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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.

Agriculture And Forestry Have A Huge Impact On The Environment
The UN's Intergovernmental Panel on Climate Change (IPCC), the leading scientific authority on climate change, highlights the important role that global and regional land use plays in limiting global warming to 1.5°C above pre-industrial temperatures. Meeting this target, the IPCC has found, will be vital for avoiding the negative effects of climate change, such as those on health, livelihoods, human security, endurance of ecosystems, and economic growth. Moreover, the sustainable management of land resources is, according to the IPCC, essential to the provision of ecosystem services, such as the production of food and freshwater, that humanity and nature rely on. With the UN forecasting that the global population will grow from today's 7.8 billion to a peak of 10.9 billion by the end of the century, pressure on natural resources will inevitably increase.

Researchers at Pennsylvania State University have estimated that global agricultural production will have to increase by 25%-70% by 2050 in order to feed this swelling population. Agriculture already uses 49% of the global ice-free land surface, and the UN in its landmark Global Assessment Report on Biodiversity and Ecosystem Services estimates that 75% of the earth's surface has been severely altered by human actions. Therefore, the sustainable intensification of existing agricultural land could be a solution that increases food production, while limiting the environmental impact of agricultural systems.

With increased land use change comes higher GHG emissions. Since the Green Revolution of the 1960s--a period that saw prodigious improvements in global grain yields driven by technological and agronomic advancements--intensive land use by the agriculture and forestry sectors has led to increased levels of GHG emissions, degradation of natural ecosystems, and a decline in biodiversity. From 2007-2016, agriculture, forestry, and other land use activities represented 23% of total net anthropogenic GHG emissions. According to the IPCC, agriculture accounts for 70% of global fresh-water use, and is considered a key driver in the potential extinction of one million species the UN estimates are at risk over the coming decades.
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.

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