SINGAPORE (Dec 5): In 2018 alone, about US$58.8 billion ($80.1 billion) in social and sustainability bonds were issued. The first green bond was issued by the European Investment Bank and the World Bank in 2007, and the market has grown to more than US$160 billion in issuances in 2018. This is according to Sustainalytics, an environmental, social and governance (ESG) research and rating firm, and it looks like sustainable financing is set to grow even bigger.
More than ever, companies are looking beyond conventional financing to sustainable financing, which is defined as any form of financial service that integrates ESG criteria into business or investment decisions. Guided by the UN Sustainable Development Goals (SDGs) as a benchmark for impact and for creating more demand for sustainability bonds, companies can no longer ignore the risk that climate change poses to their business, regardless of what industry they operate in.
For world-leading food and agri-business company Olam International, sustainable financing is not only the right thing to do but it also makes business sense in an industry that is most at risk from climate change. Already, the impact of climate change on agriculture is being felt: It is expected that the yields of crops, mainly grain and corn, could decrease by 50% over the next 35 years because of altered climatic conditions.
Olam group chief financial officer Neelamani Muthukumar tells The Edge Singapore in a recent interview that the company’s initiatives in sustainable financing are clearly a business differentiator and a strategic driver for the group as a whole.
“It is a business imperative for us, in order to remain competitive and continue to have a competitive advantage in our industry. We have been the pioneers in sustainability efforts for quite some time, and we intend to maintain that leadership on sustainability,” Muthukumar says. “We can see a cost reduction, but that’s not the most important thing. We believe that it’s the right thing to do, in terms of looking at how we can motivate the larger industry to get into sustainability-linked financing.”
Last year, Olam raised a sustainability-linked club loan of US$500 million, which, according to Muthukumar, is the first of its kind in Asia. “Typically, green financing or green bonds are costlier than traditional instruments, which can be a disincentive — but we [got round that problem by doing] a club loan in collaboration with a group of banks, with clearly defined KPIs [key performance indicators] of sustainability targets we need to meet.”
Muthukumar adds that Olam’s overall debt size is about US$10 billion, of which 10% is green, and that he wants to grow the percentage to 20% by 2020. “When we announced [our loan] last year, the approach we took was very novel. People were not sure how we measured sustainability or how we would meet our KPIs. So, we enlisted the help of Sustainalytics, and it made an initial assessment of where Olam is,” he says.
Muthukumar explains that Olam zeroed in on several tangible and material targets, including its commitment to reduce its water and carbon footprint in a materially significant way and to create further prosperity for the farming community. “We have said that we will reduce the impact of climate change, relevant to the communities that we operate in, that is, the farms and plantations. We have clearly identified KPIs, and these will be reviewed and assessed by a third party, in this case, [audit firm] EY, which will conduct reviews on behalf of the banks [we work with] and comment on whether we have indeed met the commitments we have set for ourselves.”
One major initiative that Olam has undertaken is AtSource, its proprietary sustainable and traceable sourcing platform, aimed at providing insight and transparency in connection with the supply chain of agricultural raw materials and food ingredients. AtSource can provide Olam’s customers with a social and environmental footprint of the whole journey of their agri-product, from where it is grown to the manufacturing gate, and, crucially, implement targeted and efficient programmes to improve that footprint.
While the challenge is considerable, owing to the complexity and fragmentation of supply chains, AtSource enhances Olam’s ability to assess and positively influence the estimated 4.8 million farmers in the company’s supply chain, the vast majority of whom are smallholders growing crops such as cocoa, coffee and cashews in emerging markets.
AtSource is a core part of Olam’s commitment to re-imagine global agriculture and transform the agri-food businesses, says Muthukumar. By 2025, Olam’s vision is for 100% of its physically sourced volumes to meet the critieria for the Entry Level of AtSource.
However, the journey to embed sustainability in a company has not been easy. Muthukumar says there are still gaps in the sustainability agenda, even though sustainability financing has increased significantly in Asia, which was previously thought to be far behind the rest of the world. “There has been a lot of momentum, but there is still much to catch up on. One constraint is [companies] don’t know how to articulate their sustainability efforts, and don’t have the adequate frameworks for measuring and reporting. Lenders are also increasingly wary of greenwashing.”
Greenwashing is the act of using public relations or marketing tactics to give the impression that a company or product is environmentally friendly, in order to cover up dubious environmental or ESG practices.
“Lenders are more [wary] unless you have a very clear framework to measure and report ESG efforts. I think the biggest gap in sustainable financing in Asia is whether organisations have a clear purpose and can state openly that sustainability is important to them. All this has to be very clearly articulated,” Muthukumar says. “If these are in place, then lenders will have more confidence and they will voluntarily approach various industry participants to offer sustainability-linked loans.”
He urges companies to think long term, to look at long-term drivers of value and to align everyone in the corporation to think longevity. “Sustainable profits equal corporate longevity. If they do the right thing and are aligned to doing what is right, it automatically drives long-term value.”
