Editions : October-December 2016

JOURNAL | GLOBAL PERSPECTIVES By: Lucita Jasmin

Asia has been a driving force in the global economy for the past three decades. In that time, we have witnessed poverty levels across developing countries in Asia dramatically decline. According to the World Bank, poverty across the region has fallen from 61 percent in 1990 to 7 percent in 2012, with hundreds of millions of people leaving behind the hardship of subsistence living. And according to a recent report in The Economist, a further 225 million Chinese will join the ranks of the region’s expanding middle class by 2020. 

The Asian Development Bank further posits that Asia’s middle class has doubled since 1990 to 56 percent of the population today, newly enabled with discretionary purchasing power. In parallel, we have experienced a sea change in global trade dynamics, where Asia is no longer solely the developed world’s factory, but increasingly its consumer, innovator, investor and facilitator. The current geopolitical shifts in Europe and the United States create further room for Asia’s positive economic and political influence to grow. We are very much in the Asian century and the Association of Southeast Asian Nations (Asean) is seizing the opportunities that it brings with both hands.

Asean within Asia’s ascendency

As a subset of Asia, Asean shares the same structural and demographic characteristics evident across the broader continent. Comprising Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar and Cambodia, Asean is home to some of the world’s most active and resource-intensive industries, increasingly placing it at the center of global scrutiny as demands to produce products more sustainably increase, driven by changes in consumer and corporate values, standards and expectations.

In a global context, Asean remains a high-growth region ripe for economic transformation supported by higher-value manufacturing, technology-inspired innovation and market disruption. This transformation is being effected by an increasingly educated and ambitious millennial group that comprises a large part of the region’s growing population. Growth is not a new trend. Despite cyclical dips and upswings, Asean has dramatically outpaced the rest of the world in terms of gross domestic product growth per capita since the late 1970s. Income growth has remained strong since 2000, with average annual real gains of more than 5 percent, according to research by McKinsey & Company. This is set to continue.

Growing gross domestic product has translated into improved personal financial status. In 2012, there were an estimated 190 million people in Southeast Asia who could be defined as middle class – that is, people with disposable income of between $16 and $100 per day. The same McKinsey research found that some 67 million households within Asean are already part of a new “consuming class,” with incomes exceeding the level where significant discretionary purchases are now possible. Research predicts that this intrepid consumer class could almost double to 125 million households by 2025, making Asean an even more pivotal global consumer market alongside China.

Growing middle-class spending power, rapid urbanization and infrastructure development tend to occur in tandem. As a consequence, Southeast Asian cities are booming. Today, 22 percent of Asean’s population live, work and play in cities of more than 200,000 inhabitants, with these areas accounting for more than 54 percent of the region’s gross domestic product. An additional 54 million people are expected to migrate to cities by 2025, setting off a spiral of associated economic development and growth, and more urgent calls for sustainability to be woven into the fabric of this economic ascendancy.

Creating infrastructure

As this progressive social and economic uplift attests, Asean countries have in the past prioritized economic development to increase the prosperity and well-being of their peoples. The benefits of traditional resource-based manufacturing and production are readily apparent.

While there remains much to do, with many millions still seeking a path out of poverty, developing the core infrastructure to support the region’s growing populations remains the dominant focus within Asean, with business a ready ally. Asean is home to multiple large enterprises established to generate wealth from the region’s abundant natural resources, increasingly supported by a vibrant technology start-up scene addressing infrastructure areas such as transportation, utilities and payment systems. As part of this process, Asean is now planning for or building the infrastructure that many Western economies would perceive as a default setting, or baseline, for modern urban and commercial life.

The Asian Development Bank, in its 2015 Asean Investment Report on Infrastructure and Connectivity, estimated that the region requires an infrastructure investment of $110 billion per year until 2025 if it intends to meet growing demand for power, transportation, information and communication technology, and water and sanitation. The organization further estimates that between 2010 and 2020 the energy and transportation sectors combined will total 63 percent of Asean’s infrastructure investment pool. This investment will support sustained economic growth as both a stimulus and an enabler. According to the World Economic Forum, it is generally assumed that every $1 invested in infrastructure development will yield an increase in gross domestic product of between 5 cents and 25 cents. Never have the prospects for those born into Asean’s developing heartlands been better.

A new growth factor

The economic future is clearly bright for Asean on many levels. However, there is an important factor that has traditionally been largely missing from this analysis. The majority of projections are based on “old world” models focused on economic growth or socioeconomic-focused sustainable development models, mostly neglecting the notion of natural capital. They also fail to recognize the value of environmental protection as an aspect of inclusive social development within a holistic sustainability framework.

