INVESTOR BRIEFING. On Shaky Ground. Risks in land investments. Introduction. Risks. April Land purchase overturned

Transcription

1 On Shaky Ground Risks in land investments April 2013 Introduction Investment in land is an increasingly popular asset class, with recorded agricultural transactions involving foreign investors reaching an estimated 83 million hectares in developing countries since In the context of rising consumption of food and biofuels, and with potential for long-term yields, land can be an attractive asset. Investment in agriculture can also under the right circumstances - be beneficial to the local population, with the potential to improve employment rates, healthcare and food security. However, land acquisitions have also come under increasing criticism from civil society and local communities for facilitating the forced displacement of local communities, food and water shortages, the destruction of biodiversity such as forests, and the destruction of sacred sites. For many, land investment is nothing more than landgrabbing. There is increasing case-study evidence of such impacts leading to significant local and political opposition threatening the financial viability of particular land investments. In addition, inadequate impact assessments may lead to inaccurate crop yield estimates and an incorrect pricing of an investment. This briefing outlines some of the major risks affecting land investments. It uses case-study examples to demonstrate the consequences of inadequate due diligence and failures to follow best practice. The briefing also suggests a series of questions for asset owners to pose when considering a land investment either directly or via a shareholding to enable them to make an informed risk assessment. Risks Land purchase overturned Countries with high numbers of reported land acquisitions tend to have weak land governance 2, and many have customary rather than formalised land rights. Land may be considered underutilised and available for development when it is actually in use by communities of small-scale farmers 3 or tribal pastoralists. 4 Where this is the case, diligent investigation of the current use of formal and customary rights attaching to the land, and respecting local communities right to free, prior and informed consent, will be necessary to protect against subsequent attempts to overturn the acquisition. When land rights are not properly addressed, civil unrest can occur, in turn leading to disruption of operations and, in some cases, the forced reversal of the land purchase (see Box 1). INVESTOR BRIEFING

2 Box 1: Case Study Daewoo Logistics in Madagascar In 2009, South Korean firm Daewoo Logistics found itself on the losing side of a battle over the right to 900,000 hectares of land in Madagascar. The deal would have used about half of Madagascar s arable land and had provoked widespread civil society protest. 5 Only a small section of the Madagascan population has documentation proving tenure, as obtaining titles is prohibitively expensive and complex. In addition, there is complexity over formal rights due to ongoing contention over state versus customary ownership. 6 Controversially, Daewoo Logistics was also being given the land free, with the company stating that Madagascar would gain in employment prospects. 7 The deal fuelled popular anger at then President Marc Ravalomanana, who was forced from office in March His replacement, President Andry Rajoelina, overturned the agreement within 48 hours, stating that Madagascar s land is neither for sale nor for rent. 8 Key Questions: Have local and national land rights been investigated, including any ongoing land reform programmes in the territory in question? Has land procurement respected local customary land rights? Further information on the specific financial consequences of investing in land with disputed tenure rights can be found in the December 2012 paper by The Munden Project The Financial Risks of Insecure Land Tenure. 9 Disruption to operations Local hostility caused by food insecurity can lead to the suspension of operations and productivity losses (see Box 2), in addition to the significant reputational risk of being associated with a project resulting in hunger. 66% of the land acquired in documented deals is located in countries with above-average prevalence of hunger, such as sub-saharan Africa. 10 In addition, a significant proportion of land acquired has formerly been used by smallholders 11 ; they may therefore depend on the land in question for their livelihood and basic food needs, with few alternatives for income generation if that land is acquired. 12 When crops are exported or alternative arrangements for local food growth are not put in place, hunger in the local population can pose a significant risk to operations. Box 2: Sime Darby in Liberia In October 2011, communities affected by the Sime Darby plantation in Liberia filed a complaint with the Roundtable on Sustainable Palm Oil (RSPO) 13 alleging a range of violations of the RSPO s Principles. Sime Darby ceased operations on receipt of the complaint and entered into talks with the local people. 14 Food shortages were a key concern, as the company had cleared swamps used by the local people to grow food, leaving them with nowhere to farm. In May 2012, the company agreed during talks to clear the oil palm it had already planted on the swamps and provide seeds for the community to begin farming again. 15 These risks most often arise where there is a lack of transparency about the purchase contracts, insufficient consultation with and assessment of the impacts on affected communities, and a failure to secure their prior and informed consent to the project. 2

