Nov 10, 2021
Since the Paris agreement of 2015, ESG Bonds (Environmental, Social and Governance bonds) and other Green Bonds, became increasingly important as a financial instrument and used in sustainable projects throughout the world. As most of the current industries need to reshape or re-engineer their production processes to meet the SDG's goals, it offers opportunities for investors to diversify their portfolio in a wide range of areas such as Energy, Agriculture, Water treatment... Theoretically, this financial instrument could be a catalyst to change in many domains and could assist emerging sectors such as indoor farming in its development, but it is, unfortunately, liable to each country’s definition of sustainability.
What is it exactly?
Bonds are a fixed income instrument in which investors lend their money against a fixed rate (unlike a typical investment where they would receive variable dividends depending on the financial performance of the company and own part of the company). A bond can be contracted through an I.O.U where the lender and borrower include all details (length, interest rate, payment terms...). Companies, states and other types of organizations typically issue bonds in the markets to fund their project. States would use bonds to finance the construction of a new airport, subway or school whilst companies would finance their business expansion or other projects they may have. In recent years, we have seen a sudden spike in sustainable investments, where investors support environmentally friendly projects and show how we can make an impact whilst yielding revenues. A typical example can be ESG’s.
ESG bonds is an umbrella term that encompasses environmental/social projects funding, including green bonds or social bonds, and also target-based structures, such as sustainability-linked bonds (SLBs) that incentivize the issuing company to achieve higher ESG standards across the board. These bonds are increasingly important in financial markets as companies seek to increase their sustainability credentials through a focus on renewable energy, pollution reduction, or climate change adaptations and initiatives. Companies issuing these bonds are not only addressing their role as corporate citizens but are also attracting new waves of socially-minded investors that are supportive of ESG initiatives. Since the Paris agreement of 2015, investors, companies, the general public and certain governments push to incorporate ESGs into corporate operations or investments portfolio.
How important is it?
In 2018, globally, the 3 most important sectors issuing green bonds have been Buildings (1 843 bonds), Transports (1 361 bonds) and Energy (1 139 bonds).
-> Past $1 Trillion issuance mark in September 2019.
-> Represents 1-2% of global fixed income assets.
-> Analysts expect that green bonds will reach roughly $500Bn by the end of 2021.
-> Countries such as Italy have risen nearly $9Bn to support the various green projects they have currently.
How can Indoor Farming Benefit From It?
The food supply chain contributes 19-29% of global GHG emissions of which the majority of food system emissions occur at the farm level (80%–86%); the remainder comes from pre-farmgate production and post-farmgate activities such as processing, packaging, refrigeration, transport, retail, catering, domestic food management and waste disposal.
Climate change also poses significant risks to agriculture ecosystems, potentially affecting productive uses of agriculture resources and related socio-economic systems. Technologies involved in indoor farming are a solution to providing healthy and sustainable food around the globe as it doesn’t require pesticides and other chemical compounds. What’s more most technologies have reduced the water consumption by 90% compared to conventional farms and use much less space when comparing their yearly output. At its beginning, ESG’s and other green bonds did not include agriculture, but the Development of the Agriculture Criteria originally began through the development of Land Use Criteria back in 2014. The remit of the original Land Use Criteria was to develop Criteria that would work for forestry, agriculture and other land use.
However, to improve the low carbon ambition of each sub-sector it was decided that the land sector should be tackled by several separate Criteria. Forestry Criteria were developed first, and the Agriculture Criteria now follow. In both cases (Forestry & Agriculture), the Criteria build on the principles established by the original Land Use Criteria work. The scope of the Agriculture Criteria includes cropland, grassland, livestock, and controlled environment agriculture, such as vertical farming or hydroponics.
Therefore, future projects in indoor farming may as well benefit from green bonds and ESG bonds to develop as opposed to conventional equity-related investments.
The greenwashing problem
As precise in the introduction, Green bonds are an opportunity for investors to yield considerable revenues whilst funding a sustainable project. However, it largely depends on the definition countries have of sustainability or the definition they want to give. Despite its rise over the last decade, some countries often use that to "greenwash" their projects, i.e. making it look like a green project when it's not.
Recent examples include Chinese companies investing in a more energy-efficient coal plant but labelling it as a green bond, the state of Queensland issuing bonds to protect the coral reefs but increasing their investments in coal projects or Nike investing in green bonds but dealing in the same time in child labour scandals within its supply chain.
On the other hand, some projects seem green but have substantial evidence to have long-term environmental problems. One of the most recent examples is Hydrogen, which is deemed one of the potential green replacements for oil and attracts investment from banks and/or hedge funds. Even if its usage does not have substantial carbon emissions, the initial production phases do if the hydrogen is derived from fossil fuels.
ESG bonds can become one of the solutions for sustainability transitions in countries. It offers an opportunity for every stakeholder as investors can yield substantial revenues from fixed income, companies can easily fund their projects and, the general public can benefit from it as it can decrease air pollution as well as create jobs.
On the flip side, organizations such as the World Bank, the IMF or countries have to agree on a common definition of what constitutes a green project or a social project for it to be effective worldwide. Besides, the increased usage of ESG scores from financial institutions such as JP Morgan, Goldman Sachs and others can become a good indicator of the long-term performance of a particular company if and only if there is a unique definition.
As Green Bonds and ESG’s are fixed income instruments, their presence in indoor farming would result in rising costs for an industry overwhelmed in capital and ongoing expenses. Would investors still be attracted by such a form of investment? Would farms be profitable with it? Would it force companies to decrease their expenses?