitalized, to extend the life of natural and human capital they steward,” said Christy Owen, USAID Green Invest Asia’s director.
“There is a wholesale shift to integrate ESG into business strategy to upscale responsible investment; USAID Green Invest Asia remains committed to helping companies and financiers adapt to what will become, inevitably, the new business norm,” added Owen.
USAID Green Invest Asia offers companies and banks tailored training on how to increase sustainable land use lending, particularly for small and medium-sized enterprise, advising both sides on deal structure.
USAID Green Invest Asia sustainable lending and E&S guidelines available for download at www.greeninvestasia.com/research.