As agricultural investment in Asia, Africa and Latin America grows, Mark Eckstein, environment and social director at development finance institution CDC, explains why it is vital to plan around ESG issues when buying land, and what questions investors should ask to protect themselves from risk.
Failure to assess and manage land-acquisition risks can not only affect your reputation, it can result in material investment risks and write-downs. That risk is becoming ever clearer when it comes to investing in emerging markets.
Investors who ignore this reality can see delays in accessing land, ongoing conflict, theft and sabotage of company assets and potentially a loss of social licence to operate. But proactive planning for and management of land investments can generate mutually beneficial outcomes including out-grower programs, access to labour and faster and better terms in accessing capital and investment.
Transactions involving land acquisition or long-term leases can cause the loss of livelihood, food or security for local people. That matters whether those people are using that land formally or informally.
Land-related investments in emerging markets where local people’s rights have not been fully considered have exacerbated tensions over entitlement to food, land and water. There is also growing evidence of large-scale corruption and political interference in many land deals.
Consultations that fail to identify land issues because they are commissioned too late or have inadequate scope are part of the problem. Not consulting adequately with affected parties, most often women and indigenous peoples, can also mean investors fail to understand the wider effects of their land deals. Additionally some consultants appointed to these transactions are not competent to assess social and human rights impacts.
It’s no surprise, therefore, that NGOs and others have highlighted instances of land investments afflicting communities and livelihoods – posing, at very least, reputational risk to investors.
Sensitivities over land acquisition have increased significantly in recent years and will continue to do so. Here, we provide guidance to reduce and manage the social and environmental challenges associated with the buying and leasing of land in emerging markets.
Understand social baselines and land tenure arrangements before investing
This allows investors to understand the scope and significance of potential impacts and whether compensation is adequate. They can also agree on long-term stakeholder engagement, compensation adjustments and livelihood restoration. This is also important for investees, since good social and economic baselines can help defend against opportunistic or speculative claims, such as what is termed “rent-seeking” behaviour.
Understand whether government-led resettlement is adequate
Where government agencies have been involved in the aggregation of land for private sector investors, pay attention to the terms and the adequacy of compensation arrangements. Top-up payments to meet international practices and restore livelihoods may well be required.
Assess whether the acquisition meets international standards
The two key standards are the International Finance Corporation’s Performance Standard 5 on Land Acquisition Involuntary Resettlement and the FAO’s Voluntary Guidelines on Responsible Governance of Tenure. These are the benchmarks against which acquisitions must be tested.
Understand local trends and context
Does an investment increase food insecurity for local people, exacerbate pre-existing tensions caused by nearby land acquisitions or impact vulnerable people or women? Climate change risks such as flood and drought also need to be assessed, as does whether the rule of law is effectively and consistently applied to land acquisitions where you are investing. If the answer to any of those questions is yes, enhanced social consultation and due diligence should be undertaken.
Hire the best and commission early
Don’t scrimp on the use of environmental and social consultants and consider using international consultants where local capacity is weak. You can also look at co- commissioning to build local consultancy expertise, which can later be leveraged. Ensure adequate social and stakeholder engagement expertise in the team and don’t leave it too late.
Plan for the long haul
Where communities have been negatively impacted and compensated, it is important to maintain ongoing consultation and outreach programmes to identify and address impacts that may have been overlooked. This allows investors to maintain a social licence to operate.
Mark Eckstein has worked at CDC since 2008. He was formerly the sustainable finance programme managing director at WWF-US and a principal environment specialist at the IFC. Last year CDC, which is owned by the UK government launched an ESG tool kit for fund managers.