Up until now, the unique requirements of establishing large-scale enterprises in emerging and mostly rural economies meant a focus on job creation and promoting rural economic development, in line with the predominant political and economic direction. As it turns out, the protection of Asean’s collective environmental assets has not always meshed with this socioeconomic development model.

The pathway to economic growth and the resultant burgeoning middle class have clearly had a downside. It can be argued that much of the cost of Asia’s development has been borne by the environment and underwritten with ever-increasing calls on natural capital. Many Asean countries are now counting the cost of their resource-led boom and working out how to achieve a cleaner, more sustainable journey forward.

Land-use change and forest conversion in Indonesia offers a relevant and well-studied case in point. According to Global Forest Watch Indonesia, 1.7 million hectares of forest per year were converted between 1985 and 1997, increasing to two million hectares per year until 2000 as the economy expanded on the back of export-led growth, and rising domestic and international consumer demand. From 2000, forest conversion rates dipped slightly to 1.5 million hectares per year until 2009, before easing to 450,000 hectares per year between 2009 and 2012, denoting the completion of most legal industrial plantation establishment in a cycle more developed nations went through decades or even centuries ago.

In total, forest areas in Indonesia declined from 130 million hectares in 1993 to 123 million hectares in 2001, with some 72 million hectares set aside for commercial forestry production. Commercial forestry areas include 10 million hectares allocated for pulp and paper plantations, with less than half of that area in licensed production. The majority was licensed for palm oil production. The balance of forest areas remain largely unmanaged and vulnerable to fire and illegal activity.

The demographic pressures outlined earlier continue to mount. Land conversion for small-scale palm oil operations presents a quick and effective means of generating income for many in Indonesia’s poorer communities who are located far from the burgeoning urban centers. This economic phase generated a return for Indonesia as it established a global export footprint for high-quality pulp and paper, palm oil, coal and other resource-based commodities. It has created employment and infrastructure to support newly established communities following government-implemented transmigration schemes, and it has also produced strong returns for multinational and domestic conglomerates.

It also, however, led to protest from nongovernmental organizations and civil society groups in Indonesia and around the world that branded the country as having scant regard for the environment. That reputation will take many years to change. Such negative perceptions were further exacerbated in 2015 with the fire and haze crisis in the Sumatra and Indonesian Borneo regions that affected neighboring Asean countries.

The rampant rise of the plantation economy across Indonesia and unmanaged agricultural practices on the fringe of planned, managed operations have had serious knock-on consequences for the environment, including biodiversity loss and increased threats of fire that degrade land and increase carbon emissions. The resulting carbon deficit and its contribution to climate change has been compounded by the absence of landscape planning and unclear land tenure. This has brought Indonesia to a tipping point, to which it is actively responding.

While it is by no means a completed journey, Indonesia is increasingly embracing green economy principles as it recalibrates its sustainable development model, evident in government policy direction and the actions of leading resource companies, applying global thinking to the country’s unique economic, social and environment challenges. The United Nations Environment Program defines a green economy as one that results in “improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities.” A series of international and local sustainability treaties and commitments over the past two years, culminating in a presence at the COP21 environmental conference in Paris in 2015 and a series of firm national climate change commitments, demonstrate Indonesia’s alignment with this vision and point to a clear intent and action. Leading resource companies are also contributing so that that resource-based enterprise can be a sustainable and resilient contributor to the country’s social and economic growth, particularly in rural communities.

However, green economy principles provide Indonesia with a starting point, not a template. While the principles are relevant to Indonesia, the scenarios and potential solutions in Indonesia are unique and specific, and need to be developed from within, from the bottom up, in partnership with communities and local governments. Encouragingly, this is happening, evidenced by a new moratorium on plantation development by the national government and a focus on peatland restoration by the public and private sectors.

Enterprise has an important role in achieving this bottom-up, low-carbon, resource-efficient and socially inclusive goal, as it requires the transformation of traditional growth-led, resource-based business models. In Sumatra, for example, public-private sector partnership is central to the elimination of deforestation and the protection and restoration of biodiversity and ecosystems in Indonesia’s rural areas. As the United Nations Environment Program points out, the concept of a green economy does not replace sustainable development, but recognizes that “achieving sustainability rests almost entirely on getting the economy right.”

From a business perspective, green economy thinking is helping to shape a clear and alternative growth model that supports the interests of climate, country and company. This can be seen in the Indonesian private sector’s commitment to sustainable production and environmental responsibility, driven by its increasing understanding and pursuit of shared value, a growing market awareness and rising consideration of sustainability in due diligence by the financial sector. Rather than expanding plantation areas, private sector players are focusing on research and development, and technology to drive intensification of yields and diversification into higher-value products, for example. In other words, getting more from the same.

