The ongoing struggle to end banks’ relationships with controversial palm oil companies – Indonesia

Wednesday, April 10, 2019

FFG Sweden, FFG Norway, FFG The Netherlands,FFG Indonesia

The problem

Palm oil plantations and refineries are one of the most popular short- and long-term investments in Indonesia, receiving financing from all over the world, and its tropical climate has supported Indonesia in becoming one of the largest crude palm oil producers worldwide. Over the past decade, more than $50bn has been invested in the Malaysian and Indonesian palm oil sectors, where commercial banks are important sources of capital.[1] However, this lucrative industry is frequently linked to major concerns, including: deforestation and peat development and drainage (contributing to climate change); habitat and biodiversity degradation; and human rights violations, as (agricultural) land and forests are often cleared for the development of the plantations. Workers’ conditions on the large-scale plantations are often poor, small-scale producers receive little benefit, and women in the industry have been marginalized.

In 2015, ResponsiBank Indonesia (the Fair Finance Guide in Indonesia) released a report, Bank Investments on the Palm Plantation of PT. Wira Mas Permai,[2] which explored one of the biggest Indonesian palm oil plantation companies, operating in Central Sulawesi. Throughout 2015, protests were held against the company as local farmers condemned its land grabbing and the effects of its plantations on water supply and crop production.

PT Wira Mas Permai was also criticized for failing to adhere to the ‘plasma obligation’. This states that a company applying for a plantation business licence for an area of 250 hectares or more must facilitate the local community’s development by providing a plantation area of at least 20% of the total for the development of palm oil smallholder plots.[3] Compliance with this rule is a main requirement for the development of palm oil plantations.[4]

Furthermore, despite the fact that countries in Europe are seen to be on the forefront of global environmental initiatives, the May 2017 FFG Sweden and Norway report, Nordic investments in banks financing Indonesian palm oil, indicated that Norwegians and Swedes have been indirectly supporting an industry that is known to have demolished huge swathes of Indonesian rainforest.[5] The report found that 12 major Nordic banks and pension funds – including the Norwegian government’s own pension fund – have invested over $2bn in six South-East Asian banks which finance more than 50% of Indonesia’s oil palm operations.[6] The Norwegian Government Pension Fund Global (GPFG) contributed the largest sum, of over $1.3bn.[7] Other sponsors included Nordea, AP-Fonderna, Swedbank, Handelsbanken, KLP, Storebrand, Länsförsäkringar, Skandia, Danske Bank, SEB and DNB. The South-East Asian backers of palm oil production that are key recipients of Nordic investments include Indonesia’s four largest banks – Bank Mandiri, Bank Rakyat Indonesia (BRI), Bank Negara Indonesia (BNI) and Bank Central Asia (BCA) – and two from Singapore, OCBC and DBS Bank.[8] These banks had provided loans to a total of nine palm oil firms, which were found to have engaged in unsustainable practices including deforestation of orangutan habitats, drainage of peat, poor fire prevention and mitigation, land disputes with local communities, violations of workers’ rights and failure to comply with the terms of the forestland release permit.[9]

Similarly, in the Netherlands, a 2017 case study by the Dutch FFG coalition exposed nine insurance groups in the country (Achmea, Aegon, Allianz, APG, Delta Loyd, Generali, Legal & General, NN Group, Vivat Verzekeringen) that invested in 10 disputed palm oil companies between 2013 and 2016, where all the companies were involved in serious deforestation and land grabbing controversies.[10]

Influencing activities

Following the release of the May 2017 report, Nordic investments in banks financing Indonesian palm oil, the Fair Finance Guide coalitions in Sweden and Norway, together with the Rainforest Foundation, called on the Nordic investors to address the issue of controversial palm oil production and engage with the banks regarding their role. The Rainforest Foundation invited the largest investors to a roundtable discussion involving 10 participants, several of whom are members of the UN-supported Principles for Responsible Investment (UN PRI) group on Palm Oil. The UN PRI is the main forum for investors globally regarding sustainability issues. During the roundtable in September 2017, the Rainforest Foundation proposed that the banks should expand the scope of the PRI group to also look at financiers’ role and responsibility. This would stimulate the sustainability requirements for lending to palm oil companies and would lead to better regulation of the Asian banks, which have few sustainability requirements for lending to palm oil companies. The FFG Sweden and Norway report also contributed to raising public awareness, and the largest English-language newspaper in Indonesia, The Jakarta Post, published an opinion piece on how Nordic investments are helping banks in South-East Asia to finance the criminal and corrupt activities of palm oil companies.[11]

