Matthew Phan, Business Times 12 Mar 08;
Investors, analysts - and, yes, the press too - should pay closer attention to plantation firms' environmental practices. Not only is this in favour of corporate social responsibility (CSR), it helps avoid risk too.
INVESTORS and analysts have tended to focus on the direction of crude palm oil prices when evaluating the long-term potential of the business. Few give space to environmental or operational concerns, unless it is a few lines under the Risks section of a report, if at all. But last week's shock report on First Resources shows how critical it is - for both corporations and the market - to pay more attention to such things.
After an Indonesian paper said the government would auction off three plantations (accounting for a quarter of the company's 2008 output) to pay a US$38.3 million corruption fine owed by Martias, the father of its managing director, Ciliandra Fangoso, its stock price dived. Citigroup analyst David Fergusson pointed out that Martias is not related to First Resources as a corporate entity, which he said faces very little 'material risk of expropriation' of assets. The worst that could happen is that First Resources pays off the fine - an insignificant amount for the firm, which is still worth some US$1.4 billion.
Nonetheless, the apparently immaterial risk has led to a material loss for investors, at least for now. What about other plantation stocks?
Little attention was paid when on Feb 4, Wilmar International said it had responded to complaints by the Roundtable on Sustainable Palm Oil (RSPO), which oversees practices, such as in land clearing and forest conservation, in the sector. Even less attention was paid when the original report was published last July, a 100-page document by Friends of the Earth Netherlands and two Indonesian partners.
The report said three Wilmar subsidiaries operating in Sambas, West Kalimantan, and representing 7 per cent of Wilmar's land at the time, had cleared tropical forest land without obtaining the legally required permits and without first conducting independent assessments to check if the lands were considered High Conservation Value Forests (HCVF).
In response to the various complaints, Wilmar acknowledged that the cases cited 'went against Wilmar's procedures and policies' and were based on an 'irregularly issued IUP (plantation operation permit)'. 'We deeply regret to discover . . . that there were weaknesses in our system that overlooked the requirement of independent HCVF assessments in the three companies,' it also said.
Wilmar has stopped all clearing by the three firms since last November, and placed a moratorium on new plantation development until after Environmental Impact Assessments (EIAs) have been completed, it said. The firm 'will reappraise the list of accredited EIA consultants', and has engaged an independent consultant to conduct HCVF assessments on new projects, it said. According to Wilmar, the RSPO has accepted its response, though three items still need follow-up.
Another Indonesian firm, Asia Pulp & Paper (APP), has not fared so well. On Jan 8, WWF Indonesia published a report on APP's practices in Riau and Jambi. Using map coordinates and photographs as evidence, it said APP had converted natural forest land 'without proper professional assessments or stakeholder consultation and sometimes even without proper licences'. In particular, APP converted hundreds of hectares for a logging highway that will split in two a large part of the forest, in order to link forest concessions to pulp mills, but without having met requirements under Indonesian law, the report said.
Following the report, Staples, the world's largest retailer of office products, cut APP off as a supplier, the Wall Street Journal reported in February.
SGX-listed Golden Agri Resources (GAR), like APP, is owned by the Sinar Mas Group. A separate entity, it says it has participated in the RSPO since February 2005, adopted a zero-burning land- clearing policy 15 years ago and obtained ISO 14001 certification for Environment Management Systems for its estates.
Environmental risk exists nonetheless. The RSPO is 'close to' but has not yet finalised a system for auditing palm oil mills and plantations, Rodney Taylor, director of WWF's Global Forest Programme, told BT last week. 'Until that system is up, companies should not pretend their RSPO membership is proof that they are producing or buying responsibly,' he said.
The system, to be rolled out in the next few months, will audit mills unit by unit and, over time, weed out members that do not meet standards, he said. But it won't happen overnight.
Meanwhile, investors, analysts - and, yes, the press too - should pay closer attention to plantation firms' environmental practices. Not only is this in favour of corporate social responsibility (CSR), it helps avoid risk too.
