The move highlights that firms should screen their suppliers thoroughly, says Anthony Skinner
The International Finance Corp (IFC), the World Bank’s private sector lender, said on September 9 that it would suspend investments in the palm oil business until a review of its practices in the sector is complete. The announcement not only underlines the supply chain risk faced by companies that source their oil from firms that do not exercise strict human rights and environmental sustainability practices. It also underlines the risk faced by financial institutions that grant loans but do not enforce sufficiently stringent standards when screening the businesses to which they are considering extending loans.
The IFC’s decision is particularly noteworthy given the scale of its global investments in palm oil – the lender has approximately US$132m invested in palm oil projects in Asia, Central America, West Africa and Ukraine. Equally noteworthy are the circumstances in which the IFC decided to freeze its palm oil investments. The suspension and review comes as the result of an appeal from a coalition of international and Indonesian NGOs led by the UK-based Forest Peoples Programme. The coalition filed a complaint in August 2009 with the IFC’s internal watchdog, the Compliance Advisory Ombudsman Office (CAO), over a series of IFC loans to Singapore-based agricultural group Wilmar International. Members of the NGO coalition claim that plantations belonging to two Wilmar subsidiaries in West Kalimantan’s Sambas district were operating with dubious licenses and were involved in land rights conflicts and illegal logging activities.
The appeal against Wilmar highlights a broader campaign by environmentalists to end big palm oil plantations and financing. According to Friends of the Earth “the large-scale expansion of palm oil plantations is responsible for the destruction of forests and peatlands, high carbon dioxide emissions, and land grabs from indigenous peoples.” The NGO goes on to say that “European and US mandatory targets for the use of biofuels are a major driver behind the unsustainable expansion of oil palm plantations.”
IFC reviews approach to palm oil investments
The campaign to halt IFC investments in palm oil projects has paid off, at least in the short term. On August 7 the CAO revealed publicly that the IFC was not implementing an effective strategy to deal with the palm oil sector in Indonesia. Moreover, CAO said that the IFC had violated its own procedures, and that commercial considerations had trumped the IFC’s social and environmental standards. This is despite the governance and environmental problems associated with the Indonesian palm oil industry.
World Bank President Robert Zoellick has acknowledged in late August that the independent audit highlighted important deficiencies in IFC’s practices. In a letter Zoellick said that he had “directed IFC management to take all necessary steps to ensure that the problems identified in the CAO audit are not repeated.” The IFC will now review the environmental and social performance of all of its portfolio investments in palm oil projects over a six month period. The NGO community has responded positively to the IFC’s decision to suspend its palm oil investments, claiming that they are encouraged by the World Bank’s recognition of the problem.
Setting its sights on new targets
The coalition of NGOs is likely to feel emboldened by the IFC’s decision to end investments in palm oil, and will likely turn its attention to other loan providers. Torry Kuswardono from Friends of the Earth says that "this assessment should be applied to other monoculture agrofuels plantations. We encourage other banks to follow the World Bank's step and review such investments." Many private financial institutions, such as the ‘Equator Banks,’ look to the IFC for leadership in best practice when screening prospective clients to determine whether or not to provide project finance. This includes Citibank, ABN Amro, WestLB and Barclays. They will likely strengthen the screening process of prospective clients before extending loans to firms whose environmental and human rights practices may not be up to scratch.
It is not just the reputations of loan providers that are at stake. Food, consumer goods and cosmetics companies which use palm oil as inputs also face reputational and supply chain risks should they not screen their suppliers thoroughly to ensure that they are implementing best practice in terms of community engagement (protection of human rights) and environmental sustainability. It is clearly not enough to assume that a supply chain provider is acting as a responsible corporate citizen just because the IFC granted the company a loan.
The IFC’s completion of its review on lending practices in the palm oil sector should send another strong signal for lenders and other companies involved in the palm oil sector to adapt and implement best practice on the environment and human rights. Any laggards will likely face strong criticism from the NGO coalition, not to mention critical coverage by the international press. The challenge for companies and institutions that already have tarnished reputations is how to recover confidence (from consumers and the public at large) and improve their brand standing. Ensuring that best practice is in place, and also constantly reviewed, to avoid damaging coverage and avoid negative publicity from human rights and environmental activists is key. This is a basic premise that the IFC undoubtedly wishes it had followed more closely.
Anthony Skinner is a Principal Analyst at global risks specialist, Maplecroft