 

As Indonesian companies increasingly take their place in the global market, their license to operate and long-term value creation are inextricably linked to their ability to balance production with environmental protection, efforts to conserve and restore natural capital assets as part of a holistic approach to business growth, and to operate with transparency.

An Asean sustainability model

As Indonesia’s early implementation of a bespoke green economy model attests, Asean’s opportunity is to define its own sustainability agenda, aligned with global expectations, yet tailored to its own economic, social and environmental challenges and opportunities. The scale of the Asean economy, its ambition and demographic trends mean the successful achievement of the UN’s 17 Sustainable Development Goals can be largely influenced by Asean in this way.

The key is to implement this bespoke Asean-focused sustainability agenda on the ground, simultaneously tackling three core challenges:

  • How to continue its growth momentum while respecting the planet’s safe operating space.
  • How to improve production to mitigate further strain on our natural resources.
  • How commitments and actions taken by government and the private sector on sustainability can include returns for local communities in terms of continued economic benefits and poverty reduction.

Addressing those challenges is not a linear path. However, there are clear indicators that there is cause for optimism. First, there is awareness. Today, 80 percent of Southeast Asia’s population say they are more likely to buy goods and services from companies that are committed to achieving the Sustainable Development Goals, according to a report by PricewaterhouseCoopers.

Second, there is momentum. Importantly, a study by the Massachusetts Institute of Technology and the Boston Consulting Group found that more than one-third of companies have reported profit from their sustainability efforts, a 23 percent increase from the previous year.

Third, the goal is clear. Over the next decade, Asean will no longer be solely on the receiving end of technology, funding, resources and policy advice from outside. Asean will be driving the sustainability agenda forward and leading the world in what is possible, based on what works on the ground in its unique context. This foretells the exercise of greater self-determination as well as a ramping up of influence on what the world will look like in the coming decades. The rules of the game are changing and Asean is increasingly becoming the author of the future sustainability playbook, shaping that agenda to fit the unique characteristics and challenges it faces.

The landscape approach

In 2015, Indonesia faced possibly its worst forest fire disasters in history, with more than 43 million people in Indonesia, Malaysia, Singapore, the Philippines and southern Thailand affected by choking haze. An estimated 500,000 people were reported to have suffered respiratory infections, and according to authorities, 19 people died due to haze-related illnesses. Thousands of hectares of wildlife habitat were destroyed.

On top of a series of well-publicized government-led actions, companies in Indonesia’s forestry sector have been making significant efforts to not only prevent a repeat of 2015’s fires but also curb the contribution of fire and haze to climate change. That work, consistent with the Sustainable Development Goals, focuses on changing the nature of community agricultural life and enshrining landscape protection.

To prevent fires, forests need to be conserved and, importantly, protected. For companies like APRIL, part of the Royal Golden Eagle group of companies, change is being driven through the implementation of conservation and restoration programs for peatland forests. These programs include community engagement aimed at changing attitudes and behaviors toward the use of fire as a land management tool. Supporting these tactical initiatives is a rethinking of business models that integrates natural capital into the balance sheet, putting sustainability front and center in the corporate mind-set and ensuring private sector commitments to conserving and protecting forests can be maintained and funded for the long term.

The land management method adopted moves beyond conservation to embrace forest protection and restoration as part of responsible forest management. It is called a “landscape approach,” which focuses on balancing production with forest conservation and protection through close community collaboration. This approach seeks to account for the needs of all stakeholders and emphasizes managing land use in a holistic way by factoring in environmental conservation, the livelihood of local communities, biodiversity preservation and climate change mitigation.

From a company’s perspective, it aims to achieve a healthy ecosystem where plantations receive the ecosystem services they need – water, productive soil and overall biodiversity – while also ensuring primary forests are conserved and protected, and communities in which a company operates have improved livelihoods and quality of life. Such an approach is crucial when 34 million hectares of forest in Indonesia remain unmanaged and therefore largely unprotected, making them vulnerable to encroachment and illegal conversion by people who have few economic alternatives to traditional subsistence living. Effective implementation of a landscape approach addresses this challenge by encouraging collaboration between communities, government, nongovernmental organizations and business, with each possessing a full understanding of the challenges and opportunities on the ground and respect for each other’s interests. Forests can’t protect themselves, but a landscape approach can remove much of this risk, ensuring that the root causes of forest fires and other forms of degradation are properly addressed.