3 Lack of transparency When the terms of a land acquisition are not publicly available to the affected communities, local hostility can arise either when development begins or if the terms are subsequently made public 16. In some cases, this has led to the acquisition being overturned (see Box 3). Contract transparency is recommended in the IMF s Code of Good Practices on Fiscal Transparency (2007), which states that contractual arrangements between the government and public or private entities, including resource companies and operators of government concessions, should be clear and publicly accessible. 17 The Extractives Industry Transparency Initiative (EITI) includes a commitment to encouraging high standards of transparency 18 in the extractives industry; commentary on land investment has suggested a similar initiative might now been needed for this asset class However, the EITI is not directly replicable for land investments. Any proposed transparency initiatives on land investments must include appropriate provisions requiring i) transparency prior to project commencement and ii) disclosure of all relevant matters including terms of contracts, impact assessments and compensation terms. Box 3: Case study Nile Trading & Development in South Sudan A land acquisition deal between the U.S. company Nile Trading & Development was overturned by the Southern Sudanese President in 2011, following the release of the contract by U.S. thinktank The Oakland Institute. 22 Engagement with local communities had not been comprehensive, and they were largely in ignorance of the terms of the contract until it was made public. 23 Subsequent mobilisation and protest against the acquisition led to President Kiir s announcement that the issue would be decided according to the people s will, who consequently rejected the project. 24 Lack of consent from affected communities Free, prior and informed consent (FPIC) from indigenous communities can bring clarity to land rights and is considered an international norm when undertaking land acquisitions, as stipulated in the Equator Principles 25 and the UN Declaration on the Rights of Indigenous Peoples 26. To date, attempts to obtain FPIC have been minimal; data from Land Matrix in 2012 found only 6 reports of informed consent from a sample of 86 projects. 27 Informed consent should also be obtained for compensation terms, such as payments for crops destroyed in land clearance, resettlement, or for communal land acquired. Box 4: Problems arising from lack of consent in Liberia In October 2012, advocates of communities in Sinoe County filed a complaint with the Roundtable on Sustainable Palm Oil (RSPO) alleging that Golden Veroleum Liberia (GVL) had cleared land without the FPIC of the customary land owners, contravening RSPO Principles 2 and In December 2012, the RSPO instructed GVL to cease all land-clearing activity whilst consent was sought, interrupting productivity. 29 Local communities accused the company Sime Darby of failing to consult them on compensation amounts for the crops cleared by the company and unexplained differences in prices offered for the same crop types. 30 This grievance, along with other issues, prompted the Liberian Ministry of Internal Affairs to set up a subcommittee to address compensation. 31 Contract disclosure is one way the State and business investors can pursue their respective human rights obligations and responsibilities. UN Special Representative for Business and Human Rights (2011), John Ruggie 21 3

4 Key Questions: Has best practice with regard to contract transparency and disclosure of the nature of the deal and the contracts to the affected local communities been followed? Has the principle of Free, Prior and Informed Consent been followed in accordance with best practice? Have compensation terms been properly explained to the affected communities? If there are indigeneous peoples on the land, have all relevant obligations under conventions on indigenous peoples rights been followed? Has an impact assessment on potential food and water insecurity in the local community been carried out? This is particularly relevant where the crop grown is intended for export or biofuel production. Are grievance and dispute resolution measures in place for local communities? It is best practice for community grievances to be heard by third party independent sources. Do the investment models, contracts, structure and implementation adhere to the Minimum human rights principles on large-scale land acquisitions and leases as outlined by the UN Special Rapporteur on the Right to Food? Is the model of investment designed to provide additional employment to local communities? Has an independent human rights impact assessment been carried out? Mispriced investments Reduced productivity can occur when environmental impact assessments have not been diligently carried out, leading to lower crop yields than expected (see Box 5). Mismanagement of the land can also cause long-term productivity issues, such as land degradation caused by overexploitation which is currently to blame for the loss of 5 to 10 million hectares of potentially productive land annually 32. Environmental impact assessments, as stipulated in Equator Principles 1 and 2 33 and IFC Performance Standard 1 34, can help to address this, providing clarity for investors on the real value of the asset. The risk management skill set is not something that corporate investors fully understand. Berry Polmann, Head of Real Assets at Adveq 62 Box 5: Financial risks from lack of sufficient assessment Jatropha curcas was touted as a wonder crop for biofuel production 35 throughout much of the last decade. However, exaggeration of yields and underestimation of the crop s water needs has produced more losers than winners with many projects failing to meet targets and future plans being scaled back. 36 In Mali, independent experts have stated that there is only enough water to irrigate 250,000 hectares, contrary to the government s claims of 1 million hectares available for investors interested in agricultural development. 37 Key Questions: Have independent experts assessed the environmental viability of the project, including the potential crop yield? Will the change in land use as a result of the investment cause soil degradation, biodiversity loss or the exhaustion of local freshwater supples? Has an assessment been made to ensure there are no local, national or international protected areas or species designations that affect the area? 4

