In recent years, there has been a paradigm shift in the world of investing. One on hand, ESG agriculture investing has become a strong theme in the equity markets. But the debt markets are catching up too, by means of reclassifying certain products. Known as green bonds, this system of categorizing eco-friendly debt instruments will soon give rise to massive opportunities for agriculture investment.
It has been just 13 years since the first green bond was issued by the European Investment Bank. While it was first called the Climate Awareness Bond, it was clearly the start of something new. This issuance was later followed up by the World Bank, which issued $2.3 billion worth of products with the label Green Bond.
Today, the green bond market has a total valuation of $861 billion in outstanding bonds to date. In 2019, total green bond issuance rose to a record high of $257 billion. This is a massive, 51% growth from the previous year.
What are green bonds and who buys them?
Green bonds are merely debt instruments and they are issued by financial and non-financial and public or government institutions. A green bond is no different from a vanilla bond, structurally. The difference is in knowing what the proceeds are used for and how it impacts the climate and other green initiatives.
Today, the big players include United States, Germany, France, China and The Netherlands.
The biggest investors in the green bond playbook are big names such as BlackRock and Aviva, and also include specialist ESG investors. For the retail markets, the World Bank and the IFC are some of the big names that issue green bonds and market to the broader masses.
As the green bond market evolves, newer categories are brought under the umbrella. So far, the transition to clean energy has been the biggest recipient. But over the past year, the green bond market is looking at sustainable land use as well, which could have serious implications for agriculture investing.
Classification criteria of green bonds
An important point to make here is that green bonds can be issued by any institution. This means, a tech company like Apple can issue a green bond, just as well as a state backed entity. In Mexico for example, Los Fideicomisos Instituidos en Relación con la Agricultura – or FIRA, issued $130 million in green bonds. This allowed asset classes in agriculture investing to be certified under the green bond issuance.
As evident, the term green bond is more of an umbrella term. Within the green bond universe, there can be number of criteria. Some of these include:
- Energy: The sub-categories under the energy criteria are solar and wind, geothermal, bio energy and hydropower and storage to name a few.
- Transport: All three categories of land, air and water transportation means fall into this criterion
- Water: Water storage, treatment, distribution and flood defence come under the water criteria
- Buildings: Commercial and residential including urban development initiatives are categorized under the buildings criterion
- Land and Marine use: Agriculture, commercial forestry, conservation & restoration, fisheries and aquaculture are classified under land and marine use
- Industry: Cement, metals, glass, chemical and fuel production come under the industry criterion
- Waste: Recycling, reuse, biotreatment facilities, landfills are categories under the waste criterion.
Despite the massive growth in the green bond market, land & marine use criterion is yet to be certified. Meaning that as of today, there are no certified green bonds under the land & marine use.
But this will change start from the third quarter of 2020. Public consultations are underway to certify agriculture criteria under green bonds.
How can agriculture sector benefit from green bonds?
While the investing community waits for the agriculture criteria certification, there are already a number of low key issuances. One such example is the Sustainable Investment Management Ltd, a boutique firm based in London and Rio de Janeiro.
SIM, along with the UK government and the UN is planning to issue a $1 billion green bond for the agriculture and farming sector in the next four years. The direct impact of this green bond initiative is an expectation of a yield of 180 m tonnes of soy and corn that is environmentally responsible.
In dollar value, the yield has a valuation of $43 billion in the next 10 years.
This is crucial as it comes at a time when the government of Brazil announced reduction in the subsidies on credit lines for farmers.
Interestingly, it is Latin America which is at the forefront of green bonds targeting land use which covers agriculture, forestry, etc.
With the upcoming changes, green bond issuers and buyers of these debt instruments are starting to view land use projects in making a direct positive impact on the environment. With pressure on agriculture and forest lands continue to grow, land use criteria are very likely to become the larger feature in the green bond market.
Yet, some obstacles remain. Primarily, these are to do with concerns surrounding the absence of direct revenue streams.
But the proposal to certify land use in green bonds could likely overcome these challenges. For example, the revolving credit facilities, and harvesting patterns are some ways to ensure steady revenue stream for green bond holders.
As evident, there is already a momentum building up, as seen with the issuance of green bonds especially in Latin America. With the right certification, the green bond market for land use is on track for growth in the coming years.