The Chain: Sime Darby Submits Plans for Pure-Play Plantation Company, Announces Impairments, Mitigates Liberian Liability

In 2016, Chain Reaction Research reported (“Sime Darby: Liberian Crossroads”) that Malaysian palm oil conglomerate Sime Darby (SIME:MK) would be unable to fully develop its 220,000 hectare (ha) concession in Liberia without violating its own sustainability policies. As SIME submitted in September 2017 listing plans to the Securities Commission Malaysia to spin-off its plantations and property divisions into pure-play companies, SIME has acknowledged for the first time that it will not plant its entire concession area in Liberia.

SIME’s Q2 2017 financial results included a USD 48 million impairment due to slower than expected growth in Liberia from a moratorium on new planting since 2014, dry weather lowering projected yields, and the tragic Ebola outbreak from 2014 through early 2016.

SIME is scheduled to publish its Q3 2017 earnings November 24, 2017.

SIME’s plantation and property spin-offs reference price will be available by the end of October or early November 2017, after approval by Securities Commission Malaysia. Its plantation spin-off book value is estimated at USD 3.24 billion (JPMorgan / paywall). According to JPMorgan, as shown in Figure 1 (below), SIME’s plantation company spin-off is targeting an overall increase by 2025 of 25 metric tons per ha fresh fruit bunches and 25 percent oil extraction rate, and a decrease to 10 years average maturity for its oil palm estate.

2025 Target FY2017 Indonesia FY2017 Malaysia FY2017 Papua New Guinea & Solomon Islands FY2017 Liberia
Fresh Fruit Bunch (metric tons / ha) 25 16 21 24 4
Oil Extraction Rate 25% 21% 21% 23% 19%
Maturity (years) 10 13 (inclusive of Liberia)


Figure 1: SIME’s 2025 targets. Source: JPMorgan.

Note: SIME depreciates the economic useful life of its oil palm trees using straight-line basis over 22 years. Its average refineries utilization was 70 percent in FY2017, up from 67 percent in FY2016. 70,000 hectares (ha) come into maturity in FY2017, which was 11.6 percent of SIME’s overall planted ha.

Risks from Liberian Concession

In 2009, SIME signed a 63-year concession agreement for 220,000 hectares (ha) of land to be developed into oil palm and rubber plantations in Liberia. An additional 44,000 ha were scheduled to be developed under an outgrower scheme. The company’s concession in Liberia equals 22 percent of SIME’s total global landbank.

As shown in Figure 2 (below), as of Q2 2017, SIME had planted 10,401 ha of oil palm (9,305 ha mature) and 107 ha of rubber.

Malaysia Indonesia Liberia Papua New Guinea Solomon Islands Total
Concession area (ha) 344,784 284,367 220,000 130,235 8,304 987,690
Oil palm planted area (ha) 303,806 202,302 10,401 79,459 6,765 602,732

Figure 2: SIME’s Q2 2017 total global oil palm landbank. Source: Sime Darby.

Chain Reaction Research’s 2016 analysis showed the “mainstream investors continue to value Sime Darby’s Liberian project assuming full concession development” despite the land containing 45 percent undevelopable high-density forest, as well as 34 percent medium-density forest and being home to an estimated 55 local communities who are possibly negotiating Free, Prior and Informed Consent (FPIC) with SIME. SIME’s 2009 concession agreement with the Government of Liberia stated that the full 220,000 ha would be developed, and that undeveloped land would be forfeited to the government.

Since SIME issued its moratorium on new development in Liberia two years ago, the company appears to recognize that its original development plans were untenable. In response to inquiries from Chain Reaction Research, SIME stated that:

  • Parts of the concession area are primary forests or have High Conservation Value. As per Sime Darby’s RSPO commitments, these areas will not be planted on.
  • Some areas have High Carbon Stock value and therefore cannot be cleared in line with Sime Darby’s no deforestation commitments and policies, as expressed in the Company’s Responsible Agriculture Charter.
  • If consent is not given by the customary landowners for any part of the land, Sime Darby will not proceed with planting in those areas. This is part of our commitment to uphold FPIC, RSPO, HCSA and no exploitation.
  • Some areas will naturally be unsuitable for palm oil development.

