The Power of Innovative Financing - BNP Paribas CIB
Tuesday 05 June 2018

The world's first two initiatives that bring private capital to fund sustainable projects are now launched under the 2017 MoU signed between UNEP and BNP Paribas.

One of the most important issues of our time, tackling climate change will require the firm commitment of multiple actors across the globe if it is to succeed. To date, most sustainability initiatives in mature economies have focused on reducing CO2 emissions and slowly transforming society to become more sustainable. However, in emerging markets, the breadth of impactful initiatives is often wider and comes with a greater sense of urgency. For example, in countries like India and Indonesia, sustainability projects are tackling a variety of issues including the fight against poverty and preserving the natural environment on which the local economy depends.

Successfully achieving the UN Sustainable Development Goals will mean embracing a mindset that supports the adoption of sustainable projects linked to environmentally-friendly methods involving a lower and more efficient use of natural resources. A funding need for these innovative projects has been identified. Stepping in to provide this funding is the decisive step in the development of new businesses and social models with strong societal and environmental impact.

A Framework for Innovative Financing

The vast majority of the capital investment required to meet the funding gap associated with the attainment of the SDGs - of which climate mitigation and adaptation may be the most pressing and universal concern - will need to come from the private sector. The banking sector, which sits at the heart of the financial system, is best placed to link capital providers with capital users, and is thus an enabler in the transition to a more sustainable economy.

However the finance sector alone cannot achieve broader aims of the SDGs without reference to government policy or society concerns. The most forward-thinking investors have already taken a leading role in pushing the sustainability agenda forward. The shift towards sustainability is now seen as a fundamental criterion for long-term success and profitability by corporates and institutional investors.

By supporting innovative financing banks can pave the way towards a more sustainable future and a healthier economy. One of the recent "sustainability" initiatives demonstrating the industry's commitment in this direction is captured in the Memorandum of Understanding (MoU) signed by the United Nations Environmental Programme (UNEP) and BNP Paribas at the UNEP One Planet Summit in November 2017. This MoU created a framework to ensure that ever more progressive and innovative projects receive the support of the international community and investors. This agreement set the stage for trailblazing multi-party projects.

Inaugural Ground-Breaking Sustainable Financing in Indonesia

One of these projects included Michelin, the French-based global leader in tyres and mobility, joining forces with Indonesia's Barito Pacific Group to create PT Royal Lestari Utama (RLU).

In Indonesia, local communities are facing multiple threats related to deforestation. Increasingly degraded land takes a toll on both the local population and the unique wildlife ecosystem, endangering their survival. Countering these trends requires investment in new sustainable projects aimed at preserving the environment (especially rare populations of elephants, tigers and orangutans), ensuring the survival of High Carbon Value forests, and supporting local populations.

RLU's objective is to launch climate smart, wildlife friendly and socially inclusive production of natural rubber in the provinces of Jambi, Sumatra and East Kalimantan. Natural rubber being one of the critical raw materials for the tyre industry due to its great elasticity, plasticity and resistance has led Michelin to focus on securing a source of stable supply of high-quality natural rubber.

On 26 February 2018, the Tropical Landscapes Finance Facility (TLFF) – a partnership between UNEP, the World Agroforestry Centre, ADM Capital and BNP Paribas – issued its inaugural transaction, a landmark $95 million Sustainability Bond to finance a sustainable natural rubber plantation operated by RLU in partnership with the WWF. Structured in five tranches with maturities ranging from five to 15 years, the TLFF issuance was also supported by both a partial guarantee from USAID, the United States Agency for International Development, and the support from Michelin and its local partner.

The financing will help RLU to expand its sustainable plantations, targeting more than 50% growth in the next five years with the support of local communities, while drawing on Michelin's agronomic and technical know-how.

RLU's target plantation schedule to 2024 (in HA planted)RLU's target plantation schedule to 2024 (in HA planted)

Building upon successes – The Sustainable Finance Facility in India

Building on the TLFF's success, a new financing facility – the Sustainable India Finance Facility (SIFF) will support sustainable projects in India, with a new low carbon farming project announced on June 2nd, 2018 a few days before World Environment Day in New Delhi. The parties behind this ambition have set an objective of bringing long-term finance to projects and companies that stimulate green growth, reduce greenhouse gas emissions and improve the livelihoods of marginalised communities.

The SIFF intends to support the scaling up sustainable farming techniques across one of India's largest farming states, Andra Pradesh with Zero Budget Natural Farming (ZBNF), a method achieving high agricultural output with lower natural resource inputs, simply put: growing more food for India's 1.3B people, with less resources and negative impact on the environment.

The ZBNF project focuses on fostering a low carbon farming, ultimately targeting up to six million small farmers in the Indian state of Andhra Pradesh, after an initial objective to reach 500,000 farmers by 2019, from 160,000 applying ZBNF today. This ambitious project will help increase food security while reducing deforestation and biodiversity losses, and access the growing pools of private sector capital that are increasingly looking for exposure into well-structured and governed commercial projects that combine economic development with sustainability-driven positive impact.

Such a project is yet another example of the power that innovative sustainable finance can bring to projects of this kind by ensuring the allocation of capital towards decentralised transformation projects.

Harnessing the power of impact financing

The Memorandum of Understanding (MoU), signed by UNEP and BNP Paribas at the UNEP One Planet Summit in November 2017, set the stage for trailblazing multi-party projects of this kind. They will be followed by others within the same framework, replicating the lessons learned and drawing on the experience of the flagship RLU financing for the benefit of responsible companies and investors globally. The successful follow-through of the SIFF project is another demonstration of the role of finance in driving the sustainable revolution around the world through tenacity, innovation and determination.

To achieve the ambitious triple bottom line objectives – financial, environmental and social – cooperation and joint efforts from all stakeholders are key, from investors, banks, and corporates to employees, NGOs and governments.

Sustainable Finance Facilities such as those currently being established in Indonesia and India are based on the principle of collaborative partnership, creating a mechanism to access and deliver private sector capital at scale, to help enable developing nations to meet their national development and climate commitments, through stimulating green growth and improving rural livelihoods.

Such collaborative partnerships bring together various parties, including companies, investors, development banks, local and national government and NGOs, to access to long-term credit for commercial projects with measurable and reported environmental and social impact, as well as commercial financial return, while the banking partner bring expertise as structuring adviser and financial arranger to tap the depth of the financing markets.


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