The Palm Scribe

Indonesian Banks Play Important Roles in Achieving Palm Oil Sustainability

As demand for sustainable financing grows, Indonesian banks are trying to contribute to the battle against deforestation and against other environmental and social issues in the palm oil sector, by requiring clients to comply with palm oil sustainability standards, including the RSPO and ISPO.

The WWF, in a recent press release, said that palm oil was an inseparable part or efforts to deal with the global climate crisis and as such banks and institutional investors must have a role in addressing deforestation and other environmental and social issues in the palm oil sector.

“There are other financial institutions that would step in to fill the gap left by a more responsible financial institution following divestment. This would mean that deforesting or otherwise unsustainable companies will continue to receive financing without any form of safeguards or engagement over their environmental and social impacts,” the press release said.

The NGO believes there is a clear need and role for financial institutions to address palm oil’s sustainability issues, highlighting the role of Palm oil as a critical commodity for global food security, as replacing it with other edible oils will require expanding agricultural land, leading to more deforestation and more habitat loss, and thus exacerbating climate change.

“All parties are expected not to deforest but the support of investment and finance for the oil palm sector is still needed, with the aim of changing the performance and governance of the palm oil sector. Taking the choice of boycotting or refusing to finance the palm oil sector, which we currently admit is still a problem, is not the right option,” WWF spokeswoman Elis Widen told The Palm Scribe.

“Financial Services Institutions, have an important role in encouraging the transformation of their customers’ performance to be better and more sustainable, this will actually help withstand the rate of deforestation,” she added.

To support its policy on sustainable financing, the Indonesian Financial Services Authority (OJK) has issued regulation number 51/2017 on an Action Plan for Sustainable Finance and regulation number 60/2017 on the Issuance and Requirements for Debt Securities with Environmental Insights.

The OJK then kick-started the initiative by introducing a sustainable financial platform (Indonesian Sustainable Financial Initiative, or IKBI), composed of eight banks which represent 49.5 percent of national banking assets, to encourage the implementation of sustainable finance.

This so-called “First Movers on Sustainable Banking” are Bank Mandiri, Bank Negara Indonesia, Bank Rakyat Indonesia, Bank Central Asia, Bank Artha Graha Internasional, Bank Muamalat Indonesia, Bank BRI Syariah, and Bank Pembangunan Daerah Jawa Barat dan Banten.

As one of the largest state-owned and designated bank for sustainable finance in Indonesia, Bank Rakyat Indonesia is obliged to join this initiative. BRI currently applies special provisions in analyzing credit applications from oil palm companies.

“BRI Corporate Customers consist of those who already have ISPO/RSPO certification or have added registration for the certification process,” Bambang Tribaroto, BRI’s corporate secretary told The Palm Scribe.

“The implementation of sustainable finance has non-financial aspects that benefit BRI to maintain environmental and social sustainability. This implementation also aims to improve the resilience and competitiveness of the company in facing the challenges of an increasingly dynamic banking world, with BRI’s performance achievement oriented to sustainable development (SDGs) both in terms of assets, liabilities, operational and human capital,” he added.

According to Tribaroto, each bank must have a precautionary principle in measuring social and environmental risks from collection and distribution activities. These activities include identification, measurement, mitigation, supervision and monitoring of social and environmental risks in bank activities, including the negative social and environmental impacts of projects or activities it financed.

Although the implementation of the OJK policy is left to the banks to suit their respective commitment and capability, BRI has always prioritized compliance with existing regulations. It mainly monitors the middle segment and corporations customers that are considered to have a large impact on the environment.

“We encourage, and monitor, our debtors to have sustainability certification in accordance with their respective industries, for the Palm Oil Company it’s the ISPO/RSPO certification,” Tribaroto said.

Despite the positive policies introduced by OJK, the road to sustainable financing might be long and challenging. In the case of BRI, Baroto cited the example that not all of BRI Debtors are aware of the importance of having the required certification. Also, there has not been the same level of playing field between banks in Indonesia in implementing Sustainable Finance.

However small, the efforts taken by these banks are very crucial in achieving sustainability in the palm oil sector, according to WWF.

“The bank’s efforts are important in guiding the customer’s sustainability performance by implementing time-bound commitment and action plan. By continuing to provide financing for this sector, banks have the opportunity to improve the performance of this sector better. For example, encouraging customers who do not meet the ongoing provisions for transformation,” said Elis Widen from the WWF.

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