Investors will now have to adjust to changed expectations as SIME appears to be aligning its sustainability commitments with financial outcomes. Its Q2 2017 USD 48 million impairment from its Liberian operations reflect this adjustment with SIME management on the record stating “all impairments have already been made.”

Outgrower Model Transition

Chain Reaction Research identified the advantages of a sustainable outgrower model, where SIME would abandon its own development in favor of arrangements with smallholders in the concession, as an approach that would significantly reduce reputational risks and conflict. SIME has begun developing an outgrower program they call ‘evergreen’ it is developing in a formal partnership with IDH (The Sustainable Trade Initiative) stating:

Sime Darby has held numerous discussions with IDH and has shared its views both with its senior management in the Netherlands and with the Liberia implementers on the ground. We have discussed the IDH approach and the ‘Evergreen’ model. Both “models include production and protection and in the same 1:5 ratio. We are currently unclear as to whether the IDH model is in alignment with the thinking of the High Carbon Stock Approach but believe in principle that both models could offer a way forward in Liberia. In both cases we believe that external funding to the farmers through Government of Liberia is required for these projects to be successful

We have opted for a precautionary approach and are steadily working our way through the options to ensure we uphold our commitments. This has been done with the full knowledge of the High Forest Cover working group. In addition, our focus is on raising the productivity of the land we have already planted to demonstrate that the operations is truly viable.

This response implies that the transition to a full outgrower model is a strategic commitment.

Mitigating Liberian Risks

According to SIME, the Government of Liberia is aware and supportive of SIME’s change in direction towards a green growth strategy, so the risk of legal forfeiture appears remote to unknown as results Liberia’s national elections were held October 10, 2017. Sime Darby’s expected breakeven for its new mill appears to require only 10,000 ha of development. In response to queries from Chain Reaction Research, the company downplayed the importance of the concession to their overall business, stating that, as shown in Figure 3 (below), “our Liberian plantations account for approximately 1.7% of Sime Darby’s total global planted area for oil palm (approximately 10,401 ha out of 602,732 ha globally).”

Liberia Sime Darby Group
FY2017 FY2016 FY2017 FY2016
Fresh Fruit Bunches Production (metric tons) 27,038 2,665 9,780,000 9,620,000
Fresh Fruit Bunches Yield (metric tons/ha) 4.04 1.70 19.44 18.82
Crude Palm Oil Production (metric tons) 5,691 570 2,450,000 2,440,000
Palm Kernel Oil Production (metric tons) 181 580,000 570,000
Crude Palm Oil Extraction Rate (%) 18.73% 21.39% 21.29% 21.89%
Palm Kernel Oil Extraction Rate (%) 2.48% 5.02% 5.09%
Average Crude Palm Oil Selling Price (RM/metric ton) 2,413 2,028 2,848 2,242
Average Palm Kernel Oil Selling Price (RM/metric ton) 2,469 1,581

Figure 3: SIMEs FY16/17 plantation operational statistics. Source: Sime Darby.

SIME is the world’s biggest producer of Roundtable on Sustainable Palm Oil (RSPO)-certified sustainable palm oil. For the financial year ending 30 June 30, 2016, SIME produced 2.2 million metric tons of certified sustainable palm oil and 0.5 million metric tons of certified sustainable palm kernel oil. For the financial year ending June 30, 2017, the total certified sustainable palm oil produced was 2.43 million metric tons.

SIME has achieved RSPO certification for 100 percent of upstream plantations in Malaysia (except for 2 estates and 1 mill, which was acquired recently in Johor), Papua New Guinea, and Solomon Islands and 96 percent of its upstream operations in Indonesia.

In 2011, SIME was subject to RSPO complaints when it developed a 10,000 ha portion of its concession. While its Liberian operations have not achieved RSPO certification, the company states that:

Sime Darby Plantation aims to have all operations RSPO certified. RSPO certification is only achievable once a mill is established as the Principles and Criteria only apply to the oil and not the palm fruit. The mill in Liberia was completed in May 2017 and the Company began preparations for audit to the RSPO standards in January 2017 some 3 months before mill completion. Sime Darby has already implemented the New Planting Procedures in its Liberian operations, a prerequisite to RSPO certification. We hope to achieve RSPO certification by 2018.”