A practical example of this approach in action is the APRIL Group’s Fire Free Village Program (FFVP) that works at the community level to encourage alternatives to fire and achieve long-term behavioral change. The FFVP program achieved a 90 percent reduction in fire incidences among the participating villages and is now being scaled through a newly created Fire Free Alliance, involving other international and Indonesian plantation companies as well as civil society representatives. FFVP complements the ecosystem restoration project Restorasi Ekosistem Riau, where the company is restoring 150,000 hectares of previously logged and degraded peatland forest on the Kampar Peninsula in Sumatra and on the nearby island of Pulau Padang, in partnership with Fauna & Flora International, The Nature Conservancy and Bidara, a local nongovernmental organization.

These are positive initiatives and proof points of how Asean can begin to define its own sustainability agenda at a landscape level, in line with green economy principles. Achieving a wider impact and scale from such initiatives, however, will require concerted collaboration between the public and private sectors, as well as a long-term vision for community development.

Such collaboration could involve the following:

  • Incorporating stronger conservation requirements into future forestry concession licenses, where conservation and plantation are actively managed as part of a coordinated private-public sector partnership model, centered on capacity building among small holders to improve agricultural practices and productivity.
  • Increased adoption of national certification standards to help open up access to high-value global markets that pay a premium for sustainably produced products.
  • Increasing the areas of land set aside for community development, as part of a commitment that places the community at the heart of forest protection strategies.
  • New and innovative sponsorship of localized economic development programs aimed at achieving change in the way land is managed, building on the lessons and experiences of initiatives such as the Fire Free Village Program.

At the grassroots level, localized business models could be developed to support long-term landscape conservation and protection, balancing protection and production, drawing on cross-sector and Asean-wide expertise and international best practices in areas such as ecotourism. Importantly, these types of initiatives will need to be supported by incentives for further research and development to improve yields and rotation cycles for plantation-based industries, and reduce the burden placed on natural capital and the landscape in general.

A global sustainability leader

An evolving sustainable approach to business is going to be a defining feature of Asean economies, policies and business practices going forward. Encouragingly, that focus can be seen in three observable shifts in attitude and approach to resource-based business in the region.

First, many of those who were once on opposite sides of the sustainability debate are now working together, with more common ground and shared objectives than ever before. It’s no longer about who wins a public debate; it’s about who is taking the most impactful action. That sees nongovernmental organizations objectively sitting on the advisory boards of resource companies; it sees the private sector taking initiatives in their own right to conserve and protect natural forest assets; it sees communities and companies sharing knowledge and best practices; and it sees an increasing number of effective private-public partnerships between companies and governments, including the scientific and civil society communities, for real action on the ground.

Second, throughout the value chain, from companies to customers and everyone in between, people are beginning to consciously factor in a value on natural capital and how to decouple growth from further drawdowns on it. The concept of natural capital is moving from the lecture room to the balance sheet and translating into real action at a landscape level.

Third, there is growing recognition of the interconnectedness of sustainability challenges and green economy principles. To deliver a positive future for the region and the world, more and more companies and governments are embracing the need to deliver on goals related to energy, water, food, forests, carbon and poverty alleviation in totality, each of which is a sustainability challenge and an economic opportunity. These are embodied in the Sustainable Development Goals.

As common objectives have emerged, companies, consumers, governments and civil society have become more empowered to take a big-picture view – a landscape approach to creating a better and more sustainable future. That big-picture view can drive clearer action and initiatives on the ground. By design, this means the Asean sustainability agenda is built from the ground up, rather than being imposed from above. 

Of course, there’s still a long way to go in the forestry sector. We must all do four things well in the long term. We must continue to grow and prosper as businesses, through improved production methods and greater value add. Growth in yields, revenues and sustained profits underwrite our ability to protect forests, and generate prosperity and progress for the country and communities. Many companies, including APRIL, have made impressive commitments, but we have to keep delivering and being seen to do so if we want to maintain the trust of our customers and civil society. We have seen what happens when companies betray that trust.

We must better understand carbon emissions from large-scale plantation operations, particularly on peatland, and continue to improve science and best practices so emissions are minimized and peatlands are protected.

 

Last, we must drive wider and deeper engagement beyond our own operations, engaging with experts and nongovernmental organizations, supporting government efforts, encouraging and educating our suppliers, others in the industry and the community on better practices. Asean’s sustainability agenda is a work in progress, but there is enough progress to warrant optimism and enough momentum to believe that progress will continue. While those looking from outside may remain unconvinced, those working on the inside will attest that a threshold has been passed, with an evolving compact between business and civil society providing reassurance that the days of a solely economic focus, without due commitment to a sustainable world, are rapidly passing into history.


Lucita Jasmin is the director for external affairs of the APRIL Group in Jakarta.

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