TuK, a coalition member of ResponsiBank Indonesia, launched a website[12] which lists the major financiers of Indonesian palm oil plantation companies and features case studies that uncover the deforestation and human rights violations linked to some bank and investor finance. In addition, as part of a network of sub-national and national NGOs, on behalf of the Indonesian Fair Finance Guide, TuK and WALHI (Friends of the Earth Indonesia) sent letters to over 20 banks across China and Europe demanding that they stop financing the APRIL Group – one of the largest makers of pulp and paper productions in the world – due to its poor adherence to the Government of Indonesia’s regulations regarding peat protection and management.[13] ResponsiBank Indonesia also called on the Indonesian Financial Service Authority (OJK) to encourage financial institutions to uphold ESG criteria in their lending and investment policy.[14]

FFG NL mostly engaged with insurance groups in its 2017 case study. This involved sending a questionnaire to nine insurance groups, with specific questions on five topics: screening, voting, engagement, exclusion, and commitments. In order to receive points for their answers, the groups were asked to provide supporting evidence and examples of implementation. Out of the nine insurance groups, only two – Generali and Legal & General – failed to respond, illustrating increased accountability and respect for the FFG. However, the study findings revealed that although most of the groups have established screening processes, there is still a major lack of transparency within these investments, and engagement needs to be ongoing and to have clear, time-bound targets. Above all, the study demonstrated the need for insurance groups to start behaving responsibly in their investments and to ensure sustainable and just palm oil production within the companies they invest in.

Change in financial institutions

In December 2017, the UN PRI group on Palm Oil accepted the proposal of the Rainforest Foundation to expand its scope and also consider the roles and responsibilities of financiers. As a result of this change in policy, the Norwegian Government Pension Fund (GPFG) started to engage with banks about their palm oil financing. Norges Bank Investment Management (NBIM) stated in its 2017 annual report for responsible management of the GPFG, that the GPFG had ‘initiated two dialogues on the topic of deforestation. One was with commodity traders and meatpacking companies on improving standards in their supply chain beyond the Brazilian Amazon. The other was with Indonesian and Malaysian banks on their policies governing palm oil financing.’[15] The report also exposed the banks which were engaged in deforestation for palm oil development, namely CIMB Group Holdings, Malayan Banking and RHB Bank.[16] The actions undertaken by the GPFG – one of the largest financiers of palm oil – to ensure more responsible, transparent and sustainable palm oil production, sets an excellent example for other financial institutions to follow.

The publication of the various reports by the Fair Finance Guide coalitions and the accompanying social media campaigns generated much attention to the corrupt practices within the Indonesian palm oil industry. In Sweden, for example, several banks responded publicly to the report and welcomed the dialogue with the FFG coalition about the issue.[17] A noticeable change was seen in the improved policies of Handelsbanken, whose policies now require that palm oil should be certified and that companies may not lobby to undermine political measures to fight climate change – demonstrating the bank’s increased political will and societal awareness.[18]

However, in October 2018, a report by the Centre for Research on Multinational Corporations (SOMO) commissioned by FFG NL’s partner, Milieudefensie (Friends of the Earth Netherlands), examined the links between three Dutch banks (ABN AMRO, ING and Rabobank) and controversial palm oil companies.[19] It revealed that the banks offer investment funds that include shares in these selected palm oil companies, and that the banks are not informing customers about all the companies in the funds, making it difficult for customers to know whether palm oil companies are part of a fund they are investing in. The findings of this report are very disappointing, as they indicate that financial institutions in the Netherlands have not terminated or worked to improve their financial relationships with controversial industrial palm oil companies since FFG NL released its 2017 report on insurance group’s involvement in deforestation and land grabbing in the palm oil sector.