Their Q2 2017 unaudited financial statements say that “for the current financial year, [the] Plantation division recorded a 91.8% jump in operating profit from RM 1,031 million to RM 1,977 million despite an impairment of assets in Liberia of RM 202 million.” Along with SIME’s filing with Securities Commission Malaysia and SIME’s statement that “all impairments have already been made”, analysis suggests that SIME is now able to enable its Liberian operations on it is 20,000 ha portion of its concession to be financially secure while potentially addressing community FPIC and deforestation-related concerns.

Report: Farmland Investments in Brazilian Cerrado: Financial, Environmental and Social Risks

Following the financial crisis of 2007-2008, there has been a growing investor interest in farmland around the world. In Brazil, this interest has been most pronounced in the Cerrado, a large tropical savanna biome that covers more than 20 percent of the country. Here, institutional investors such as pension funds and private equity, real estate firms and agribusinesses have adopted business models that aim to produce value from land appreciation by acquiring land, clearing it from its native vegetation and transforming it into farmland. While land prices in the Cerrado have increased nearly fivefold between 2003 and 2016, there are signs that the farmland real estate market is currently overheated.

These large-scale farmland acquisitions have resulted in significant environmental and social impacts. Between 2013 and 2015, 1.9 million hectares (ha) of the Cerrado was cleared of its native vegetation. Cerrado deforestation contributed to 29 percent of Brazil’s carbon emissions. Moreover, land acquisition in Brazil is linked to a process of grilagem, whereby land deeds are falsified and later sold. Traditional communities have been impacted through forced removals, loss of hunting grounds and other livelihood impacts.

Continue reading

Report: SLC Agrícola: Cerrado Deforestation Poses Risks to Revenue and Farmland Assets

SLC Agrícola is Brazil’s largest publicly traded farming company, founded in 1977. It operates 15 large farms, spread across six Brazilian states – Mato Grosso, Goiás, Bahia, Piauí, Maranhão and Mato Grosso do Sul. This includes activities in the Matopiba region (comprising of the states of Maranhão, Tocantins, Piauí and Bahia), sometimes referred to as the “newest agricultural frontier” in Brazil. It actively purchases, clears and transforms land in the Cerrado biome for industrialized soy, corn and cotton production. The Cerrado biome, a vast tropical savanna, is an environmentally sensitive area where deforestation rates are high. WWF and others recognize the Cerrado as the biologically richest savanna in the world, home to hundreds of endangered species and traditional communities. As the source of rivers and waterways, the Cerrado functions as a vital source of water for many of Brazil’s largest cities. Continue reading

The Chain: Bunge Buys IOI’s Specialty Fats Business, Zero-Deforestation Policies Require Integration

On September 12, 2017, Bunge announced it will acquire a 70 percent controlling ownership interest in IOI Corporation’s Loders Croklaan for USD 946 million, comprising USD 595 million in cash plus EUR 297 million equivalent. IOI will retain a 30 percent ownership interest and customary protective rights. For the next five years, Bunge will the right to purchase the remaining 30 percent interest from Loders Croklaan. Likewise, IOI will have the same right to sell its remaining 30 percent interest to Bunge.

IOI’s CEO Datuk Lee Yeow Chor stated:

“In this respect, IOI will maintain our strong sustainability commitments as spelled out in IOI Group’s Sustainable Palm Oil Policy”.

“IOI will have two representatives on Loders’ five-member board of directors and our representatives will also be involved in key management decisions taken by Loders”.

Likewise, Bunge confirmed:

“Bunge and Loders are committed to sustainable sourcing, including zero-deforestation, zero peat conversion, protection of human rights, traceability and transparency. This transaction will combine leading policies, people, programs and partnerships from both companies. Bunge intends to continue its work as a member of The Forest Trust, increasing the sustainability of its supply chain and collaborating in projects that help advance industry performance. Following the close of the transaction, Bunge intends to base its palm oil sourcing on Loders’ policy.”

