Indonesian banks can and should play an important role in supporting the transformation of the palm oil sector toward more sustainable practices, says a a White Paper into financial risks in the palm oil sector.
Sharing the findings of the White paper entitled “Managing Palm Oil Risks, A brief for financiers,” Profundo CEO Jan Willem van Gelder, one of the authors said that banks, including those in Indonesia, have benefited from the steep growth in the Indonesian palm oil sector. This sector continues to grow and has already become a major driver of local economic development and poverty alleviation.
There is, however, increasing attention on the high social and environmental costs of palm oil development. Stakeholders, including governments, buyers, banks and investors, are now increasingly becoming aware of the large sustainability risks and costs in the palm oil sector.
“It is time for the Indonesian financial sector to join the growing ranks of those heading toward sustainability,” van Gelder told a roundtable platform workshop here organised by the Roundtable on Sustainable Palm Oil (RSPO).
“The Indonesian financial sector faces sizeable reputational, regulatory and financial risks if it continues to support non-sustainable palm oil companies.,” he said, adding that the risks were linked to detrimental environmental and social impacts caused by non-sustainable palm oil practices.
Van Gelder said that palm oil is very important for the economy of Indonesia but increasingly the country and also the world is seeing that there is also a high social and environmental price to be paid. Indonesia is now the world’s top palm oil producer, as well as consumer. Palm oil exports contributed 12 percent of the country’s total exports in 2016 and the sector employe about 5.6 million people directly.
“It is not only an economic success story but also it has a lot of sustainability problems.” Van Gelder said that banks as well as other financial institutions not only needed to be aware of the risks but they also needed to integrate sustainability criteria into their lending decisions.
“The regulatory pressure on banks to integrate sustainability criteria into their lending decision is increasing and their continued exposure to the sustainability issue in the palm oil sector could tarnish their reputations among both domestic retail clients and foreign investors, This will make it more difficult for banks to attract sufficient funding and meet solvency requirements,” van Gelder said addressing a roundtable platform workshop here organised by the Roundtable Sustainable Palm Oil (RSPO).
Agus Sari, CEO of Landscape Indonesia and also one of the authors of the report, said that sustainability financing was still hindered by the fact that risks related to sustainability were not yet mainstream enough, even though they were becoming increasingly real.
He said that one of the aims of the report was to see how far sustainability risks, especially in the palm oil sector, will become financial risks that have to be borne by financing institutions.
Van Gelder said that the major stakeholders “are taking measures to manage the sustainability risks and this new environment is creating significant reputational, regulatory and financial risks for a stable and prosperous future.”
“One of our major homework is how to engage the financial sector in Indonesia, which is not yet familiar with the financials risks of palm oil,” Rumondang said.
She said that she wanted an increasing realisation that besides presenting a lot of benefits for the economy and people’s welfare, palm oil also had its risks.
Edi Setiawan, Director for Sustainable Financing with the Financial Services Authority (OJK), said that the agency had already issued regulation 51 which obliged all financial institutions, to apply the principles of sustainability in their operations. The ruling, however, was deemed by many as still being too general in nature.
Setiawan said that there was a number of Indonesian banks, large and small, who have already agreed to champion sustainable financing, including in the palm oil sector.
Christine Hadiman, Director for Commercial Banking with HSBC said that her banks has been incorporating sustainability criteria in its lending practice. Specifically for the palm oil sector, HSBC only provides financing to palm oil companies with RSPO certification.
“Before 2014, it was still flexible, but after that it has become a must, the RSPO certification,” she said, adding that although it meant, at least initially, the loss of potential customers, “for banks, reputation is important.”
Hadiman said that applying sustainability criteria in bank lending was not an easy task, especially since the playing field was, according to her, not yet level. Customers who deems that sustainability tags are not important for them could easily move to other lending institutions which do not impose such requirement.
“In the short term, there will be a loss in business opportunity because RSPO requirements are quite tight,” she said.
She also said that although government regulations were necessary to assure sustainable finance, the regulations should not be too strict. “the market is not yet ready,” she explained.
Van Gelder said that now, technology including satellite imaging, drones, the internet, allows real time monitoring of whether companies are destroying the environment. The effects would also not only be for the companies, but also the banks that finance them.
“Bigger transparency makes the risks more apparent and more real,” he said.