The Chain: Norwegian Government Pension Fund’s Soy Company Exclusion Linked to Deforestation, No Longer Invested in SLC Agrícola

The Norwegian Government Pension Fund has slowly ramped up its response to deforestation concerns within its portfolio. The Fund has a history of addressing risks in sectors and companies that it considers prone to long-term risks. This included companies that face elevated risks from environmental, social, and governance (ESG) issues. Between 2012 and 2015, the Fund dropped investments in 29 palm oil companies. In 2016, this focus expanded to included pulp and paper, leading to a decision to exclude four additional pulp and paper companies from the Fund’s portfolio that year. The Fund’s 2017 annual report stated that for the first time, the Fund excluded a soy company due to deforestation, suggesting continued concern over risks in the forest sector.

The Fund’s 2017 annual report laid out their policies regarding deforestation. On p. 81, the Fund stated:

Soy production: The production of soy has been linked to deforestation in Brazil, as previously forested areas are converted to agricultural land. Certain land conversion practices can result in increased greenhouse gas emissions, reduced biodiversity, increased water stress and pollution of existing water sources, as well as negative impacts on local communities. Evolving standards, such as the Round Table on Sustainable Soy, aim to mitigate the negative impacts of soy production.

When assessing companies, we consider the geographical footprint of their operations, the percentage of the business linked to the production of soy and other agricultural commodities, documented land conversion activities and the percentage of their operations certified by the Round Table. Our analysis resulted in the divestment from one company in 2017 (emphasis added).

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Tunas Baru Lampung: Contested land and peat clearing could drive substantial value loss

Tunas Baru Lampung (TBLA) is an integrated palm oil and sugar cane company established in 1973. It was publicly listed on the Jakarta Stock Exchange in 2000. TBLA is a member of the Sungai Budi Group, which is one of Indonesia’s largest manufacturers and distributers of agricultural consumer products. As of January 2018, 46 percent of the company’s shares were publicly listed. TBLA’s oil palm landbank is estimated at 88,660 hectares (ha), located in South Sumatra and West Kalimantan. In addition, the company converted two plantations – PT Dinamika Graha Sarana and PT Bangun Nusa Indah Lestari – to sugar cane in 2017. TBLA aims to grow its plantations with 2,000-4,000 ha per year in addition to the 74,060 hectares already developed.

The company’s palm oil operations are vertically integrated. Besides its plantations, TBLA possesses three mills, two palm oil refineries, three processing facilities for soap and margarine and one biodiesel plant. Its two refineries are located in Lampung and Sidoarjo. They have processing capacity of 51,000 MT/year and 30,000 MT/year respectively.

Key Findings

  • An estimated 75 percent of TBLA’s landbank is contested. Since 2014, TBLA has cleared almost 7,000 ha of peatland and forest across its concessions and it has been involved in four reported social conflicts. TBLA’s total oil palm landbank equals 88,660 ha, of which 74,060 ha are already developed and planted with oil palm. The remaining 14,600 ha, 16.5 percent of the total landbank, are still covered with peat, peat forest and forest.
  • Several TBLA clients have engaged the company on sustainability issues. The issues raised by TBLA’s clients increase the likelihood of its suspension from the No Deforestation, No Peat, No Exploitation (NDPE) market. As a result, the company could be limited to supplying the ‘palm oil leakage’ market. Whereas its vertically integrated business model allows TBLA to circumvent trader/refiner NDPE policies, its sales to consumer goods companies with zero-deforestation commitments are at risk.
  • TBLA’s recent peat clearance violates Indonesia’s peat moratorium. The company faces regulatory risk from these violations at several plantations, in the form of fines, stop-work orders, loss of business permits and operational licenses, and loss of tender eligibility for subsidized biodiesel supply.
  • As a result of non-compliance with clients’ NDPE sourcing policies, 10 percent of TBLA’s revenues are at risk. Additionally, TBLA’s violations could result in a 1-year permit freeze resulting in a decrease of eight percent of its revenue. Jointly these negative effects could equal to 26 percent of TBLA’s equity value. The company may also face increased cost of capital in the future.
  • To mitigate potential revenue losses, TBLA may opt to restore its peat lands. TBLA might also need to set aside an additional 13 percent of its land for peat restoration. These two changes equals 16 percent of the company’s equity.

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The Chain: A Tale of Two Indonesian Green Bonds

Over the past two weeks, two green bonds were issued in Indonesia. The Government of Indonesia issued a USD 1.25 billion green sukuk bond – a government first – while Tropical Landscapes Finance Facility (TLFF) issued a USD 95 million sustainability bond.

Both bonds target some of their proceeds towards sustainable landscapes, but these two bonds are a study in contrasts. The TLFF bond has a clear approach to deforestation risk mitigation while the green sukuk includes an “element of deforestation.” Continue reading

The Chain: Unilever and Nestlé Publish Detailed Supplier Lists

In February Nestlé and Unilever both published a list of all their direct and indirect palm oil suppliers and mills. These two consumer goods companies are major players in the global palm oil industry, and purchase about four percent of palm oil production globally. Most of the larger palm oil traders and refiners, such as Musim Mas, often suppliers to Nestle and Unilever, had already published similar lists.