5 Allegations of inadequate protection of human rights There is increasing attention on land acquisitions from civil society groups and media 38, with campaigns focusing on humanitarian issues. Several other high profile NGOs are working on land grabs, including ActionAid 39, Oxfam 40 and Greenpeace International 41. NGOs primarily focus on hunger 42 (see Box 6) and water scarcity 43 in this context, although the destruction of culturally important sites during land clearance is another potential reputational risk and contravenes Article 8 of the UN Declaration on the Rights of Indigenous Peoples 44. Forced evictions have also been recognised as a violation of the International Covenant on Economic, Social and Cultural Rights 45 which guarantees the right to adequate food and to an adequate standard of living, together with the right to adequate housing. Investors also need to be aware of the potential impact of the UN Principles for the Respect, Protect, Remedy Framework on business practices which articulate the corporate responsibility to protect human rights, and are influencing a range of international guidelines and principles, for example the Equator Principles 46 and the OECD Guidelines for Multinational Enterprises 47. Box 6: Hunger caused by land acquisitions as key campaign focus The IF campaign launched in 2013 with the backing of over a hundred civil society organisations, including several global campaigns organisations. 48 It has chosen land acquisitions as one of its four key issues causing world hunger 49. With celebrity backing 50, the campaign calls for the UK government to put land acquisitions on the G8 s agenda and act to safeguard affected communities 51. Policy changes Land investments can be undermined by changes in policy at national or supranational levels which can significantly affect the value of the investment. With a recent World Bank report warning that we are on course for a 4 degree world 52 and increasing numbers of extreme weather events 53, awareness of the changing climate is a key driver of policy change (see Box 7) and may present a significant risk to agricultural investments in the coming years. The due diligence process can help ensure that investment managers and operators have the policies, systems and expertise needed to integrate environmental, social and governance (ESG) considerations into their ownership activities. Christina Olivecrona Sustainabilty Analyst AP2 63 Box 7: Financial risks from policy u-turns In May 2010 the world s largest producer of palm oil, Indonesia, announced a two year moratorium on deforestation 54 which came into effect in Whilst the moratorium does not affect existing forest use permits, it does ban the issuance of new permits for the conversion of virgin forest 56. The move is part of a pledge made by Indonesia s President to combat climate change which he has decribed as the urgent global challenge 57. In October 2012, the EU limited global land conversion for biofuel production 58 in a move that the biodiesel industry has said could render 1.5bn of investments worthless 59. The policy u-turn 60 came after scientific studies cast doubt on the emissions savings from biofuels, in addition to concerns of food shortages in grain growing regions that had seen a poor harvest. 61 Key Questions: What is the investee company s previous track record in land operations? Is the company the subject of ongoing investigations by industry bodies such as the Roundtable on Sustainable Palm Oil, or under national or international law? What sustainability and human rights policies are in place for the project, and how is compliance beng monitored? 5

