On 26 February 2015, Chain Reaction Research (CRR) published its sustainability risk analysis of Malaysian palm oil company Kuala Lumpur Kepong (KLK). The report gives an overview of the company, delves into the environmental and social issues it faces, and presents a financial analysis of how sustainability risks may impact the bottom line.

As noted in the report, a draft version of the sustainability risks identified was sent to KLK for review on 24 November 2014 and subsequently. KLK did not respond to CRR regarding these issues prior to publication of the report.

Two weeks after publication, on 13 March 2015, KLK issued a formal response to CRR directly. Below, we review the main issues raised in the response.

Deforestation
With regard to deforestation, the CRR report stated: “Over the last seven years, KLK has been deforesting 24,000 ha in Kalimantan. The company states that there is a report showing that these forests were not primary forest or High Conservation Value areas. This report was however never made public by KLK, so stakeholders cannot assess its value. KLK has also not published the size of the conservation areas it controls in some of its plantation areas.” In its response, KLK does not provide an answer to the concerns raised by CRR with regard to KLK’s lack of transparency. On two of the seven plantations linked to deforestation in the report, KLK has provided additional non-public information in its response. We would have included this in the report if KLK had responded previously to the draft version.

Traceability and transparency
Recently, three major palm oil traders – Wilmar, Musim Mas and IOI – have taken steps to reveal their third-party suppliers. The CRR report stressed that KLK’s supply chain governance should be a major pillar of its sustainability policy. Around 70 percent of the palm oil products that KLK sells come from the plantations of external suppliers. Very little information is publicly available about the identity and location of these third-party suppliers. KLK has now communicated that it is working to address some of these issues: “KLK is in the process of working on the traceability in its supply chain and any progress on the initiatives will be included in our first report targeted by end May 2015,” the company writes. We look forward to seeing more information on the substance of their sustainability work.

Expansion plans in Liberia and Papua New Guinea
In its response, KLK states that CRR has made use of an inflated KLK landbank. To clarify, KLK has the majority ownership (81.6%) of a landbank in Liberia comprising 21,018 ha, not 169,000 ha. However, KLK’s subsidiary, Equatorial Palm Oil (EPO), does mention the 169,000 ha on its website, and put its long-term planting target for Liberia at 145,000 ha. We recommend that EPO and KLK provide further public clarification of their plans.

With regard to Liberia and Papua New Guinea, KLK mainly highlights its efforts to engage with communities, and says that the CRR report puts too much focus on present conflicts with communities. However, there is insufficient evidence to support KLK’s assertions about implementation of Free Prior and Informed Consent (FPIC) practices now or in the future.

Two key elements of FPIC are that communities are allowed to represent themselves through their own, freely chosen representatives, and that the communities’ right to withhold consent, as expressed through those representatives, is respected. In both Liberia and Papua New Guinea, KLK has attempted to undermine long-standing community positions against palm oil development, and instead sought consent from persons without the mandate to represent the communities’ decisions on the use of their customary lands.

For its investors, customers, affected communities and concerned NGOs, we believe KLK should publicly share the details of its plans in Papua New Guinea and Liberia, and more explicitly define how the company will respect communities’ right to FPIC.

• In Papua New Guinea, KLK stated that it would abide by the court’s ruling against two of three leases it held in the Collingwood Bay area, and that it would not interfere with locals’ registration of ownership and utilization of customary land. KLK should disclose if the company or its local partners are working with any landowners to apply for registration of ownership of their customary land, and if so, in what villages and what resources the company is providing. The company should also disclose how it will meet the RSPO Principles and Criteria and its existing commitments to zero-deforestation on State Lot 5, which is largely covered in primary forests, should it proceed with palm oil development in this area.
• In Liberia, KLK and its subsidiary EPO should publicly and formally respond to the request that the company engage in a participatory mapping process to excise the eight villages in Grand Bassa County, which are party to a formal RSPO complaint against the company. The communities have already pre-empted an FPIC process by saying they do not want palm oil plantations on their land. The RSPO has just issued a preliminary decision on the case, stating that there are reasonable grounds to believe that Principle 2.2 has been breached, which states that the right to use the land by the company (in this case EPO/KLK) is demonstrated, and is not legitimately contested by local people who can demonstrate that they have legal, customary or user rights. KLK and EPO can help resolve this conflict by agreeing to a participatory mapping process with the RSPO complainants.

Providing this information would give confidence to financiers and customers that KLK’s practices will not pose material or brand risk to them.

Social issues in Indonesia
In the report, we stated that KLK has not addressed reports from Sawit Watch on the use of child labor in its operations. In its response, KLK does not address this pending issue. On another case, KLK is correct that our report incorrectly stated that, “KLK has admitted that a contractor working for PT Satu Sembilan Delapan used under-aged persons and illegally withheld wages of its workers.” Indeed, KLK has stated it took action without having any conclusive evidence. However, KLK has still not responded to the 2013 Sawit Watch field reports that showed workers being recruited by the same contractor, Handoyo, who was supposedly blacklisted in 2010. KLK should reveal its procedure for blacklisting labor contractors and what due diligence it has done to verify that Handoyo and other blacklisted contractors are no longer recruiting for the company. KLK should also disclose its practices for screening, managing and monitoring labor recruiters

With regard to the other cases on working conditions mentioned in the CRR report and KLK’s response, we have relied on information from NGOs and officials in the field. On the issue of land disputes with communities, we acknowledge that it is difficult to get accurate, updated facts from newspaper articles only. We did find evidence of two demonstrations at the PT Adei plantation, but we may have misstated that the demonstrations were still ongoing.

Looking ahead
In its response, KLK stressed that it should not be solely assessed on it past performance as a company. However, our report includes a sustainability outlook, on which KLK received a medium score. In general though, we see more value in reviewing actual practices on the ground than in assessing policies that should still be implemented, especially when KLK’s policy on supply chain governance is not yet properly worked out. While other palm oil traders have set deadlines and are moving forward to address compliance and transparency issues with third-party suppliers, KLK has still not addressed the risks of its supply chain governance and practices detailed in the report. KLK can begin to demonstrate its commitment to change by doing the following:

• Publicly sharing the details of its plans in Papua New Guinea and Liberia, as outlined above;
• Releasing its list of third-party suppliers – as industry leaders Wilmar, Musim Mas, and IOI have already done;
• Responding to outstanding reports on the use of child labor and the continued use of blacklisted contractors that hire underage children and illegally withhold wages;
• Disclosing its High Conservation Value assessments and its conservation area maps and activities.

We look forward to engaging in an honest, productive dialogue with KLK and its investors about how the company can address the company’s sustainability issues and the risks posed to its bottom line.