The changing architecture of forest governance and investment in sustainable landscapesDr Steven Lawry, CIFOR

Bangkok, Thailand. July 7-9, 2015

Regional Forum on Developing and Financing LEDS for the Agriculture, Forestry and Other Land

Use Sector: Moving from Promise to PracticeDusit Thani Hotel, Bangkok, Thailand

July 7-9, 2015

The changing architecture of forest governance and investment in

sustainable landscapes

Dr Steven LawryDirector, Forests and Governance PortfolioCenter for International Forestry Research

(CIFOR)

Presentation outline

1. Rapid growth in Socially Responsible Investments in recent years. Why?

2. Consumers and civil society shifting investor perceptions of costs of social and environmental risks: a hypothesis.

3. Consumer markets, investors, businesses and civil society shaping new non-state forest governance arrangements.

4. Non-state arrangements in conflict with goals and standards of state-centric governance

5. Building “Hybrid” governance6. Outcomes from the Global Landscapes Forum: the Investment Case, London, June 10, 20157. Some things to think about over the next few days

Background and state of play The sustainable investments

market has grown significantly, from $13.3 trillion in 2012 to $21.4 trillion in 2014.

99 percent of global sustainable investment assets are managed in North America, Europe and Australia.

In 2014, sustainable assets under management in Asia stood at $53 billion, an increase from the $40 billion in 2012.

Source: Global Sustainable Investment Review 2014. Global Sustainable Investment Alliance

Rapid growth in Socially Responsible Investing2012-2014

 

 

 

Source: Global Sustainable Investment Review 2014. Global Sustainable Investment Alliance

Civil society campaigns target investor and producer practices 

Growing consumer expectations that commodities 

are sustainably produced

Shifting business practices. Companies design more socially equitable, low-carbon business models, e.g. zero deforestation. 

Changes facilitated by multiple actors

Consumer and financial market drivers of corporate sustainability commitments: a hypothesis

1. Consumers: create strong market demand for 

sustainably produced products

3. Businesses: transition to more 

sustainable business models

4. NGOs: monitor private sector 

against sustainability criteria, and build 

capacity

5. Government: Regulatory 

framework on which businesses 

can build sustainably

Changing calculus of investor risk and rewards. “Dirty” practices = reputational and market risk

2. Investors: create investment products 

that enable sustainable production

1. Consumers – growth in share of commodities certified 2008-2012

Source: The State of Sustainability Initiatives Review, 2014. International Institute for Sustainable Development

2a. Investors – standards and platforms

Voluntary standards and multi stakeholder partnerships

• Banking for Environment Initiative,

• Natural Capital Declaration,

• UN Principles for Responsible Investment,

• Sustainable Stock Exchange initiative,

• The Equator Principles,

• The Global Reporting initiative.

Banks are also participating in commodity specific standards and roundtables

2b. Institutional investors

Institutional investors can have important impact in shifting corporate practices by engaging in shareholder motions.

In 2013 Norway pension fund divested from 23 palm oil companies.

Buy-in from shareholders, owners and managers helps to determine the priority that sustainability gets within the firm.

Some banks are extending standards beyond their investment departments – to private clients, wealth management departments, IPO services, commodity trade finance and trade finance.

2c. SRI practices and products 1. Negative/exclusionary screening: the exclusion from a fund or

portfolio of certain sectors, companies or practices; 2. Positive/best-in-class screening: investment in sectors, companies

or projects selected for positive ESG performance relative to peers; 3. Norms-based screening: screening of investments against

minimum standards; 4. Integration of ESG factors: the systematic and explicit inclusion of

ESG factors into traditional financial analysis; 5. Sustainability themed investing: investment in themes or assets

specifically related to sustainability (i.e. clean energy or sustainable agriculture);

6. Impact/community investing: targeted investments, typically made in private markets, aimed at solving social or environmental problems;

7. Corporate engagement and shareholder action: the use of shareholder power to influence corporate behavior.

New York Declaration on ForestsSeptember 2014

At least halve the rate of loss of natural forests globally by 2020 and strive to end natural forest loss by 2030.

 Support and help meet the private-sector goal of eliminating deforestation from the production of agricultural commodities such as palm oil, soy, paper and beef products by no later than 2020, recognizing that many companies have even more ambitious targets.

3. A Business Case: Zero-deforestation pledges showing early success in Brazil

Brazil's Soy Moratorium first voluntary zero-deforestation agreement implemented in the tropics (2006) and set the stage for supply-chain governance of other commodities, such as beef and palm oil. Between 2001 and 2006, soybean fields expanded by 1

million hectares in the Amazon biome; direct conversion of forests for soy production contributed to record deforestation rates.