Unilever CEO Paul Polman telegraphed this move earlier in the year in a speech at the World Economic Forum in Davos, saying that:

“A lot of people think if you outsource your value chain you can outsource your responsibilities. I don’t think so. We need to be at the forefront of change. This is why Unilever is committed to greater transparency and continue to work with our partners to drive positive change in the palm oil industry.”

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The Chain: Government of Indonesia Backtracks on Palm Oil Standards while Industry and Investors Demand NDPE and Supply Chain Transparency

In 2018, corporate palm oil buyers concerned about reputational and financial risks are looking for sellers whose product is covered by reliable No Deforestation, No Peat, No Exploitation (NDPE) policies. But the Government of Indonesia has proposed moving in the opposite direction, loosening requirements for a certification program known as the Indonesian Sustainable Palm Oil Standard (ISPO) aimed at making their product attractive to buyers.

ISPO was first deployed in 2009 as a means for increasing the sustainability of Indonesian palm oil. While it was mandatory in comparison with RSPO, its requirements were much less stringent. In part because companies using ISPO continued facing allegations of human rights abuses and land grabs, it didn’t reach the same level of international recognition as the RSPO certification.

In January 2018, the new draft regulation written by the Government of Indonesia on the Indonesian Sustainable Palm Oil Standard (ISPO) certification showed the Government of Indonesia is considerably weakening the standard. The changes proposed by the Government of Indonesia would, among other things, remove independent monitoring and replaces the word “protection” with “management” with respect to natural ecosystems.  Continue reading

The Chain: Pepsi Suspends Palm Oil Purchased from Indofood Agri Resources, Broadening Supply Chain Policies


On January 24, PepsiCo announced that the company and its joint venture with Indofood Sukses Makmur, IndoFood Fritolay Makamur (IFL), had suspended purchasing palm oil from Indofood Agri Resources (IndoAgri). Pepsi stated it made this procurement decision because “PepsiCo is very concerned about the allegations that our policies and commitments on palm oil, forestry stewardship and human rights are not being met.”

PepsiCo has been subject to NGO pressure for its ties to IndoAgri in the past. In 2016, the Rainforest Action Network (RAN), OPPUK – a local labor rights organization, and the International Labor Rights Forum documented alleged labor grievances against IndoAgri including laborers under 18 years of age, low pay, health and safety conditions, production quotas, and use of informal labor. In its updated 2017 analysis, the coalition called out PepsiCo’s supply chain for its “conflict palm oil,” writing in that “workers’ testimonies contradict Indofood’s statements related to Freedom of Association.” RAN filed a formal complaint for breaches of the labor rights laid out by the Roundtable on Sustainable Palm Oil (RSPO) was filed against Indofood subsidiary PT PP London Sumatra Indonesia Tbk in October 2016 and is still ongoing. A 2017 report by Chain Reaction Research showed that 36 percent of the Crude Palm Oil (CPO) processed by Indofood came from undisclosed sources, creating reputational risks for purchasers. Continue reading

The Chain: Potential ADM Takeover of Bunge Carries Uncertain Supply Chain Impacts

On January 19, the Wall Street Journal reported that ADM was considering making a hostile takeover bid for Bunge similar to Glencore’s unsolicited bid in May 2017 that led to Glencore and Bunge agreeing to a “standstill” agreement that prevents Bunge from further unsolicited bids. J.P. Morgan analyst Ann Duignan reported that this agreement “ends in the next few weeks,” at which point it is possible that Glencore and ADM may enter into a bidding war for Bunge. Since the announcement, last week ADM shares were up 7.7 percent and Bunge’s shares were up 5.5 percent versus gains in the S&P 500 of 2.2 percent. ADM also owns 24.9 percent of Wilmar International, the largest global palm oil trader.

Bunge had announced last September 2017 that it was acquiring a 70 percent controlling ownership interest in IOI Corporation’s Loders Croklaan specialty fats business for USD 946 million.

ADM, Bunge, ADM’s Wilmar investment, and Bunge’s Loders Croklaan investment all have significant deforestation supply chain commitments. The proposed acquisition would require integration of these four firms’ supply chain tracing and tracking tools. This could benefit the market as Wilmar’s No Deforestation, No Peat, No Exploitation upstream commitment and its public dashboard does inform key buyer Loders Croklaan’s ability to achieve its own NDPE commitment, positively impacting Loders’ EU market sales position.

Both companies have No Deforestation, No Exploitation (NDE) commitments for soy as well, but ADM’s commitment is more advanced and innovative as it also includes no deforestation of High Conservation Value and High Carbon Stock areas. Yet both have remaining gaps addressing excluding legal deforestation and providing full supply chain transparency from farm to mill. Chain Reaction Research highlighted these issues in its December 2017 report Bunge: Key Position in Cerrado State Puts Zero-Deforestation Commitment at Risk. Continue reading