IOI will continue to be the main palm oil supplier to Bunge’s Loders going forward. As shown in Figure 1 (below), IOI has 150,129 hectares (ha) of mature oil palm trees. IOI’s extraction rates are also comparable to their competitors, such as Sime Darby, at 21.35 percent for crude palm oil and 4.81 percent for palm kernel oil.

Description Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016
    Production (‘000 Tons)
        Crude Palm Oil (CPO) 173.952 138.297 184.598 194.337 152.877
        Palm Kernel 38.885 32.311 40.414 43.816 35.062
        Fresh Fruit Bunches (FFB) 799.778 655.274 827.579 872.997 717.484
    Extraction Rate (%)
        Crude Palm Oil 21.35% 20.62% 21.77% 21.75% 20.74%
        Palm Kernel 4.81% 4.78% 4.78% 4.90% 4.75%
    Area Planted (‘000 Hectares)
        Mature 150.129 148.764 147.095 147.077 148.166
        Immature 24.737 26.162 27.964 48.356 31.575
        Total Area Planted 174.866 174.926 175.059 195.433 179.741
        Total Titled Area Planted 217.917 217.917 217.917 217.917 217.917
    Yield per Mature Hectare (Tons)
        FFB Yield 5.44 4.49 5.71 6.02 4.92
        CPO Yield 1.16144 0.925838 1.243067 1.30935 1.020408
    Average Selling Price (USD/Ton)
        Crude Palm Oil  $639  $701  $640  $608  $622
        Palm Kernel  $621  $722  $667  $642  $581

Figure 1: IOI’s palm oil production statistics. Source: Bloomberg.

J.P. Morgan is the exclusive financial advisor to Bunge. Shearman & Sterling is Bunge’s legal counsel.

Bunge’s Financing

According to Bloomberg (paywall), Bunge entered into a USD 900 million, unsecured, delayed draw, three-year term loan agreement with Sumitomo Mitsui Banking Corporation. This loan may be used to pay for the purchase of Loders Croklaan.

Bunge dropped 4.31 percent on the announcement closing September 12, 2017 at USD 71.44.

IOI’s shares traded slightly higher up 1.98 percent closing at RM4.64 with volume at 17.6 million shares traded, 330 percent above average daily volume in 2017. IOI’s shareholders may get a special dividend of about USD 0.03 per share. IOI will use the revenue to expand its upstream operations.

Improving and Integrating Traceability to Plantation Dashboards: Operational Risk

The sustainability risk is that the sales of Loders to Bunge may decrease IOI’s downstream margins. IOI’s margins are high because Loders’ industry-leading specialty fats business includes over 300 patents and other processes the are accretive to margins. IOI will be left with much lower margin palm oil plantation, refining, and oleochemicals, which are price competitive, unlike specialty fats. While the sale cuts IOI’s net debt to 24 percent from 86 percent.

As shown in Figure 1 (above), Loder’s annual revenue of USD 1.6 billion on sales of 1.6 million metric tons of specialty fats implies an average selling price of USD 1,000 per ton compared with IOI’s average crude palm oil selling price of USD 639 means IOI will lose a high margin business from the sale.

The key sustainability concern is IOI will need to invest in processes to maintain its zero-deforestation commitments. But palm oil production is a lower margin business.

Finally, Bunge’s palm oil dashboard updated their zero-deforestation commitment on September 13, 2017. It reported it global traceability to its mills as 92 percent but Bunge also reported its traceability to plantations as only 14 percent. On the other hand, IOI’s dashboard reports it has 100 percent traceability to its mills with 51 percent traceable from plantation to mills.

Given that IOI just sold its high margin business to Bunge, and Bunge and IOI have both committed to maintain their zero-deforestation commitments – which means managing the operational risks of the plantation suppliers – they will both need to secure the funding to integrate their palm oil dashboards, which may be an added short-term cost.

The Chain: Mars’ USD 1 Billion Commitment Mitigates Deforestation, May Green Lincoln National Corporation’s Portfolio

On September 6, Mars announced their new Sustainable in a Generation Plan to invest USD one billion in reducing environmental impacts focusing on climate action, water stewardship, land management and improving livelihoods – putting pressure on peers to make similar commitments.

