SINGAPORE — A new risk analysis released today by Chain Reaction Research (CRR) finds that deforestation and other sustainability issues pose major financial risks to palm oil giant Bumitama Agri. If the issues are not resolved, they could dramatically affect Bumitama’s access to its primary customers as well as global capital markets. However, the company has recently made serious moves towards addressing these issues, positioning itself to avoid some of the largest risks.
The CRR analysis comes in the wake of a wave of new policies from the world’s largest palm oil companies that commit to deforestation-free sourcing. Both of Bumitama’s largest buyers, Wilmar International and Golden Agri-Resources (GAR), have announced strong industry-leading policies that commit them to cease purchases from companies engaged in deforestation, peatland conversion, or serious human rights abuse.
The analysis shows that if both Wilmar and GAR dropped contracts with Bumitama due to the serious sustainability issues outlined in the report, the company’s profitability and Return on Equity (RoE) would be severely impacted. Recently, however, Bumitama launched high carbon stock pilot studies on five of its subsidiaries, and has ended three contracts with growers using legally disputed land. As part of this effort, it has set aside a total of 13,000 hectares for conservation. The analysis finds that although the company still faces some financial liabilities due to past deforestation, it is likely to avoid the most serious threats to market access if it continues and expands its current sustainability initiatives.
“With the palm oil sector undergoing a radical transformation right now, we wanted to take a closer look at one palm oil company to see if serious risks are being ignored,” said Jan Willem van Gelder, Director of CRR partner Profundo. “Bumitama is a fast-growing plantation company that has had serious sustainability issues in the past.”
“The good news is that Bumitama seems to be taking this challenge to its business model seriously,” said Glenn Hurowitz, Managing Director of CRR partner Climate Advisers. “Its recent actions are very positive. Now, Bumitama should move to create its own comprehensive forest conservation policy with a transparent implementation plan. That’s what its customers are demanding in order to keep doing business with the company.”
As part of their analysis, CRR assessed the legal status of Bumitama’s land bank, and claims on it by other parties. Of Bumitama’s land bank (206,000 ha), 41 percent is “contested,” a generic term for disputable legality, overlaps with mining concessions, claims by communities, and/or land that should be protected for ecological reasons. The analysis finds that some 10,000-20,000 ha is seriously contested, while other risks can be mitigated without major financial impacts.
Bumitama has been listed on the Singapore stock exchange since April 2012. By mid-2014 it had a market capitalization of USD 1.72 billion. The fast-growing company has more than 150,000 ha of planted oil palms in the Indonesian provinces West Kalimantan and Central Kalimantan.
Comprehensive Risk Analysis: Bumitama Agri Ltd.
October 16, 2014
Chain Reaction Research conducted a Comprehensive Risk Analysis of palm oil giant Bumitama Agri Ltd., and found that deforestation and other sustainability issues pose major financial risks. If not resolved, they could affect Bumitama’s access to its primary customers as well as global capital markets. However, the company has recently made serious moves towards addressing these issues, positioning itself to avoid some of the largest risks.
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