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The Chain: Indonesia’s haze crisis, Astra’s new policy, Lumber Liquidators’ plea deal, and more

October 28, 2015

Amidst growing haze crisis, Jokowi calls for moratorium on peatland development

The ongoing haze crisis in Indonesia has been called “the biggest climate story on the planet right now” and “a crime against humanity of extraordinary proportions” this week in the international press, and could pose significant financial and legal risks for companies and investors operating in the region. As has been widely reported, forest and peatland fires caused by agricultural development (which have been exacerbated by a deep drought) are now causing severe regional health problems and deaths, threatening endangered wildlife, and emitting enormous carbon pollution. By its own estimates, the fires have already cost the Indonesian government over $30 billion, furthering dragging the country’s economic growth, which has slowed to 4.7% – the second lowest rate in Southeast Asia. Local communities in Indonesia are now filing lawsuits against the government and the Singapore government has served notice to Asia Pulp & Paper and four smaller Indonesian companies under the Trans-boundary Haze Pollution Act, a 2014 law that allows Singapore to fine companies up to $1.4 million for polluting its air.

In response to the crisis, the Indonesian government has taken public accountability measures by investigating firms and arresting seven corporate executives in connection with fires. On Tuesday the 27th, Indonesian Vice President Jusuf Kalla said that the government was considering declaring an official national emergency to deploy thousands more troops to fight the fires. Mongabay recently surveyed six major plantation companies (APP, APRIL, GAR, Cargill, Wilmar, and Musim Mas), all of which discussed their own battles against the fires, but blamed outside encroachers or fires spreading to their concession areas. The fires may pose serious reputational risks for companies found to be violating sustainability policies, but publicly listed firms are already feeling the financial impact. Agriculture stocks in the Jakarta Composite Index have fallen 29%, ranking among the three worst performing sectoral indices this year.

In a cabinet meeting on Friday the 23rd, President Jokowi called for a moratorium on new peatland development. Civil society groups are pushing for its immediate implementation, as well as a stronger legally binding proposal “to ban any future peat licenses, and to revoke existing concessions on which development has yet to begin.” Yesterday, Jokowi cut short his much-anticipated trip to the U.S. after meeting with President Obama in order to return to the government’s management of the crisis.

Association of Banks in Singapore launches new responsible financing guidelines

The Association of Banks in Singapore (ABS) recently responded to the haze crisis in Southeast Asia by launching new industry guidelines aimed at integrating Environmental, Social and Governance (ESG) criteria into its members’ lending practices. A major report by the World Wildlife Fund earlier this year on sustainable finance in Singapore, Indonesia and Malaysia highlights the alarming gap between ESG standards adopted by financial institutions from ASEAN countries and the standards adopted by their international counterparts. The new ABS guidelines aim to systematically integrate ESG criteria into member banks’ risk assessment and lending decision-making processes, as well as to create greater transparency and accountability on ESG issues, particularly for high-risk commodities. The ABS membership spans 161 foreign and local banks, many of which are financing the regional palm oil industry. Apart from Singaporean banks such as UOB, OCBC and DBS, there are also banks from Indonesia (Mandiri Bank, Bank Central Asia) and Malaysia (CIMB, MayBank, RBH Bank) among its members, as well as international banks such as HSBC. If these banks implement strong ESG guidelines into their lending practices, it could have a significant impact on many palm oil and paper companies that raise capital through Singapore. Chain Reaction Research will continue to monitor and evaluate the implementation of these guidelines by member banks and their partners.

Astra commits to zero-deforestation, will be monitored by Norwegian pension fund

Indonesian palm oil producer Astra Agro Lestari (AALI:IJ) announced last month a new Sustainability Policy to elimination deforestation, peatland development, and human rights exploitation from its supply chain, effective immediately. The policy change follows a June 2015 announcement of a moratorium on forest and peatland clearing. The moratorium followed an investigation and civil society campaign focusing on Astra’s sister company, Mandarin Oriental Hotels, which is also owned by British conglomerate Jardine Matheson. Advocates welcomed the policy change and called for swift and transparent implementation. The move may have also saved Astra from losing investment from the Norwegian Sovereign Wealth Fund. The fund had previously been considering a measure to exclude Astra for ethical violations, but instead opted to place the company under observation in consideration of its new policy commitment.

Lumber Liquidators takes plea deal for U.S. Lacey Act violations

A U.S. court last week accepted a plea deal for the hardwood flooring retailer Lumber Liquidators (LL:US) to pay over $13 million in fines and penalties for violating the Lacey Act, a law that forbids U.S. importation of wildlife and forest products sourced illegally. The case represents the first time a major U.S. company has been found guilty of illegal wood imports under the Lacey Act. In addition to the fines and penalties, Lumber Liquidators will be placed on a 5-year probationary period while it implements a Lacey Act compliance plan that will “radically alter the way the company sources wood products.”

In February 2015, the company revealed that it was facing potential criminal charges stemming back to a federal investigation of its supply chain. The company’s practices were first brought to public attention by a 2013 Environmental Investigation Agency report that exposed the illegal wood trade in eastern Russia and traced products through China back to Lumber Liquidators. Since announcing the criminal case earlier this year, the company’s stock fell precipitously. A recent report by the Union of Concerned Scientists found that since the Lacey Act was updated in 2008, illegal wood imports into the U.S. have declined between 32-44 percent. Companies are still importing $3 billion worth of illegal wood into the U.S. every year.

New financing for Eagle High Plantations faces serious risks

PT Eagle High Plantations Tbk (formerly known as BW Plantation Tbk), the plantation unit of the Indonesian conglomerate Rajawali Group, recently secured a $201 million loan from PT Bank Negara Indonesia Tbk for debt refinancing, payments due on bonds and for building a new palm oil mill. This loan is secured with pledges on the land of several of the company’s’ subsidiaries, as well as several palm oil factories. An underlying risk for the banks and investors of PT Eagle High is that the value of PT Eagle High’s land may be significantly less than expected. A Chain Reaction Research report from last November showed that the company acquired palm oil producer Green Eagle Holdings, which lacks permits for 70% of its land bank. The CRR report warned that PT Eagle High could soon lose much of its business with palm oil traders, such as Cargill and GAR, that are now implementing Zero Deforestation, No Peat, No Exploitation policies. PT Eagle High and its subsidiaries have been found to be clearing High Carbon Stock forests in recent months. As a result, the company’s forestlands could become stranded assets and the company could soon be unable to secure further plantable land without access to global traders and markets.


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