Nordic investments in banks financing Indonesian palm oil

Monday, May 1, 2017

Sweden and Norway - Banks are vital to the rapidly expanding Indonesian palm oil sector. Most palm oil companies need to borrow money to establish oil palm estates. An investment of at least USD 50 million is needed to convert land/forest into a 10,000-hectare fruit-bearing oil palm estate. This report looks at six main banks financing oil palm expansion in Indonesia. Four of them are Indonesian, while two are from Singapore.

The four largest Indonesian banks are Bank Mandiri, Bank Rakyat Indonesia (BRI), Bank Negara Indonesia (BNI) and Bank Central Asia (BCA). Bank Mandiri, BNI and BRI are the three largest lenders to the Indonesian palm oil industry, and BCA is likely the fourth largest. Some facts:

- Palm oil is an important business for these banks, as the palm oil sector accounts for approximately 8% of their total lending.

- These four banks account for approximately half of all lending for Indonesian oil palm development.

- By the end of 2016 these four banks had outstanding loans to the Indonesian palm oil sector totalling an estimated USD 12.5 billion.

- Since the beginning of 2014, outstanding agriculture sector loans with these four banks have increased by 70%. BRI and BNI in particular have been expanding their palm oil portfolios rapidly.

The two Singaporean banks reviewed for this report are its two largest: Oversea-Chinese Banking Corporation Limited (OCBC) and DBS Bank. Neither OCBC nor DBS publish details of the amounts they loan to the Indonesian palm oil sector. However, several indicators – such as their lending to companies listed on the Indonesia Stock Exchange – point to the fact that these banks are among the largest lenders to the Indonesian palm oil sector.

Banks are not taking their sustainability role

Two recent developments have accelerated the process of transition towards sustainable practices for the Indonesian palm oil industry:

- Major players in the supply chain have signed No Deforestation, No Peat, No Exploitation (NDPE) policies. These NDPE policies include commitments to the concept of Free, Prior and Informed Consent (FPIC) for indigenous and other local communities, zero burning, preventing poor working conditions, and preserving High Conservation Value (HCV) areas, High Carbon Stock (HCS) areas and peatlands.

- After Indonesia’s haze disaster of late 2015, which resulted in enormous environmental and economic losses for the country, the Indonesian government signed a binding regulation on peatlands. Currently, developing oil palm on peatlands is forbidden.

Meanwhile, the banking sector has shown little progress on the sustainability front. The only achievement in this regard appears to be that more responsible banks are more inclined to do business with more responsible companies. The main banks supporting oil palm development are happy to finance any company’s operations as long as the economics of their loans look good.

Sustainability policies of the six Southeast Asian banks

 

Earlier, in 2015 and 2016, different NGOs conducted four assessments on responsible financing by banks. These assessments show international banks from the United States, Europe, Australia and Japan integrating sustainability concerns into their lending behaviour better than their counterparts from Indonesia and Singapore.

 

Recent reviews of the sustainability policies of six Southeast Asian banks conducted for this report confirm the findings of these earlier assessments. The six banks covered in this report appear to fall seriously short on applying sustainability criteria in approving loan requests from the palm oil sector. Furthermore, none of these banks have publicly disclosed any concrete sustainability requirements with regard to financing palm oil, or any sustainability engagement with clients. In general, their public disclosure at best merely pays lip service to sustainability.

 

Practices at odds with responsible financing

 

The Southeast Asian banks highlighted in this report offer minimal public transparency. However, the study did manage to identify significant clients these banks are financing. Loans from the six banks can be linked to nine large palm oil companies operating in Indonesia whose oil palm estate operations have caused deforestation, peatland destruction and/or violations of human rights. In some cases, activities by these palm oil companies appear to be in contravention with Indonesian policy, regulations and law. The banks should have identified these issues before agreeing to lend money, and clearly failed to carry out sustainability due diligence; a process for identifying, preventing, mitigating and accounting for actual or potential adverse impacts.

 

Nordic investors in the six Southeast Asian banks

 

Nordic asset managers have direct shareholdings worth more than USD 2 billion in the six main banks financing Indonesian oil palm operations (BRI, Bank Mandiri, BNI, BCA, OCBC and DBS). Most Nordic asset managers are also a client of the world’s largest asset managers, such as Blackrock and Vanguard. These indirect shareholdings (also in the six banks) of the Nordic asset managers have not been assessed for this report.

 

The Nordic investors with the largest amounts of money invested in the six Southeast Asian banks are the Norwegian Government Pension Fund Global (GPFG) with USD 1.3 billion, and Nordea with USD 0.3 billion. Remaining members of the top five are AP-fonderna with investments of USD 163 million, Swedbank with USD 140 million and Handelsbanken with USD 66 million.

 

Together these Nordic asset managers have leverage to enhance responsible lending policies and implementation by the six Southeast Asian banks. Some Nordic investors already have individual leverage on grounds of the size of their shareholdings in the Asian banks highlighted in this report. GPFG is among the ten largest shareholders of Bank Mandiri, DBS and OCBC, while Nordea is among the ten largest private shareholders of BRI and BNI.

 

In response to questions for this report, most Nordic investors confirmed they had yet to engage with any of the six banks on palm oil sustainability. On the positive side, most asset managers stated their potential interest in participating in a joint initiative to engage with the six banks.

 

Nordic financial institutions’ policies are not fully aligned with the NDPE policies common in the oil palm market place, and increasingly common for all agricultural, including estate crop commodities. Conservation of High Carbon Stock forests and peatlands are often not included in their policies, and some Nordic asset managers have yet to show their full commitment to respecting the principle of Free, Prior and Informed Consent (FPIC) for indigenous and other local communities.

READ THE FULL REPORT

 

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