Innovative finance for innovative landscapes
Innovative finance is needed to protect the ecosystem services that Indonesia provides to its people and the planet. Innovative landscape management must match that finance, explained Director-General Tony Simons at a forum in Jakarta
‘In the past we have seen innovative finance and tropical landscapes as two separate things’, said Tony Simons, director-general of the World Agroforestry Centre (ICRAF), addressing the Innovative Finance Forum: Sustaining Indonesia’s Tropical Landscapes in Jakarta, Indonesia, 14 March 2016. ‘Now, we must find ways of linking them if we are to address the huge costs of securing our environment from further harm and protecting our food supply’.
The Forum, which was co-hosted by the Government of Indonesia, United Nations Environment Programme and the United Nations Office for REDD+ Coordination in Indonesia, was told by HE Sudirman Said, Minister of Energy and Mineral Resources, that Indonesia needed USD 135 billion to meet its commitment to reduce greenhouse-gas emissions by 25% but was only able to cover 10% of the sum from its own budget. The investment needed to rehabilitate the forests of Indonesia alone has been estimated at USD 80 billion. Clearly, with costs such as these, coordinated action needs to be taken by governments and the financial sector, with development partners and research institutions playing an important facilitating role.
‘“Innovative” finance, which can involve new investment instruments, can also conjure images of “creative” accounting of the kind that led to the global financial crisis of 2008, the effects of which are still being felt today’, said Dr Simons. ‘Perhaps what we are really looking for is “financing of innovative tropical landscapes” rather than trying to invent new wheels to turn existing financial mechanisms’.
Some of these mechanisms include instruments such as ‘green’ bonds, which provide returns to investors but at lower rates and over longer periods, building in a kind of ‘green’ discount that socially- and environmentally-responsible institutions are willing to bear, whether from a desire to satisfy shareholders’ demands or a realization that all the evidence points to current commodity value chains being unsustainable in the long term, hence, threatening companies’ very survival as profit-making entities. Despite being ‘green’, they are still existing mechanisms that have been adjusted to suit the particular investment climate that tropical landscapes demand.
‘In essence, placing the need for innovation at the landscape rather than the financing level will result in more practical, truly sustainable, investment opportunities’, Dr Simons told the Forum, ‘not only for institutional investors but also for those who invest their entire livelihoods: the smallholders who produce much of the world’s agri-commodities’.
This means focusing on smarter investment decisions from better land-use policy—such as that generated through ICRAF’s Land-use Planning for Low-emissions Development Strategies method, which has been adopted for use in all provinces of Indonesia by the National Development Planning ministry (BAPPENAS)—and wiser land-management practices. This type of approach brings together all people with interests in a landscape to agree on ways to reduce greenhouse-gas emissions from land uses, which is then integrated into the district’s spatial plans and the results fed into the national greenhouse-gas accounting framework for reporting to international bodies.
‘With this type of management in place, governments and private investors can more clearly see the role that financial instruments can play’, said Dr Simons.
Logically, what follows from this is the question of what kind of landscape decisions and consequent practices are needed for Indonesia—and other tropical countries, in particular—to move into a sustainable economic framework for the land-based sector.
‘We face several key challenges to understand this better’, said Dr Simons. ‘We need to, first, understand how to make smallholding farming more profitable without retarding achievement of environmental goals. Second, how can we ensure that the entire farming sector—including large-scale, plantation, commodity production—is more sustainable. Third, what is needed to make the full rural economy in a landscape more resilient in the face of climate change’.
To help smallholders improve their livelihoods, that is, become more profitable, it isn’t just about establishing new enterprises or entering value chains more effectively but also about developing farmers’ skills by building their capacity to better manage what they have through agroforestry and other proven practices that reduce carbon emissions.
‘Farmers often focus just on cash flow and not profit and loss’, explained Dr Simons. ‘So long as cash revenues keep flowing they are unlikely to examine how they are drawing down on their natural capital or their depreciation over time’.
Smallholders typically diversify for their own consumption and rely on one or two cash crops, which individually usually have a high demand but also an accompanying high volatility of price. Consequently, farmers will need a clear, enforced regulatory framework from government and financial incentives from private investors if they are to meet the national challenge of not only reaching greenhouse-gas reduction targets but also boosting food supply to feed the world’s growing population. This is particularly the case in Indonesia, with two-thirds of the population set to live in cities within 25 years.
To ensure the entire farming sector is sustainable is an even greater challenge.
‘Ever since the term “sustainability” first emerged in the early 1980s, we have been grappling with what it means and how to make it a reality’, he said. ‘Agriculture isn’t focusing its research for development as well as other sectors, such as health. Medicine and public health have been very targeted on what they research and the impact of that research. Agriculture needs to learn from this approach and invest more carefully, such as through expanding understanding of agroforestry in all appropriate biophysical and socio-economic environments on the planet’.
The third challenge, of making rural areas more resilient to climate change, is crucial because it brings together both the biophysical and socio-economic spheres. We need to know how to make all the multitude of rural landscapes the world over more adaptable and resilient to the impact of a changing climate. We are already seeing the effect of unpredictable rainfall and prolonged droughts and floods, extreme temperatures and failing crop yields. Trees on farms have been proven to not only mitigate the effects of climate change but also help farmers become more resilient as well as improving their livelihoods. But more investment is needed to understand the changing climate in which we live and its effect in specific agricultural areas. So far, the world hasn’t properly understood this and the role good governance of landscapes plays.
‘Our research shows clearly what is needed in the broadest sense’, said Dr Simons. ‘Now it is time for governments and the private sector to stand up and act on it. We applaud the Government of Indonesia for its leadership in this area; it is becoming a shining light for the rest of the world. But it can’t do it alone: the international community needs to put its money and expertise behind such efforts and learn from the huge experiment that Indonesia is pursuing not only for the benefits of its own citizens but also for the entire planet’.
The way to meet the three key challenges, according to Dr Simons, is to 1) reform regulatory regimes to provide the right market signals, incentives and sanctions for all agri-commodity value chains; 2) mobilise finance, including ‘blended’ finance that combines public guarantees with private investment, to reduce the risk new supply chains and provide finance for farmers to transit to them, especially for smallholders through vehicles such as micro-financing; 3) building stronger enterprise designs using the latest evidence and technologies; and 4) ensuring robust monitoring that can show the impact of investments and drive better performance.
Indonesia is uniquely placed to shape the global shift towards a ‘green’ economy and research organisations, such as ICRAF, are also uniquely placed to provide globally-general, locally-specific solutions, as Dr Simons demonstrated to the Forum. It is now incumbent on governments, investors, farmers, companies and researchers to work together to secure a sustainable future for all of us.
Read more from the Forum
This work is linked to the CGIAR Research Program on Forests, Trees and Agroforestry