Indonesian financial institutions face increased risk from unsustainable palm oil
A new report by the Roundtable on Sustainable Palm Oil (RSPO) and Landscape Indonesia highlight that Indonesian financial institutions are facing increasing reputational, regulatory, and financial risks by funding unsustainable palm oil producers.
Co-authored by Jan Willem van Gelder of Profundo, Pablo Pacheco of the Center for International Forestry Research (CIFOR) and Agus Sari, CEO of Landscape Indonesia and senior associate at the World Agroforestry Centre (ICRAF), the report traces the routes by which unsustainable palm oil practices may translate into increasing risks for the banks and investors financing them.
The report “Managing Palm Oil Risks: A brief for financiers” was launched December 12 by the Roundtable on Sustainable Palm Oil (RSPO) and Landscape Indonesia and it sets out a clear way forward for banks wishing to take the bold step to transition their current palm oil portfolio towards one that is more supportive of sustainable economic development in Indonesia.
The environment in which Indonesia’s palm oil sector operates is changing. Major stakeholders, including governments and refineries, are taking measures to manage sustainability issues, and these are creating clear risks for banks who have unsustainable producers in their portfolios, said Agus Sari, CEO of Landscape Indonesia and senior associate at the World Agroforestry Centre (ICRAF) and one of the authors of the report.
Many stakeholders are taking steps to tackle sustainability issues associated with palm oil expansion, including deforestation, peatland destruction, and forest fires, as well as land conflicts with local communities, labour issues, and corruption and tax avoidance. For example, after the devastating forest fires in 2015, the Indonesian government issued policies prohibiting the development on peat areas and limiting further expansion of palm oil.
Data quoted in the report shows that the present market and regulatory circumstances could mean that 75 percent of land which had been reserved for future expansion of oil palm plantations cannot be developed on.
Serious reputational risks
Such restrictions on producers could translate into risks for the banks financing them, as the value of collateral taken for loans predating these developments has fallen. Stricter requirements from global buyers, who are committed to source only sustainable palm oil, would mean that non-compliant palm oil producers may lose contracts, which could result in lower revenue and profits.
Additionally, the banks financing unsustainable palm oil producers face serious reputational risks. As civil society’s ability to monitor how a company’s contribution to environmental and social damages increases, a bank’s reputation can be compromised if any of their clients is found to be in breach of their sustainability requirements and this information is made public.
A new regulation issued by Indonesia’s Financial Services Authority (Otoritas Jasa Keuangan, OJK) in July 2017 outlines that banks are required to report on sustainability and to have a sustainable finance action plan. The regulation specifies penalties for non-compliance and builds on the OJK’s 2014 vision that the finance sector should push for sustainable development in Indonesia.
Banks have played an important role in the steep growth of the palm oil sector thus far, and can also have a positive impact on future growth. Financial institutions, including banks through its financing decisions, can encourage companies to meet their social and environmental responsibilities. At the same time, business decisions that incorporate sustainability concerns will create stability and prosperity for the bank by limiting risk exposure, said Tiur Rumondang, Country Director for RSPO operations in Indonesia.