In the 2 years preceding the agreement, 30% of soy expansion occurred through deforestation rather than [on] previously cleared lands. After the SoyM, deforestation for soy fell to ~1% of expansion in the Amazon biome by 2014.

Source: H.K. Gibbs, et. al, “Brazil’s Soy Moratorium.” Science 23 January 2015: Vol. 347 no. 6220 pp. 377-378

Soy moratorium (caveat)

“By prohibiting new deforestation, the Moratorium incentivizes soy expansion into already-cleared areas, which may displace pastures and could indirectly lead to more deforestation. Zero-deforestation agreements in the cattle sector, together with national and municipal policies, may partially mitigate the risk of this indirect deforestation.”   Source: H.K. Gibbs, et. al, “Brazil’s Soy Moratorium.” Science 23 January 2015: Vol. 347 no. 6220 pp. 377-378

Elements of the moratorium’s success

1. A limited number of soy buyers that exert considerable control over soy purchase and finance;

2. Simple requirements for compliance; 3. Streamlined and transparent monitoring and enforcement

systems; 4. Simultaneous efforts by the Brazilian government to

reduce deforestation; and 5. Active participation by NGOs and government agencies.

Monitoring and compliance mechanisms established by the Soy Moratorium offer a model for expanding supply-chain governance to other soy-producing regions and commodities

Source: H.K. Gibbs, et. al, “Brazil’s Soy Moratorium.” Science 23 January 2015: Vol. 347 no. 6220 pp. 377-378

4a. NGOs: A shift in advocacy strategy

“NGOs have come to realize that anti-corporate demonstrations, organized boycotts, and protests can be far more effective and powerful than anti-government campaigns, particularly when targeting established, reputable global brands. In response, corporations have attempted to identify and select the available areas and opportunities to cooperate with NGOs in order to cement fruitful and self-reinforcing relationships.”

Sigfrido Burgos, (2013) "Corporations and social responsibility: NGOs in the ascendancy", Journal of Business Strategy, Vol. 34 Iss: 1, pp.21 - 29

4b. Company/NGO cooperation

NGOs:

Monitor company performance Provide independent verification Technical capacity support Ultimately, signal to investment and

consumer markets company legitimacy

5. Governments

Forest governance historically the domain of governments

But new consumer/investor/NGO/company arrangements are coming to constitute a parallel governance regime

These non-state forest governance arrangements partially in harmony, partially in conflict with state goals and standards

Indonesia: Terms of palm oil land use regulations in conflict with zero-deforestation landscape management

Reforms in state governance necessary to provide policy and regulatory frameworks supportive of corporate sustainability commitments

Summing up

Supply of SRI capital less a constraint Lack of technically, socially and politically viable investment

projects may be the greater limiting factor. Tension between production and conservation goals requires

mediation and resolution. Technical and social aspects supportive of SRI—small holder

inclusion, building “clean” value chains, land use planning, data and monitoring systems—require planning and investment.

Governments and non-state actors will naturally prioritize goals, outcomes and trade-offs differently. Could lead to conflict and stalemate

Progress requires building hybrid governance architecture.

Civil society campaigns target investor and producer practices 

Growing consumer expectations that commodities 

are sustainably produced

Shifting business practices. Companies design more socially equitable, low-carbon business models, e.g. zero deforestation. 

Changes facilitated by multiple actors

Consumer and financial market drivers of corporate sustainability commitments

1. Consumers: create strong market demand for 

sustainably produced products

3. Businesses: transition to more 

sustainable business models

4. NGOs: monitor private sector 

against sustainability criteria, and build 

capacity

5. Government: Regulatory 

framework on which businesses 

can build sustainably

Changing calculus of investor risk and rewards. “Dirty” practices = reputational and market risk

2. Investors: create investment products 

that enable sustainable production

Civil societyPrivate sector

Government

Government

Production

Capital investment

Financial services

Civil society

Local communities

Land 

Ecosystems

Questions for the coming days

Policy and institutional needs: How to reconcile private sustainability commitments and national policy goals.

Investing in agriculture vs. investing in landscapes Ensuring smallholder access to “clean” value

chains Is public finance sufficiently nimble to leverage

large-scale (or small-scale) private investment? Tenure: When is it a constraint and when is it not?

Global Landscapes Forum: the Investment case (Royal Society, London, June 10th 2015

Key messages• Role of government is key to provide the appropriate framework on which private sector can build – e.g. resolving unclear land tenure issues.

• Better data and transparency required to inform government reforms and allow private sector to calculate risks.

• Significant part of the solution can be found in providing fair, affordable capital to smallholder farmers so that they can upgrade operations.

• Design and roll out of innovative financial instruments e.g. insurance products for smallholders

• Improve technical capacity and knowledge among government, financial sector and agribusiness related to sustainability and land use.

Thank you!