The Chain: Indonesian Sustainable Financing, new EU declarations, and more

Palm oil sector first in pilot project on Indonesian Sustainable Financing

On November 23, 2015 eight Indonesian banks committed to implementing sustainable financing as part of their global environmental goals. This move follows the earlier launch of the Sustainable Financial Roadmap by the Financial Service Authority of Indonesia, locally known as OJK, on December 5, 2014.

The eight banks involved are Mandiri, BRI, BCA, BNI, Bank Muamalat, BRI Syariah, Bank BJB (Banten dan Jawa Barat) and Bank Artha Graha Internasional. These banks will be involved in the “first step to becoming a sustainable bank” pilot project, with the initial phase looking at the palm oil sector. The participating banks represent a significant section of the Indonesian banking sector, with a combined share of 46 percent in total Indonesian banking assets.  The group also include the top three financiers of the Indonesian palm oil sector: Mandiri, BNI and BRI. The largest, Mandiri, had outstanding loans to palm oil plantations totaling some IDR 49 trillion (USD 3.57 billion) as of September 2015, rising nearly 9 percent year-on-year.

The pilot project will start in January 2016 and will run for one and a half years. OJK, along with the global NGO World Wildlife Fund, has developed a guidebook as one of the tools for the preparation of sustainable finance regulations in 2016. To support this pilot project, OJK and the environment ministry, have formed a task force to identify companies that have implemented environmentally friendly principles and fully comply with the government’s Environmental Impact Analysis (Amdal) regulations.

Two new declarations show EU support for sustainable supply chains

This week the Dutch government, which will assume the EU presidency early next year, launched two declarations supported by EU member states, EU business organizations and various companies on commitments towards sustainable palm oil and combatting deforestation through agricultural commodities. The first is a commitment to support “100% Sustainable Palm Oil in Europe by 2020” that defines sustainable palm oil “as a stepping stone approach, working towards RSPO certified (or equivalent) at minimum, and aim to build upon existing declarations and commitments on sustainable palm oil in Europe.”

The second declaration is further signed by government ministers from Denmark, France, Germany, Netherlands, and UK “Towards Eliminating Deforestation from Agricultural Commodity Chains with European Countries.” The statement “declares ourselves supportive of the private-sector and public initiatives to halt deforestation by no later than 2020,” while also “recognizing that many companies have even more ambitious targets as for example expressed in the New York Declaration on Forests” at the September 2014 UN Climate Summit.

Mixed signals in Indonesia’s response to the haze crisis

As detailed in a recent Chain Reaction Research report [analysis] this year’s fire outbreaks could cost Indonesia close to USD 35 billion in revenue and create significant market risks for companies and investors operating in the region. The Indonesia’s Ministry of Environment and Forestry has responded to the crisis by announcing instructions to ban the conversion of peatlands, the use of fire and planting on burnt lands. In addition, Indonesia is reportedly planning to form a new government agency, directly overseen by President Jokowi, designated to manage the country’s peatland restoration efforts. The government has informally committed to restoring two million hectares of peat in Kalimantan and Sumatra in order to minimize the risk of future fires. In addition, Indonesia’s second largest pulp and paper company, Asia Pacific Resources International Holdings Limited (APRIL), announced last week during the Paris climate talks that it would invest $100 million over 10-years to expand protection and restoration of carbon-rich peatlands in central Sumatra.

Ongoing divisions “between Indonesian government ministries over how to tackle peatland fires” have publicly surfaced in the wake of the government’s actions, with Agriculture Minister Amran Sulaiman reportedly contradicting the Environment and Forestry Minister by stating that burnt peatland in Kalimantan may now be used to plant commodities such as corn and soy. Meanwhile, the governments of Indonesia and Malaysia recently announced the formation of a new palm oil cartel, the Council of Palm Oil Producer Countries (CPOPC), in an effort to exert greater price control. Even as President Jokowi has stated the country will take “real actions” to address peatland and forest destruction, many observers remain concerned that the president’s instructions have not been made legally binding through a formal regulation (Perppu), and that the new CPOPC partnership could potentially undermine private-sector progress over the last two years to eliminate deforestation.