SE Asian corporations – Golden Agri-Resources, Kuala Lumpur Kepong, Sime Darby, Olam International, Wilmar International, and Felda Global Ventures – are seeking to expand their palm oil business in West and Central Africa. Palm oil has been identified as a driver of both tropical deforestation and climate change, and this expansion also often has financial risks due to concerns about negligence of communities’ rights and environmental impacts. At the same time, countries supporting palm oil expansion are often post-conflict, fragile states seeking development and investments, dealing with weak governance and legal systems and lack instruments to stimulate and regulate responsible management practices.
Investments in Africa since 2008 illustrate both systemic and company-specific material financial risks. For example, the experiences of investors and corporations expanding into Liberia illustrate that it is important to absorb lessons from previous SE Asian investments regarding specific social and environmental risks and opportunities.
- Operational Risks: Hazards to investments can threaten the economic viability of projects when key risk management lessons are not applied in frontier markets. For example, relying on government assurances has proven to be insufficient in securing title when land banks are contested.
- Stranded Assets Risk: Contested land bank reduces future growth and impacts investor value. Key drivers are difficulty in forecasting public policies, governance risk, land-tenure disputes resulting from unclear customary and legal ownership, and international deforestation policy commitments and regulatory changes to halt climate change.
- Financial Risks: Failure to obtain free, prior, and informed consent (FPIC) from local communities can result in cash flow disruption. For example, every SE Asian investment in Liberia has been subject to delays, community conflicts, and complaints filed with the Roundtable on Sustainable Palm Oil (RSPO).
- Reputational Risk: Violations of procurement policies and ESG criteria imposed by investors, buyers, and certification standards can damage companies’ reputation. This increases revenue-at-risk and earnings volatility, and may increase the cost of capital as lenders price risks more accurately. For example, civil society has had success in monitoring current and proposed corporate actions in Liberia.
- Regulatory and Procurement Risks: Companies relying on land conversion for large-scale plantations may no longer be compliant with corporate buyers’ procurement policies regarding environmental and social risks, and international deforestation policy commitments.
- Palm Oil in Africa Can Succeed: Effective financial risk management aligned with investors’ expectations and local communities’ requirements and avoiding deforestation and biodiversity impacts can drive long-term financial returns. Large-scale concession models may become obsolete. Schemes that integrate smallholders and respect customary land rights are a precondition to create mutual benefits for both sides and value creation.