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The Chain: NASDAQ’s EU Listing Guidance; Nestlé, Others’ Cocoa Deforestation Commitment; EU Votes for Sustainable Vegetable Oils; Court Orders Indonesian Palm Oil Review

April 10, 2017

Mondelēz, Nestlé, Others Make Cocoa Deforestation Commitment

12 of the biggest companies in the cocoa supply chain including Cargill, Olam, Ferrero, The Hershey Company, Mars, Mondelēz International and Nestlé made a public pledge to end deforestation and forest degradation in the cocoa sector by 2018. The cocoa commitment will link producer nations with buyer nations and corporate entities with financial tools intended to stop deforestation, support cocoa-growing communities and enable broader gender and community inclusion.

Moody’s recently suggested that global cocoa demand may grow. Annual per capita cocoa demand in China and India is about 0.1 kilograms per capita, much lower than the annual cocoa demand in Western Europe of 4.7 kilograms per person.

EU Votes for Sustainable Vegetable Oils

The European Parliament voted on April 3 to urge the European Commission to phase out the use of non-sustainable vegetable oils for biofuels by 2020. Motorists are the top consumers of palm oil in Europe. In 2015, 46 percent of all the palm oil used in Europe ended up in the tanks of cars and trucks. The resolution also includes a call for the development of a single certification scheme.

By 2014, EU palm oil demand had reached 3.22 million metric tons, an increase of 2.76 million metrics tons since 2010. During the same period, EU consumption of soybean oil used for biodiesel decreased by 555,000 metric tons to 440,000 metric tons in 2014. This demonstrates consumer preference for palm oil over soybean oil.

Given the EU’s increasing demand for palm oil, the vote creates an opportunity for exporters and importers to unify around jurisdictional programs so that palm oil exporting countries can achieve EU criteria. This approach might mitigate material financial risks currently facing investors. For example, in Indonesia roughly three out of every 10 hectares (ha) leased to oil palm concessions is on stranded land. This stranded land equals 6.1 million ha – or the size of ten million football fields.

On April 6, 2017, Neste Oil – one the EU’s largest biofuel importers – published its palm oil dashboard, providing traceability of its entire supply chain including companies, mills and estates.

Court Ordered Central Kalimantan Palm Oil Review

A court in Central Kalimantan ordered the Indonesian government to review permits for palm oil companies because of catastrophic fires in 2015. According to a study published by Harvard and Columbia Universities, the 2015 fires may have resulted in over 100,000 fatalities. The court order impacts Wilmar International, Genting, and other palm oil producers.

The Court ruling ordered the Central Kalimantan government to:

  • Review and revise the permits of all plantation companies, whether implicated in the 2015 fires or not.
  • Actively enforce civil and criminal laws to penalize companies whose concessions were involved in the 2015 fires.
  • Inform the public regarding the affected land and the companies that own concessions implicated in the fires.

In addition, the Central Kalimantan government is required to:

  • Form a Joint Team on Forest Fire Management consisting of the Ministry of Environment and Forestry, the Ministry of Agriculture and the Ministry of Health.
  • Build a Respiratory Medicine hospital and an evacuation room for people affected by forest fires.

NASDAQ’s EU Listing Guidance

Nasdaq’s Nordic and Baltic exchanges in Stockholm, Helsinki, Copenhagen, Iceland, Tallinn, Riga and Vilnius launched guidance to support listed companies in their ESG disclosure. The report reflects guidance from the World Federation of Exchanges, the European Union directive on non-financial reporting, the U.N. Sustainable Stock Exchanges initiative (SSE), and other industry association comments.

Similarly, the Intercontinental Exchange and the New York Stock Exchange – its subsidiary – launched an ESG portal to enable listed companies to consider ESG factors in their firm management.

Both the NASDAQ guidance and NYSE resources suggest including climate risk reporting for companies in the agriculture and forests sectors. For example, the relevant NASDAQ’s metrics for the agriculture and forest sectors include:

  • Direct and Indirect GhG Emissions
  • Carbon Intensity
  • Board: Transparent Practices
  • Direct and Indirect Energy Consumption
  • Gender Diversity
  • Fair Labor Practices
  • Primary Energy Source
  • Temporary Worker Ratio
  • Supplier Code of Conduct
  • Renewable Energy Intensity
  • Water Management
  • Injury Rate
  • Bribery / Anti-Corruption Code
  • Tax Transparency
  • Child and Forced Labor Policy
  • Human Rights Violations

Key missing indicators relevant to the agriculture and forests sectors include:

  • Board of Directors oversight for material deforestation risk factors. This is because companies self-reported to CDP in 2016 that they may have annually USD 900 billion revenue-at-risk from deforestation linked to cattle, palm oil, soy and timber.
  • Direct and indirect GhG emissions from commercial agriculture. This is because it is estimated that agriculture drives 71 percent of tropical deforestation.

Finally, the World Federation of Exchanges (WFE) released its annual ESG survey. WFE reported that currently 20 percent of exchanges globally had mandatory ESG reporting. They also concluded that 25 exchanges globally require ESG disclosure on supply chains.

The WFE also reported that 75 percent of exchanges believe globally consistent ESG disclosure standards can be developed. This is interesting given that the green bond market grew to USD 118 billion as of July 2016. And recently, the London Stock Exchange issued the first green bond to fund reducing emissions from deforestation and forest degradation in November 2016.

The International Finance Corporation’s (IFC) USD 152 million 5-year 1.546 percent coupon bond supports private sector development that prevents deforestation in developing countries. Bond investors can receive cash or a carbon-credit coupon. The carbon-credit coupon is a tradable permit representing the right to emit one ton of carbon dioxide equivalent. Investors can then retire or trade these credits. The carbon credits are from a project in Kenya.

As the WFE reported, 2016 saw a 32.16 percent increase in value of bonds listed between 2015 to 2016 – from USD 75 trillion to USD 99 trillion – so maybe green bonds can further grow the financial structures available to corporates to mitigate their material deforestation risks.

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