Mars move now greens its existing USD 10.5 billion in debt and loans owned by creditors such as Northwestern Mutual Life and Lincoln National Life Insurance. Lincoln National Corporation, owner of Lincoln National Life Insurance, recently engaged with Friends Fiduciary Corporation, a Quaker socially responsible investment manager, regarding greening its bond portfolio.

As shown in Figure 1 (below), Mars’ new commitment in effect begins to green Lincoln’s USD 24.4 million investment in debt issued by Mars wholly-owned subsidiary Wrigley. Mars bought Wrigley in 2008.

This means that Lincoln is the beneficial owner with Prudential, JP Morgan, and Hamilton Lane the investment managers for the private placement of the USD 24.4 million debt.



% Outstanding

Bonds Held
Wrigley 2.4% 10/21/18




Wrigley 2.9% 10/21/19




Wrigley 3.375% 10/21/20






Figure 1: Lincoln National Corporation’s Mars bond ownership September 7, 2017. Source: Bloomberg.

Mars’ new carbon reduction goal is to reduce the total GHG emissions across their value chain 27 percent by 2025 and 67 percent by 2050 (from 2015 levels) to keep the planet from warming beyond two degrees Celsius.

As reported by Bloomberg, shown in Figure 2 (below), Mars’ new annualized carbon reduction goal is ranked tenth amongst its peers. Mars now joins both Kellogg and General Mills in including supply-chain related emissions in its 67 percent emissions reduction goal by 2050. Mars also stated it wants to achieve net zero emissions from direct operations by 2040.


Figure 2: Food peers’ annualized carbon reduction goals. Source: Bloomberg / Greg Elders.

CEO Grant F. Reid September 6, 2017 said business needs to lead “transformational change” in order to tackle the most urgent threats facing the planet and its people. Reid continued: Continue reading

The Chain: Felda Global Ventures Stops Peat Clearance, Faces Potential Deforestation Liability Equal Q2 2017 Net Income

Following a Board meeting on August 24, Felda Global Venture’s (FGV) executives updated its Sustainability Policy. The new policy states FGV pledged to halt peat forest clearance by its subsidiaries in West Kalimantan, Indonesia, operating under the names PT Citra Niaga Perkasa (PT CNP) and PT Temila Agro Abadi (PT TAA). It also pledges to rehabilitate peat land developed after August 25, 2016, when FGV first adopted its Sustainability Policy.

With the new policy FGV pledges:

  • “No deforestation, no conversion of High Conservation Value (HCV) areas, no new planting on peat land immaterial of size and depth and no new development of areas classified as having High Carbon Stock, irrespective of when the lands are acquired or owned by FGV Group;
  • Will adopt best management practices for existing peat land estates and endeavor to rehabilitate peat lands that have been planted after 25th August 2016; and
  • Will stop immediately all new development on peat lands irrespective of when the land was acquired or any previous RSPO New Planting Procedure approval.”

The decision by the FGV to permanently to discontinue development in the remaining land bank at PT CNP and PT TAA is a welcome step. It means that 1,400 ha of peat forest may now not be deforested and drained for oil palm plantation development. An additional 1,000 ha might be rehabilitated. FGV has publicly indicated that it sought stakeholder feedback to its sustainability policy in response to Chain Reaction Research’s updates in April and May 2017.

FGV Board’s decision comes 16 months after Chain Reaction Research first publicly described FGVs compliance-related material financial risks.

During this period, FGV engaged stakeholders regarding its subsidiaries actions while, at the same time, its subsidiaries continued to clear peat forest. In August 2016, FGV had launched its own NDPE policy, but its subsidiary PT TAA continued to clear peat forest – in non-compliance with FGVs policy and despite engagements by Aidenvironment and FGV buyers Wilmar and Musim Mas. When Aidenvironment raised this with FGV in April 2017, FGV said that neither its NDPE policy nor the Government of Indonesia’s December 2016 ban on peat clearance applied. The company’s legal adviser justified the continued peat clearance saying that PT TAA had obtained permits to clear the peat forest some years back. The wording of the updated sustainability policy now signifies a marked change from this position.

