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AFOLU LEDS Finance MappingAsia LEDS Forum 2014
John Costenbader, Climate Focus Yogyakarta, 10 November 2014
Outline
1. Key Financial Instruments
2. International Public Finance
3. Private Sector Finance
1. Key Financial Instruments
Grants
Loans
Bonds
Equity
Risk Mitigation
Financial Instruments
• Definition: Finance without repayment
• Suitable for: Initial research, feasibility studies, capacity building, social and environmental purposes.
• Cost: Expensive to providers
• Example:
– Government to non-profit organizations
– Donors to forest conservation projects
1.1 Grant
• Definition: Up-front finance with agreement from the borrower to repay with interest– Lender of loan is usually a single financial institution
• Suitable for: Asset investments, such as enterprises engaging in production of agricultural or forest products
• Cost: Main cost is payment of interest• Example: Vietnam Five Million Hectares
Reforestation Program included concessional loans to entities investing in production forests
1.2(a) Debt - Loan
• Definition: Up-front finance with agreement to repay at a future date with periodic interest payments
– Bonds dispersed across multiple investors & borrowers can raise larger amounts than via other forms of debt
• Suitable for: Asset investments, such as enterprises engaging in production of agricultural or forest products
• Cost: Main cost is payment of interest
• Example: A recent bond by Swedish forest products company SCA is linked to certified forests, & includes a commitment to increase forest cover by 1% annually
1.2(b) Debt - Bond
• Definition: Provision of capital by an investor in return for shares in ownership and a share of profits (‘dividends’)
• Suitable for: Asset investments, such as enterprises engaging in production of agricultural or forest products
• Cost: Riskier to investors
– Dividends are not guaranteed
– In the event of bankruptcy, equity investor has the last claim
• Example: The Reforestation on Degraded Lands in Northwest Guangxi, China project is co-financed by $17.8 million equity from local government, a forestry development company and participating farmers
1.3 Equity
• Definition: Instruments aimed at reducing finance risks– Public-private funds
– Insurance and risk guarantees
• Example: Overseas Private Investment Corporation (OPIC) provided $900,000 political risk insurance for the OddarMeanchey REDD project in Cambodia
1.4 Risk mitigation instruments
Private Sector Finance
• Voluntary sustainability initiatives
• Carbon markets
• Green bonds
International Public Finance
• Bilateral finance
• Multilateral finance
Domestic Finance
• General budget
• Earmarked taxes, levies
• Extractive industry revenues
• Green bonds
AFOLU LEDS
AFOLU LEDS Finance Map
2. International Public Finance
• Bilateral programs have pledged most funding regionally to Asia-Pacific (46%)
– Just 7% of allocated bilateral finance went to AFOLU sector
• Disparity in range of fund allocation: Norway & UK Climate Funds have most financing still available, followed by Australia Forest Carbon Initiative
– Over 88% of REDD+ finance from public sector, of which bilateral programs are largest source with 56% of all finance pledged since 2006
2.1 Bilateral Funding
• FCPF Readiness Fund (16%), UN-REDD (10%), and Pilot Program for Climate Resilience (8%) had largest percentage of total approved multilateral finance going to AFOLU sectors in LEAF countries.
• Slow REDD+ disbursement: Multilateral development banks have disbursed little finance to actual projects.
2.2 Multilateral Funding
3. Private Sector
3.1 Voluntary Sustainability Initiatives
• Land set-asides
– Ex: Wilmar HCS & HCV forest protection (25,860 ha)
• Reforestation/ecosystem restoration
– Ex: Danone replanted 5,500 ha mangroves in Sundarbans
• Sustainable agriculture practices
– Ex: PepsiCo direct seeded 4,000 ha rice in India (saved 7B litres water & 70% GHG reduction)
• Sustainable supply chains
– Ex: Unilever sourcing sustainable tea & 100% cert. palm oil
3.1(a) VSIs: Forest & Land Use Practices
• Investment in REDD+/conservation projects– Ex: Microsoft investment in Oddar Meanchey & Rimba Raya
• Education/research grants for sustainable ag. – Ex: Cargill $225,000 to 1st sustainable oil palm teaching farm
collaboration w/ Institut Pertanian Bogor in Indonesia
• Capital investment in sustainable operations– Ex: Unilever $130M investment in Sei Mangke, Indonesia
sustainable palm oil processing plant
3.1(b) VSIs: Sustainable Investments
• Clean Development Mechanism (CDM) CDM projects in agriculture and A/R valued at USD 30 million in SE Asia from 2009-13.
3.2 Carbon Markets
0
2
4
6
8
10
12
14
Malaysia India Philippines Vietnam Thailand Cambodia
Val
ue
of
inve
stm
en
t (U
SD m
illio
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CDM in Southeast Asia (agr. + A/R)
• Voluntary MarketsIn 2012, voluntary forest carbon market valued at USD 10.7 million in SE Asia.
• Climate Bonds– USD 346 billion raised in 2013 for climate projects (largely
transport & energy; all AFOLU in North)
– relatively unknown in LEDS, especially in AFOLU sector– no commonly understood definition of activities funded (but
now certification standards)– not a new source of finance; only a debt instrument for
companies and governments to raise capital.
3.3 Climate Bonds
Bond holder
Typically pension funds or
large institutional investors
Bond issuer
Government or
company
Activity
Green development
/projects that address
climate change
Loan
Interest on
loan and
principal
Investment