6 Conclusion In the rush for land, time must be taken to carry out comprehensive due diligence and impact assessments on issues including formal and customary local land rights, human rights, food and water security and environmental viability. Investors in land are exposed to significant risks in cases where there are failures to conduct such due diligence or to ensure compliance with international best practice including the principle of Free, Prior and Informed Consent. The questions in this briefing are intended to assist potential investors in land in the assessment of the adequacy of due diligence undertaken and the project s compliance with best practice. About ShareAction ShareAction (Fairshare Educational Foundation) is a registered charity that promotes responsible investment practices by pension providers and fund managers. ShareAction champions greater transparency and accountability to the millions of people whose long-term savings are managed by institutional investors and other professional agents. ShareAction believes that responsible investment helps to safeguard investments as well as securing environmental and social benefits. ShareAction is supported financially by a number of leading charitable foundations and counts amongst our member organisations a growing number of globally recognised NGOs and trade unions. Over 8,000 individuals support our work both by taking action directly to advance responsible investment and through personal donations. About Friends of the Earth For more than 40 years we ve seen that the wellbeing of people and planet go hand in hand and it s been the inspiration for our campaigns. Together with thousands of people like you we ve secured safer food and water, defended wildlife and natural habitats, championed the move to clean energy and acted to keep our climate stable. Be a Friend of the Earth see things differently. Further information: Louise Rouse ShareAction louise.rouse@shareaction.org shareaction.org Kenneth Richter Friends of the Earth kenneth.richter@foe.co.uk The opinions expressed in this publication are based on the documents specified in the end notes. We encourage readers to read those documents. Fairshare Educational Foundation is a company limited by guarantee registered in England and Wales number (registered address Unit TR.G.03 The Leather Market, Weston Street London SE1 3QB) and a registered charity number

7 ENDNOTES Unless otherwise stated, all links were accessed on Foreign Investment in Farmland: No Low-Hanging Fruit. Deutsche Bank This statistic is from Land Matrix data and Deutsche Bank notes that only half of it may be considered reliable. 2. Ibid 3. Siakor, S. K A. Uncertain Futures: The impacts of Sime Darby on communities in Liberia. Fern Levitt, T. Crisis or rebirth? The Future of Ethiopia s Pastoralist Tribes. The Ecologist tribes.html 5. Madagascar leader axes land deal. BBC News africa/ stm 6. Christoff, S., Madagascar: Community resistance to corporate land theft. Farmlandgrab.org Spencer, R. South Korean company takes over part of Madagascar to grow biofuels. The Telegraph Madagascar leader axes land deal. BBC News africa/ stm 9. The Financial Risks of Insecure Land Tenure: an investment view. Rights and Resources Initiative Foreign Investment in Farmland: No Low-Hanging Fruit. Deutsche Bank com/prod/dbr_internet_en-prod/prod /foreign+investment+in+farmland%3a+ No+low-hanging+fruit.PDF 11. Ibid 12. Ibid 13. Letter to Roundtable on Sustainable Palm Oil from Liberian community members. Forest Peoples Programme Letter to Liberian communities from Roundtable on Sustainable Palm Oil. Forest Peoples Programme rspolettertolocalcommunityresimedarbyoctober2011.pdf 15. Siakor, S. K A. Uncertain Futures: The impacts of Sime Darby on communities in Liberia. Fern Wudu, W. S. Mokaya Payam Leaders Reject 600,000Ha Land Lease. Gurtong.net International Monetary Fund. Code of Good Practices on Fiscal Transparency external/np/pp/2007/eng/051507c.pdf 18. Extractive Industries Transparency Initiative. Principles and Criteria Blas, J. and England, A., Foreign Fields: Rich states look beyond their borders for fertile soil. Financial Times html#axzz2icaeau2h 20. Blas, J., World Bank Backs Farmland Investment. Financial Times s/0/0778c538-baaf-11df-b73d-00144feab49a.html#axzz2icaeau2h 21. Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie. United Nations Human Rights Council Dealing with Disclosure: Improving Transparency in Decision-Making over Large-Scale Land Acquisitions, Allocations and Investments. The Oakland Institute oaklandinstitute.org/files/dealing_with_disclosure.pdf 23. Understanding Land Investment Deals in Africa: Nile Trading and Development Inc. in South Sudan. The Oakland Institute Wudu, W. S. Mokaya Payam Leaders Reject 600,000Ha Land Lease. Gurtong.net Draft of Updated Equator Principles III (EP III). Equator Principles United Nations Declaration on the Rights of Indigenous Peoples unpfii/documents/drips_en.pdf 27. Foreign Investment in Farmland: No Low-Hanging Fruit. Deutsche Bank Compaint on Golden Veroleum Liberia. Roundtable on Sustainable Palm Oil rspo.org/en/status_of_complaint&cpid= Letter to Golden Veroleum Liberia from the Roundtable on Sustainable Palm Oil. Roundtable on Sustainable Palm Oil Siakor, S. K A. Uncertain Futures: The impacts of Sime Darby on communities in Liberia. Fern Liberia: Agri-business expansion threatens forests and local communities livelihoods. Forest Peoples Programme ttp:// 7

