Sustainability Investing Challenge

Team

Jose Andres Montes Lopez (Financial Analysis Lead), Clarie Ng (Enviromental & Social Impact Lead), Max Rychwalski (Economics Co-lead), Mark Gallo (Economics Co-lead)

Challenge

According to the Borgen Project, Indonesia contributes around 11.2% of all the plastic waste in the ocean each year making it the world’s second largest plastic polluter after China. Most recently, Indonesia reportedly produced around 9.52 million tons in 2019 marking a nearly doubling of the plastic waste it produced in 2010 when it was estimated at 5.05 million according to Indostats. Being the largest archipelagic country, the majority of Indonesia’s population (80%) relies its coasts for food fish. Indonesia produces 24,500 tons of plastic waste daily, with the majority ending up polluting its rivers and coasts. Therefore, plastic pollution poses a significant human health risk towards the 273.5 million Indonesians (as of 2020), of which 56.7% live in an urban area.

Aiming to mitigate against this ecological and health hazard, seaweed-based bioplastics have been touted as one of the most viable alternatives as they share many of the valuable properties of plastic but are also bio-degradable (naturally decomposed) and low resource intensive.

However, costs associated with the underdevelopment of the domestic seaweed industry paired with high export demand have made the material unaffordable for the local economy. With the exception of South Sulawesi, whose production eclipses the aggregate of remaining regions, the lack of unified farming practices, harvesting protocol, and post-harvest processing control render supply vulnerable to volatile pricing, climatic shocks, and inconsistent quality. In addition, downstream final products and operations also require affordable financing as businesses seek to transition into using seaweed-based bioplastics.

Idea

Our fund addresses the plastic waste issue and seaweed supply challenges in the Indonesia. Our proposal seeks to help the seaweed industry meet the growing demand for seaweed while enabling businesses transition to this bio-degradable, ecologically friendly, and job-creating material.

Innovative Solution

Proposed investments seek to improve the reliability and stability in seaweed supply market through collection operations in an LLC and help the finance transition or scaling of businesses through an innovative purchase agreement linked loan instrument called “SeaLess Plastic” (SLP) Loans. LLC would be a joint partnership with ASTRULI, a seaweed industry association, and local government, who already pledged investments in seaweed farming operations and collect, dry, store and sell seaweed. Operations would be strategically executed so as to coordinate annual harvests and help farmers learn the “Sulewasi farming model” compensating those who follow advice with stable and annual seaweed purchase agreements pledged by “Blue Loans”

The SPL Loans would be underwritten by local banks who would earn an origination fee that is flat for small loans and a percentage for medium to large loans. They would be liable for 10% of loan and matched with a 10% government guarantee offering a 20% insurance on any defaults ensuring rigorous due diligence in underwriting process. The loans would be priced at an annual basis with interest linked to purchase agreements that are automatically renewed at the end of each month. Companies would receive their starting rate based on the date they commitment to agree to buy seaweed. For companies looking to transition to seaweed, they would be eligible for the Blue rate contingent on purchasing within 2 months which would decrease to True Blue rate once fulfilled. Any failure to renew purchase agreement would increase rate to Out of Blue until it is renewed or loan is repaid. To the right, there is an illustration of a transitioning business who wants to finance its transition to seaweed-based products. While not eligible for the True Blue rate, the borrower can get the Blue rate and use discounted loan to fund transition and begin purchases within 2 months.

Addressable Market

With the current annual growth rate of 1.07%, Indonesia is expected to have 305.7 million citizens in 2035 and an urban population of 66.6%. The population has a high annual consumption of 700 plastic bags per capita which government is attempting to curb with taxes, bans and civic campaigns creating a demand for a seaweed-based bioplastic. For example, in the 2017 World Ocean Summit Declaration, the government committed to spend $1 billion annually on the reduction of plastic waste in order to achieve its goal to reduce plastic waste in its water by 70% within 8 years. Additionally, taxes of Rp 200 on plastic bags or Rp 30,000 on plastic per kilogram were finalized since the end of 2019. In tandem, there is a concurrent policy focus on alleviating pressures on Indonesia’s coastal sustainability with seaweed farming being promoted by the government as an alternative environmentally friendly livelihood overfishing. Coupling Indonesians’ high demand for plastic and the government’s efforts to reduce plastic pollution and promote the seaweed farming sector, Indonesia is an ideal market for biodegradable plastic substitutes.

