Environmental Investments

EBG Capital

March 2015

Responsible Investments in Agriculture in Practice:

A Case Study Review

EBG Capital

Contents

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Introduction

Overview of surveyed funds

Overview of case studies

Results and conclusions

Recommendations for actions

Contact us

Disclaimer

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ContentPage

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Background

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Food price crisis emerged in 2006 - 2008. o Food security + ‘land grabs’ moved onto public agenda.

Current food demand is rising.o More over next decade than last (OECD 2011) = global population growth (9.3 billion by 2050);

rising per capita incomes; higher-protein diets.

Foreign investment in developing world blamed for exacerbating crisis.o “Diverts food from local consumption.”

Introduction

Rationale -

Agriculture Responsible

Investing (RI)

Increasingly high economic and reputational risks to Ag investors. o Easily accessible, productive farmland already in production.o Non converted land requires large infrastructure investment (e.g. transport, storage, irrigation.)

In response, international organisations developed Ag RI principles and guidance o To address Environmental, Social and Governance (ESG) issues.o Many investors now signatories.

Ag RI can generate a wide range of developmental benefits:o increased food security and economic opportunities; protection of delicate ecosystems;

preservation of local or tribal lands + access to resources.

Report Aims &

Objectives

Report identifies practical, ‘on the ground’implications of Ag RI principles and guidelines. Case studies + best practices from leading investors.

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Overview of surveyed funds

Assets under management ($m) Target geographies

Note onConfidentiality

o Charts based on anonymous survey findings.o Self reporting: not independently verified.

Fund Universe 35 funds approached. 8 responded with partial or completed case studies. (Below F1, F2…F8)

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Overview of case studies (1)

Area of land subject to investment (Ha) Commodities produced

F1 F2 F3 F4Bananas, wheat, groundnuts and vegetable production

Certified organic bananas

Coffee, Cocoa REDD+ carbon credits, sustainable cocoa

Fund F1 F2 F3 F4 F5 F6 F7 F8

Ownership Acquired asset, curatorship + lease

Own assets, lease land

Loans to smallholders and trade organisations

State concession for land use of 20 yrs

Own; investment period 7-10 yrs

Own Lease estates from govt (30 yr renewable lease)

Leasehold

Investment strategy

Buy farm, equipment, infrastructure; land originally leased for 14 yrs, now 99 yr lease

Lease land, invest in infrastructure

Working capital loans + pre-financing of production/ harvesting

7 yr loan to counterparty who works with smallholders

Buy farmland + infrastructure; strategy to target expansion / consolidation

Buys farms + other assets + make improvements

Stake in company, strategy to acquire new estates + expand operations

Equity investment in existing agribusiness

Operating structure

Self-operate Self-operate Land is owned by smallholders, counterparty assets as collateral

Borrower operates project under contract to fund

Buy + lease to experienced operators

Buy + lease to local farmers / operators

Self-operate Self-operate

Type of ownership, investment strategy and operating structure

F5 F6 F7 F8Grapes, citrus fruits, deciduous and stone fruits

Arable crops, especially grains and oilseeds

Darjeeling tea Cotton, soybeans

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Overview of case studies (2)

Local jobs created (permanent and seasonal) Principles / guidelines adhered to

Greenfield vs. existing

Most acquire existing farming operations = to improve, renovate and expand. Fewer acquire ‘greenfield’ projects = no previous farming activities existed.

Start of operations

Majority of “new” investments made between 2010-2014. One plantation in operation since 1940s.

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Results and conclusions (1)

Due diligence

Prior to investment investors undertake significant due diligence (internal + external):o land lease, o financial + commercial (counterparties), o market and country / political, ando environmental and social.

Land tenure and

governance

Land tenure is the most significant concern.o Security of land leases or other land-based rights.

Most investors acquire existing assets rather than ‘greenfield.’ o Easier to secure land tenure, greater impact for local communities.

Free, Prior, and Informed Consent (FPIC)

– Local

Stakeholder Consultation

Even among ‘best in class’, FPIC is the thorniest issue:o general lack of understanding of FPIC,o unclear on extent consultation is necessary, ando uncertainty : how to consult stakeholders without a (more) local third party.

All Ag RI monitor from an ESG perspective and remedy issues before they morph into reputational risk.

At least one RI ended an investment process over the potential for social unrest.

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Results and conclusions (2)

International principles / guidelines

International principles/guidelines are a checklist not a practical tool.o For most respondents, their operations + strategies are neither uniform nor standardized = non-

legal international principles/guidelines are not applicable or practical.