Change in companies invested in

In an effort to continue political engagement and discourse on the issue, ResponsiBank Indonesia published a White Paper to the Indonesian Financial Supervisory Authority, providing recommendations for a more sustainable financial sector in Indonesia.[20]

Although little change has been seen among the palm oil production companies, the various coalition campaigns and research as well as the protests by Indonesian local communities, have placed the issue at the forefront of public debate. For example, within the EU, negotiators came to an agreement in June 2018 to phase out the use of palm oil in transport fuels starting from 2030, mainly due to the very high indirect greenhouse gas emissions caused by deforestation and the drainage of peatlands associated with the cultivation of palm oil.[21] This new EU-wide law will certainly pose new challenges for palm oil producing companies and they will be forced to develop more sustainable practices if they want to maintain their supply to Europe, one of the biggest consumers of Indonesian palm oil.

In November 2018, members of the Roundtable on Sustainable Palm Oil (RSPO) agreed on a new palm oil standard that halts deforestation, protects peatlands, and improves human and labour rights protection. Two Dutch banks are members of the RSPO – the ING Group and ABN AMRO – meaning that these banks and all other member companies must comply with this new set of environmental and social standards in order to meet RSPO certification standards. This is likely to lead to improved practices among palm oil production companies and thus more impact on the ground in the coming years.

Impact on the ground

As yet, little positive impact has been recorded in the region affected by the palm oil plantations of PT. Wira Mas Permai. Follow-up studies conducted by TuK illustrate that to date, no solutions or compensation have been provided by the palm oil company. TuK noted that PT Wira Mas Permai continues to intimidate local communities and has not taken any specific measures to resolve the conflict over land.

TuK has continued to engage on the issue. The organization was able to review PT. Wira Mas Permai’s operational licence, together with the local government, through hearings with the Cooperative Office and the Department of Trade, and involved academics from local universities in its campaigning activities. A trade union for the plantation workers has been established, and the company eventually complied with the plasma obligation. Despite this apparently positive step, many of those who lost their land (when it was forcibly taken by PT Wira Mas Permai) were then merely recruited as workers on the plantation, meaning that their rights and requests have still not been respected.

TuK and other CSOs will continue to advocate for the rights of local communities. In addition to conflict resolution, TuK will focus on increasing the resilience of the affected communities through income diversification (mainly by diversifying their food crops).

Continued pressure on financial institutions and companies is necessary to create the positive, long-term impact that is desired. It is crucial that the case of the Central Sulawesi community does not go unheard and that financial institutions are accountable and take responsibility for their investments. It is possible to establish a sustainable, responsible and, most importantly, ethical palm oil production value chain. This case of financial institutions’ involvement in controversial Indonesian palm oil plantations will continue to be monitored by civil society actors worldwide.


Read the full report here

 

[1] BankTrack. (2018). ‘Banks and Palm Oil’. February 8, 2018. https://www.banktrack.org/campaign/banks_and_palm_oil (last accessed December 6, 2018).

[2]ResponsiBank Indonesia. (2015). ‘Bank Investment on Palm Plantation in PT. Wira Mas Permai, Central Sulawesi’. https:// fairfinanceguide.org/ffg-international/case-studies/2015/bank-investment-on-palm-plantation-in-pt-wira-mas-permai-central-sulawesi/ (last accessed December 5, 2018).

[3] Bobby Noer Rahman. (2016). ‘Indonesia: “Plasma Obligation” For Oil Palm Plantation Business Established Prior To The Issuance Of Regulation Of The Indonesian Minister Of Agriculture No.26/200’. Mondaq. February 17, 2016. http://www.mondaq.com /x/467128/Inward+Foreign+Investment/Plasma+Obligation+For+Oil+Palm+Plantation+Business+Established+Prior+To+The+Issuance+Of+Regulation+Of+The+Indonesian+Minister+Of+Agriculture+No262007 (last accessed December 9, 2018).