8 business-expansion-threatens-forests-and-local-commun 32. Foreign Investment in Farmland: No Low-Hanging Fruit. Deutsche Bank Equator Principles Performance Standards on Environmental and Social Sustainability. International Finance Corporation Document.pdf?MOD=AJPERES 35. Crooks, E., Back to Petroleum. Financial Times Matlack, C., A Green Fuel Awash in Red Ink. Businessweek articles/ /jatropha-a-green-fuel-awash-in-red-ink 37. The Land Security Agenda: How investors risks in farmland create opportunities for sustainability. Earth Security Initiative pdf 38. Oxfam Warning on Land Grabs. BBC News newsid_ / stm Coldplay team with Oxfam to raise land grab awareness. NME coldplay/68735 Land-grabbing firms beware: cost of ignoring people s rights is rising. Guardian guardian.co.uk/global-development/poverty-matters/2013/feb/18/land-grabbing-firms-peoples-rights 39. Biofuels and Land Grabs. ActionAid A Guide to Land Grabs. Oxfam. grow/guide-to-land-grabs 41. Understanding Land Investment Deals in Africa: Massive deforestation portrayed as sustainable development. The Oakland Institute in collaboration with Greenpeace International oaklandinstitute.org/sites/oaklandinstitute.org/files/land_deal_brief_herakles.pdf 42. Land. Enough Food If Rulli, M. C., Saviori, A. and D Odorico, P., Global Land and Water Grabbing. Proceedings of the National Academy of Sciences Jacobs, R., The Top 5 Land-Grabbing Countries. Mother Jones blue-marble/2013/01/top-land-grabbing-countries 44. United Nations Declaration on the Rights of Indigenous Peoples unpfii/documents/drips_en.pdf 45. United Nations International Covenant on Economic, Social and Cultural Rights Draft of Updated Equator Principles PACKAGE.pdf 47. OECD Guidelines for Multinational Enterprises Who we are. Enough Food If Land. Enough Food If Celebrities back one of the biggest world hunger campaigns. ITV News itv.com/news/update/ /celebrities-back-one-of-the-biggest-world-hunger-campaigns/ One Direction join Enough Food If Campaign. Virgin Media newsfeeds//11654/2013/01/24/one-direction-join-enough-food/ 51. Land. Enough Food If Turn down the heat: why a 4 degree centigrade warmer world must be avoided. World Bank warmer_world_must_be_avoided.pdf 53. Hedegaard, C. Get used to extreme weather, it s the new normal. The Guardian Myslewski, R. Climate Scientists link global warming to extreme weather. The Register co.uk/2013/02/26/climate_boffins_moot_global_warming_based_weather_affecting_mechanism/ 54. Indonesia pledges two-year deforestation moratorium. BBC News news/ Indonesia finally signs forest deforestation moratorium. Sustainable Business sustainablebusiness.com/index.cfm/go/news.display/id/ Belford, A. Indonesia agrees to curb commercial deforestation. New York Times nytimes.com/2010/05/28/world/asia/28indo.html?_r=0 57. Ibid 58. New commission proposal to minimize the climate impacts of biofuel production. Europa.eu Chaffin, J. Brussels to unveil new biofuels policy. Financial Times s/0/8ed0eb48-17a3-11e feabdc0.html#axzz2medajbjb 60. Dunmore, C. EU to limit use of crop-based biofuels. Reuters article/2012/09/10/us-eu-biofuels-idukbre8890sj Ibid 62. Berry Polman. Investors take an interest in farmland. Financial Times a0933e86-333b-11e2-aa feabdc0.html#axzz2ibkbbabn 63. The Land Security Agenda: How investor risks in farmland create opportunities for sustainability. Earth Security Initiative pdf SHAREACTION.org 8