All respondents signed at least one. Most complied with more than two.o UNPRI, PRAI, IFC Performance Standards, Global GAP, GMP

Some have stricter internal processes: to define, execute and monitor ESG.

ESG monitoring

ESG monitoring: standard practice + often dovetails existing monitoring.o Often mandatory for local operating entities / counterparties.

Most Ag RI balance = internal oversight + rigorous counterparty contracts + external consultants.

o A note on the local approach = authority is with those who understand performance + issues. However, this creates potential for corruption, abuses, negative ESG impact + reputational risk.

Local impact and

livelihoods

Social impact viewed either as community development or livelihoods:o Community development = improved housing, electrification, education, healthcare and sanitation. o Improved livelihoods = increased income, improved skills training, infrastructure, establishment of

cooperatives, better access to markets, clean water and commodities.

Quality of impact varies.o Some see RI as a‘cost’ of doing business, others as principle.

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Results and conclusions (3)

ESG ‘learning curve’

Sector would benefit greatly from improved ESG knowledge and more practical guides.Of respondents: Last 5 years - significant improvement of ESG awareness + transparency.

o Varied use of detailed KPIs. o Only one reported KPIs measuring business impact on local community.o Only two employed dedicated ESG specialists. (Note: not necessary for successful ESG strategy.)

Constraints to implementing

ESG

Number of international principles / guidelines cause confusion.o Managers and investors are not always clear: which apply or how to implement.

Some principles / guidelines (e.g. IFC) developed for large-scale projects = not specific to agriculture.

Cost constraints for small projects prevent full external ESG due diligence.

Ag RIMotivations

Prime motivator = reputational risk. o Activist NGOs focusing on‘land-grabbing’= clear business case to proactively reduce risk.

No clear examples of cost benefit analysis – as in other sectors (e.g. manufacturing.) Significant blind spots exist. Certain investors can work outside RI guidelines:

o local investors, o investors with a strategic interest in physical access to soft commodities, and o private investors benefiting from opaque legal and ownership structures.

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Recommendations (1)

Scale the Survey

Map current AG investors.

o Identify investors via Land Matrix database.

o Classify with publically available information.

o Match with PRI membership.

Scale the survey:

To additional international investors.

To local investors.

o Improved understanding of local knowledge and attitude to Ag RI

o Can cooperate with national or local land administration bodies (e.g. INCRA in Brazil)

To local stakeholders (360ᵒ feedback)

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Recommendations (2)

Global Initiatives to

Improve Ag RI

Expand research on global Ag RI best practices

o Based on map (previous slide.)

o Provide recommendations to resolve the most significant challenges.

Improve knowledge and practices of sector wide investors and investment managers.

o Training, networking, forums.

Select Efforts to Improve

Ag RI

Conduct targeted cost benefit analysis on ESG implementation in Ag.

Test select projects against declared standards – ‘deep dive’ opportunities + challenges

o Via third party observation, due diligence and reporting.

Develop locally-adaptable, concrete guidance on ESG best practice.

Prepare National concrete guidance/legal frame for target countries

o Based on international principles / guidelines, in particular: VGGT/RAI

o For different target groups (investors, local and central administrations, communities and CSOs), develop an ‘independently verified’ scorecard of ESG impacts on local stakeholders

EBG Capital

Dr. Bernd Schanzenbächer

EBG Capital AGwww.ebg-capital.com

Telephone : +41 43 344 59 06Facsimile : +41 44 205 99 44

E-mail: bernd.schanzenbaecher@ebg-capital.com

Lavaterstr. 40CH-8002 Zurich

Switzerland

EBG CapitalEnvironmental Investments

Contact us

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Christian Graefen

GIZ – Germany www.giz.de

Telephone: +49 6196 79 1212E-Mail: christian.graefen@giz.de

Dag-Hammarskjoeld Weg 1-565760 Eschborn

Germany

Disclaimer

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This study was prepared by EBG Capital AG for the Germany Agency for International Cooperation (GIZ). The opinions expressed in this study are solely the opinions of EBG Capital and do not necessarily reflect the opinions of GIZ or BMZ/German Government.

We would like to express our sincere thanks to the individuals at each of the investment funds included in this report (who are not identified) who provided us with information regarding their responsible investment (“RI”) practices.

No fees or other inducements were offered or received for the provision of this information. We have attempted to be as independent and balanced as possible in the selection, analysis and reporting of the funds included in this report. However, we cannot eliminate the possibility that some of the information provided to us has not been entirely representative of the situation on the ground for a particular investment; on-site due diligence has been beyond the scope of this particular report. Nevertheless, we believe this report provides the reader with a fair assessment of current “best practice” in relation to foreign agricultural investments by asset managers, private equity funds and family offices.