In the company’s letter to stakeholders, FGV clarifies that it had issued a stop-work order to PT TAAs management on April 25, 2017. FGV states that it recommenced the land clearing – again due to community pressure – for a two-week period until it stopped again on May 19. Aidenvironment confirms that since then no significant land clearing has occurred. FGV states it will discuss their case with the Government of Indonesia’s Peat Restoration Unit (BRG) for the peat land already cleared and it intends to use RSPOs Best Management Practices.

In 2012, FGV had acquired 95 percent of the 14,385 hectare (ha) PT CNP concession for USD 5.5 million. Then in 2013, FGV purchased 95 percent of the 8,193 ha concession for USD 7.6 million. According to Aidenvironment, these two concessions combined have cleared 16,498 ha of peat land since 2010.

Chain Reaction Research’s April 21, 2016 coverage described FGVs financial risks from deforestation, non-compliance with its buyers’ No Deforestation, No Peat, No Exploitation (NDPE) policies, and possible stranded assets. The next month, in May 2016, FGV reported its deforestation-linked non-compliance with the Roundtable on Sustainable Palm Oil’s (RSPO) Remediation and Compensation Panel.

RSPOs relevant compensation and remediation policy is not new. March 6, 2014, RSPO Board of Governors implemented its Remediation and Compensation Procedures Related to Land Clearance Without Prior HCV Assessment. On p. 10, the procedures state RSPO may expel companies who violate its criteria regarding land clearing that occurs after May 9, 2014. According to RSPO, possible compensation to mitigate this risk of being expelled include USD 2,500 to USD 3,000 per ha payable the first year the compensation agreement is accepted.

Aidenvironment analysis suggests that FGV may become the first supplier to the NDPE market that will be held accountable for knowingly proceeding with non-compliant land clearing. If stakeholders demand FGV to compensate according to RSPOs rules, the following may occur.

  • FGV may be required to implement a responsible forest management plan for the remaining peat forest in and outside of its two concessions.
  • According to RSPOs guidance for Remediation and Compensation, FGV may need to pay USD 5.2 million to USD 6.1 million for compensation for the HCV area cleared by PT CNP (260 ha) and the peat forest cleared by PT TAA (1,800) since April 2016. It is important to note that RSPO has not applied this compensation requirement. This would be the first time this compensation arrangement would be applied.

Finally, this compensation arrangement – while uncertain – may be material to investors and analysts, according to Climate Advisers. FGVs possible liability equals FGVs Q2 2017 net income available to common shareholders reported at USD 6 million.

Event: Risks for Investors in Tropical Commodities, September 27, 2017, Berlin

Risks for Investors in Tropical Commodities
An event at the PRI in Person 2017 Conference in Berlin

Wednesday, September 27, 2017, 1:30 pm to 2:30pm
InterContinental Hotel, Berlin, Germany

Free Admission

To register, or if you have any questions regarding this event, please email

Production of tropical commodities such as palm oil, soy, beef and timber creates sustainability risks: deforestation, peat land development, land rights conflicts and labor norms violations. As governments, customers and financiers increasingly act to address such risks, commodity producers will find it increasingly difficult to continue operating as usual and their expansion opportunities will be curbed – turning land concessions in stranded assets rather than sources of future cash-flow. This should worry investors in commodity producers and their supply chains: traders, food companies and retailers.

Chain Reaction Research (CRR) coalition is Aidenvironment, Climate Advisers and Profundo. CRR helps investors to understand and address these risks. We perform proprietary, in-depth research on the sustainability risks created by commodity producers in Asia, Africa and Latin America. Findings are analyzed and impacts for the companies and their supply chains are modelled and described in concise equity analyst reports. In this side event, we will discuss our approach, our findings and what they mean for investors.



  • Investors taking action on tropical commodity risks
    Katherine Kroll – Green Century Capital Management
  • Analyzing the financial impacts for investors
    Gerard Rijk – Profundo
  • Researching sustainability risks of tropical commodity production
    Tim SteinwegAidenvironment


To register, or if you have any questions regarding this event, please email

For more information about Chain Reaction Research, please visit our website.