Bumitama Agri Ltd Update

We wanted to alert you to news on Bumitama Agri Ltd (BAL:SP) that could have a bearing on its market and access to finance. Within the last few days, Bumitama has been the subject of yet another NGO report – this one from Friends of the Earth, SumofUs, and the Forest Heroes campaign – that details illegal deforestation for palm oil. Bumitama has recently been the subject of investigations by Environmental Investigation Agency, Rainforest Action Network, Greenpeace and others regarding its deforestation and clearance in orangutan habitat, and is increasingly perceived by customers and financiers as the “bad boy” among palm oil growers when it comes to environmental performance.

In response to previous accusations, the company in April pledged to stop land clearance until environmental and social impact studies were completed. However, the new report finds that the company continued clearing forest and peatland for months after its pledge. The land clearance appears to have occurred while Bumitama was in negotiations with the RSPO.

The new report criticizes Bumitama lenders HSBC and Rabobank for financing these activities, as well as investors in IOI, which became a 31.2 percent owner of Bumitama after the company’s public listing in April 2012. The major IOI investors and lenders targeted in the report include:

  • HSBC
  • Safra National Bank of New York
  • Rabobank
  • Van Eck Associates
  • BlackRock
  • The Vanguard Group
  • Prudential
  • Emerging Global Advisors
  • California Public Employees’ Retirement System
  • Pensioenfonds Zorg & Welzijn

The report also highlights customers of and investors in Wilmar International, which purchased 56.8 percent of Bumitama’s Crude Palm Oil in 2011; however, we understand from interviews that Wilmar has been heavily engaged with Bumitama to rectify the problems identified.

Indeed, in response to the latest report and pressure from its customers and financiers, Bumitama has issued a statement saying that it has stopped all “planting activities” by the subsidiaries named in the report. While it admits non-compliance with the RSPO New Plantings Procedure, the company also claims it “did not destroy the forest or kill any orang-utans.” It also says it has entered into an MOU with Tanjung Puting National Park to restore cleared forest.

Of course, given the photographic evidence of forest and peatland clearance in this report, as well as photographic evidence of orangutan displacement by Bumitama that received global press attention, the extent to which Bumitama is resolving these questions remains unclear. NGO’s have told us that they are working to verify Bumitama’s claims; meanwhile, Bumitama investors and major customers have told us they are following the results of those investigations closely to determine their own future interactions with the company.

In advance of the report publication, several major financiers and palm oil buyers have reported urging the company to rectify its problems. The news follows the announcements by Ferrero Rocher and Unilever that they will join Nestle, Neste Oil, and other leading companies in moving towards deforestation free sourcing policies. Other global consumer companies like Kellogg’s and Mondelez have also indicated that they are developing deforestation-free sourcing policies, suggesting increased demand for palm oil from companies not engaged in deforestation or peatland clearance – and market access risks for those that are, particularly for global consumer brands. It’s unclear to what extent sustainability performance affects access to global capital markets, but that dynamic may be evolving as more banks and other financial institutions face scrutiny for connections to companies alleged to be engaged in deforestation.