Scalability

The first SeaLess Plastic fund focuses near one out of 10 processing plants as a starting point. Thus, this strategy could be scaled across Indonesia near other processing plants. Outside of Indonesia, the fund can target nearby nations such as Malaysia which shares many similarities with the Indonesia. Later iterations of the fund can target China, who is already one of the world’s largest producers of seaweed and is trying to curb its plastic waste levels which amount to 59.08 million tons annually, 74% of which are inadequately managed. In all, the SeaLess Plastic fund would be easily scalable within Indonesia and nearby countries and ultimately China who shares a similar high plastic demands as well as the geographical and climatic similarities.

Investor Appeal

Size of the investment, target impact, and income fund allocation would make this opportunity particularly appealing for development funds and family foundations whose have a low risk appetite. In particular, foundations and family offices whose impact non-financial goals are addressed by the Fund.

Impact Metrics

Seaweed based Plastics outcompetes every alternative on the market. As a form of extractive aquaculture, seaweed-based bioplastics not only rid the market of single use plastics but also provide Indonesia a solution towards reducing carbon emissions and coastal eutrophication while providing higher food and economic security. Completely reliant on saline or brackish water, seaweed-based bioplastics do not require scarce freshwater resources. Gracilaria’s flexibility towards pond and open-water cultivation releases huge potential areas for cultivation without infringing on limited cropland. In addition, co-cultivation with shrimp or freshwater fish in ponds could mitigate eutrophication while maximizing space.

Financial Analysis

Collection estimates are based on low to high estimated production levels from 60 farms derived from similar projects and at a selling price of .60 cents per kg. (Net Margin of .20 cents) Yield estimates are based on 136 loans fully amortized annual loans at the “Blue Rate” distributed based on business size with the largest concentration (74%) on small businesses. No reinvestment is considered.

Media

Following images feature details of award placing teams. While we managed to obtain one of the available prizes, the overall winner was an ETF-Refugee fund. Our team, alongside the runner team received the same prize amount and were recognized. Hence, many of the media mentions showcase the winner while mentioning our project in the details.

The Challenge: Mobilizing Finance to Improve the World | Morgan Stanley

This year, Northwestern University's Kellogg School of Management celebrates a decade of hosting the Challenge and fostering exciting innovations in sustainable investing. As lead sponsor of the event for the last seven years, Morgan Stanley's Institute for Sustainable Investing has been a proud supporter of the Challenge and looks forward to continuing to build sustainable investing capacity for the next generation of finance professionals.

The Sustainable Investing Challenge has become a leading indicator of talent and ideas

ImpactAlpha, Apr. 15 - MBA programs generally teach students what's achievable using common investment tools like venture capital, private equity and debt. Business (and public policy) students competing in this year's Kellogg-Morgan Stanley Sustainable Investing Challenge have been challenged first to imagine what's possible, then to engineer a financial instrument to make it happen.

Refugee ETF Wins 2020 Kellogg-Morgan Stanley Sustainable Investing Challenge

NEW YORK--()-- Morgan Stanley's Institute for Sustainable Investing and Northwestern University's Kellogg School of Management today announced that the Refugee ETF team was named the winner of the 2020 Kellogg-Morgan Stanley Sustainable Investing Challenge. The team was one of 12 finalists competing in the digital Challenge on Friday, April 17th.

Refugee ETF Wins 2020 Kellogg-Morgan Stanley Sustainable Investing Challenge

The MarketWatch News Department was not involved in the creation of the content. Morgan Stanley's Institute for Sustainable Investing and Northwestern University's Kellogg School of Management today announced that the Refugee ETF team was named the winner of the 2020 Kellogg-Morgan Stanley Sustainable Investing Challenge.

Refugee ETF Wins 2020 Kellogg-Morgan Stanley Sustainable Investing Challenge

Morgan Stanley's Institute for Sustainable Investing and Northwestern University's Kellogg School of Management today announced that the Refugee ETF team was named the winner of the 2020 Kellogg-Morgan Stanley Sustainable Investing Challenge. The team was one of 12 finalists competing in the digital