[4] Ibid.

[5] Rainforest Foundation Norway, FFG Norway and FFG Sweden (2017). ‘Nordic Investments in banks financing Indonesian Palm Oil’. https://d5i6is0eze552.cloudfront.net/documents/Publikasjoner/Andre-rapporter/Executive-summary-Nordic-investments-in-banks-financing-Indonesian-palm-oil-ID-39926.pdf?

[6] Ibid.

[7] Vemun Olsen. (2017). ‘New report linking Nordic banks and government pension funds to Indonesia’s palm oil deforestation’. BankTrack. May 30, 2017. https://www.banktrack.org/news/new_report_calls_out_nordic_countries_commitment_to_ forest_protection_by_linking_nordic_banks_and_government_pension_funds_to_indonesia_s_palm_oil_deforestation (last accessed October 9, 2018).

[8] Ibid.

[9] Rainforest Foundation Norway, FFG Norway and FFG Sweden. (2017). ‘Nordic investments in banks financing Indonesian palm oil’, page 8. https://fairfinanceguide.se/media/373720/2017-05-29-final-report-nordic-investments-in-banks-financing-indonesian-palm-oil.pdf

[10] FFG NL. (2017). ‘Deforestation and Land Grabbing in the Palm Oil Sector’. https://fairfinanceguide.org/media/373737/2017-05-deforestation-and-land-grabbing-in-the-palm-oil-sector-nl.pdf

[11] Nurkholis Hidayat. (2017). ‘Dealing with banks involved in financing crimes’, The Jakarta Post, November 23, 2017. http://www.thejakartapost.com/academia/2017/11/23/dealing-with-banks-involved-in-financing-crimes.html (last accessed December 6, 2018).

[12] http://forestsandfinance.org/

[13] Okto Yugo. (2017). ‘30 Indonesians NGOs Urge APRIL’s buyers and Banks’, Jikalahari, November 27, 2017. http://jikalahari.or.id/kabar/30-indonesians-ngos-urge-aprils-buyers-and-banks/ (last accessed December 6, 2018).

[14] Anugerah Perkasa. (2015). ‘KERUSAKAN LINGKUNGAN: Bank Didesak Tinjau Ulang Kinerja Debitur’, Bisnis, October 30, 2015. http://finansial.bisnis.com/read/20151030/90/487544/javascript (last accessed December 6, 2018).

[15] Norges Bank Investment Management. (2017). ‘Responsible Investment: Government Pension Fund Global /2017’, page 39. https://www.nbim.no/contentassets/67c692a171fa450ca6e3e1e3a7793311/responsible-investment-2017---government-pension-fund-global.pdf

[16] Ibid., page 40.

[17] FFG Sweden. (2017). ‘Bankernas kommentarer på rapporten’. https://fairfinanceguide.se/media/373721/bankernas-kommentarer.pdf (last accessed October 9, 2018).

[18] Handelsbanken Guidelines. https://www.handelsbanken.se/shb/INeT/IStartSv.nsf/FrameSet?OpenView&iddef=& navid=Investor_Relations_En&sa=/shb/inet/icentsv.nsf/Default/qDE9EFF7539EF53B9C1257EC0004AC89F (last accessed December 6, 2018).

[19]  Myriam van der Stichele. (October 2018). 'The untold story about the link between Dutch banks and industrial palm oil companies.' Somo. https://www.somo.nl/nl/wp-content/uploads/sites/2/2018/10/Rapport-Palmolie-web.pdf

[20] ResponsiBank Indonesia. White Paper. https://responsibank.id/media/494859/white-paper-revisi-uu-perbankan-final-pdf.pdf

[21] Robert-Jan Bartunek and Alissa de Carbonnel. (2018). ‘EU to phase out palm oil from transport fuel by 2030’. Reuters, June 14, 2018. https://www.reuters.com/article/us-eu-climatechange-palmoil/eu-to-phase-out-palm-oil-from-transport-fuel-by-2030-idUSKBN1JA21F (last accessed December 18, 2018).

 

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