Investors Face Indirect Exposure

February 4, 2017
By financing the massive expansion of the palm oil sector, banks are contributing to deforestation, peat development and social conflicts. Analysis of bank financing – both loans and equity and debt underwriting – of 16 major palm oil companies from 2006-2015 shows that banks are more important financiers than equity and debt investors. This means that investors in these banks also are exposed indirectly to sustainability risks. The adoption of no deforestation policies by banks has an impact, but too many banks have not yet adopted such policies.

Key Findings

• More loans, more bonds and less shares. The 16 selected large oil palm growers and traders attracted more loans per year in the period from 2006-2015 and issued more bonds. Only share issuances showed a negative trend.
• Loans are becoming more important than bonds over time. Both new loans and new bond issuances are growing faster than the total assets of the companies, but the growth of loans is stronger. This means that banks have strengthened their position as the main external financiers of the sector. Investors in important banks are thus exposed indirectly to sustainability risks in the palm oil sector.
• SE Asia banks are the most important lenders to these palm oil companies, closely followed by East Asian and European banks. Banks from North America, Australia and other regions play a smaller role. Banks from different regions seem to respond similarly to upward and downward changes in the market.
• Malaysian and U.S. banks dominate underwriting. Indonesian banks do not play as relevant a role in underwriting compared with Malaysian banks.
• Companies which improved their sustainability performance 2010-2015 may have attracted more loans and issued more bonds. Companies that did not improve their sustainability performance also attracted more loans, but did not issue bonds. These companies, which are lagging behind in terms of environmental and social commitments, avoid the bond markets and rely strongly on bank financing.
• Of the 17 most important banks, only three have adopted strong ESG policies on the palm oil sector. Another seven have a policy, which needs further improvement, while seven banks have a weak policy or no policy at all.
• The stronger the ESG policies of banks, the more their loan portfolio focuses on companies, which appear to have improved their sustainability performance, 2010-2015. Banks thus seem to bring their policies into practice.
• It appears companies that have not improved their sustainability performance, increasingly rely on loans from banks that have weak ESG policies. These banks mainly come from Indonesia, Malaysia, Singapore and the United States.

Download as PDF: Banks Financing Palm Oil