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The Chain: Sime Darby’s Potential Liberian Divestment Emphasizes ESG Risks

February 14, 2019

On January 22, 2019, Frontpage Africa reported that Sime Darby put its Liberian plantation up for sale. According to the news story, Sime Darby decided on this path as the Liberian government did not meet its obligations. The decision likely relates to the stipulation in Sime Darby’s 2009 concession agreement that states the 220,000 ha concession was “free of encumbrance.” The company reportedly faces “high cost of CSR (corporate social responsibility), small land area planted and high costs of operations.”

In response to the above-mentioned article, Sime Darby has neither confirmed nor denied this information. In a statement shared with Chain Reaction Research (CRR), the company says: “The sources quoted do not represent the official views of SDP or its subsidiary, Sime Darby Plantation Liberia (SDPL). SDP acknowledges that the challenges faced by SDPL’s operations as mentioned in the article are ongoing and have been highlighted previously in various media publications.

The statement furthermore indicates that the company “is currently conducting a review on our operations in Liberia and, at the moment, there is no intention for us to expand SDPL’s planted hectarage. Any further development by SDPL will depend on the yield patterns of the trees we already planted. SDPL is also considering various other options including cooperation with international NGOs to develop smallholder programmes […] As with any of its investments, SDP continuously reviews its operations to ensure that it delivers sustainable growth and value to its shareholders.”

Sime Darby Liberia holds a landbank of 220,000 ha, with a planted area of 10,508 ha. In FY2018, Sime Darby Plantations generated 33 million RM revenues (USD 8 million) in Liberia from the production of 64,611 MT of Fresh Fruit Bunches and 15,520 MT of Crude Palm Oil. It exclusively services the domestic Liberian market.

Sime Darby Liberia has been operating at a loss (2018: RM 71 million, 2017: RM 120 million). Low FFB yields due to a prolonged dry spell (6.8 MT/ha vs 20.5 MT/ha company average), weak CPO prices realized (2,221 RM/MT vs 2,558 RM/MT in Malaysia), and high operational costs as a result of delayed land development and high CSR expenses are factors behind the losses.

The following list provides reasons why Sime Darby may not sell its Liberian operations:

  • Land expansion potential is severely limited. As reported in 2016 by CRR, 45-79 percent of Sime Darby’s landbank cannot be developed under current NDPE market conditions, whereas FPIC processes with local communities are lengthy and complex. Full concession developments would require FPIC negotiations with approximately 55 communities. This situation likely deters most potential buyers.
  • Any potential buyer may be faced with similar, if not intensified, sustainability-related business risks. These include: 1) operational risks from community conflicts, as can be witnessed by repeated instances of theft and violence around Sime Darby’s plantations, 2) legal risks from the potentially contradicting terms of Sime Darby’s concession agreement with Liberia’s Land Rights Act, 3) reputational risks stemming from Liberian and international civil society action, and 4) stranded land risks from the inability to further develop the concession.
  • A sale may not recover Sime Darby’s past investments. The company has already taken several impairments on its investment in Liberia, including a RM 118 million impairment on property, plant and equipment in 2018. It now assesses the recoverable amount of the subsidiary at RM 269.2 million, down from RM 403.6 million in 2017. Over the last two years, the group made capital investments totaling RM 197.2 million to its Liberian subsidiary. It is unlikely that a sale price recovers these investments. Sime Darby may instead attempt to turn the business into a profitable one.

The sustainability implications of a divestment would likely be severe. In recent years, several companies have divested from, suspended or mothballed their activities in Liberia. A notable example was the 2012 divestment of Vattenfall and Swedfund from biomass enterprise Buchanan Renewables, which negatively affected the livelihoods of Liberian farmers. Civil society groups have argued that sudden shutdown of such land-related projects can increase the risk of adverse human rights impacts. Divestment could also indirectly lead to an uptake in deforestation, as former workers look for alternative sources of income.

Mitigating such adverse impacts may require Sime Darby to develop a responsible exit strategy and undertake a human rights due diligence process, in accordance with the UN Guiding Principles of Business and Human Rights. Such due diligence activities may include impact assessments on the adverse impacts of the divestment itself, compensation schemes for workers and communities, and human rights due diligence of the counterparty in the sale.

This Sime Darby case emphasizes how companies and investors could face ESG risks related to deforestation and human rights. CRR flagged the stranded land value impact in November 2016. In that report, CRR concluded: “Sime Darby’s share price could devaluate due to restrictions on the concession area. Mainstream investors continue to value Sime Darby’s Liberian project assuming full concession development.”

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One Response to The Chain: Sime Darby’s Potential Liberian Divestment Emphasizes ESG Risks

  1. […] been considering a possible sale since early 2019. In February 2019, Chain Reaction Research (CRR) reported that a sale of its Liberian plantation was complicated as a result of high operational costs, a […]

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