- NGOs are increasingly engaging in dialogue with palm oil companies.
- To get through to financiers, some NGOs present their arguments in terms of material risk.
- However, some still some feel that there still exists a gap between activists and the finance world.
Part four in a five-part series on the attitudes of palm oil financiers towards company sustainability. Read the first, second, third and fifth installments.
The previous article in this series discussed the role of governments and regulators in getting the palm oil industry to internalize its environmental risk. But regulators are only half of the puzzle. NGOs play an equally crucial role.
In the palm oil sector, environmental NGOs have traditionally acted as whistleblowers and public activists. This approach has had some success in drawing public attention to the issue and keeping companies accountable. Notable achievements include Unilever’s adoption of a sustainable palm oil policy following public demonstrations at its headquarters by Greenpeace,[115] [116] and the divestment of Deutsche Bank from Indonesian producer Bumitama Agri after consultations with a German NGO, Rainforest Rescue, as well as a public petition receiving nearly 88,000 signatures.[117]
However, as the complexities surrounding the issues in the palm oil industry become more apparent, NGOs are progressively taking on the role of mediators and knowledge providers to help companies transition to sustainability. “NGOs have increasingly engaged in dialogue with companies,” Judith Walls, assistant professor at Nanyang Technological University, told Mongabay. Walls, who researches the intersection of business and sustainability, remarked, “Even environmental NGOs now regularly sit on corporate advisory boards and consult with companies about how to address environmental issues.”[118] In the palm oil sector, WWF has released a number of reports and guides to help financiers make more sustainable investing decisions, including “The Palm Oil Financing Handbook” (2008),[119] “Environmental, Social and Governance Integration for Banks” (2014),[120] and “Sustainable Finance in Singapore, Indonesia and Malaysia” (2015).[121]
By relying on the traditional activist approach, NGOs risked simply “targeting larger brands, rather than the most destructive entities,” said Benjamin McCarron, of Singapore-based consultancy Asia Research & Engagement.[122] To get through to financiers, NGOs need a much more comprehensive approach presented in terms investors can understand: namely, material risk. “We need a package consisting of improving standards, looking at lending, engaging with companies, and viable audits,” said Cary Krosinsky, independent sustainability advisor. “Every sector is different and needs its own strategy.”[123]
Efforts to reach financiers generally fall into two categories: research reports and shareholder tools. Research reports focused specifically on the financial impacts of unsustainable palm oil are picked up by financiers through controversy mining tools.[124] For example, the work of Chain Reaction Research (CRR) in highlighting the financial risks of unsustainable companies has played a key role in the adoption of more robust sustainability policies by companies such as Bumitama, as well as the blacklisting of growers such as Sawit Sumbermas Sarana by major palm oil traders.[125] “CRR reports and news updates are distributed to hundreds of analysts and others in the finance sector,” said Eric Wakker, a senior consultant with CRR, noting that the analyst community’s reception to these reports has been positive.[126]
Shareholder tools are used by a specific category of activists known as activist investors, who also own shares in a company, and whose actions can significantly affect the amount of risk investors perceive to be associated with a particular firm. Shareholder tools are diverse, ranging from proxy votes and letter-writing campaigns to shareholder resolutions and boycotts, but all share the characteristic of advocating change from within the financial system.[127] Activist investors are seen as more credible by risk analysts and fellow investors, as they believe the financial interests of activist investors are likely to be aligned with their own.[128]
One of the most significant activist investor groups in the palm oil sphere is the Sustainable Palm Oil Investor Working Group (IWG). The IWG comprises 25 institutional investors, all of which are members of the UN-supported Principles for Responsible Investment, representing over $2 trillion of assets under management. IWG members take an active role in engaging the palm oil companies in their portfolios, asking for clear commitments and timebound plans to obtain certification from the Roundtable on Sustainable Palm Oil.[129]
Aside from these specialized groups, however, some feel that there still exists a gap between activists and the finance world. “Many NGOs, especially local NGOs, find it hard to understand the financial sector and how to influence them,” said Wakker, who helps organize training workshops for NGOs to better educate them on the subject.[130] Krosinsky, the sustainability advisor, was concerned that too much effort is being focused on divestment and corporate governance, and too little on pressing issues such as stopping deforestation. In addition, he observed, “everyone is currently promoting their own agenda…the key point, which is that you can outperform financially with ESG, is being lost.”[131]
Whatever the approach taken, experts emphasize that fruitful results from the NGO-financier relationship in the palm oil sector depend heavily on dialogue – not just between NGOs and financiers, but also between financiers and palm oil companies. “Dialogues between investors at the more responsible end [of the spectrum] and listed producers…have had some success,” McCarron said.[132] “With dialogue, each party becomes more aware and knowledgeable of the struggles the other party faces,” added Walls. “[But] if one party…only wants to point fingers or deny things, then nothing will change.”[133]
Differing responses from public and private companies to activism
Compared to private companies, publicly listed companies have generally been perceived as being more receptive to activism. As a result, they have become the focus of the majority of activist campaigns. “Publicly listed companies tend to have better disclosure and be more responsive, as they are more in the public eye,” McCarron said.[134]
The traditional recourse for investors owning shares in unsustainable companies has been divestment. However, there has been significant pushback against the divestment model. Many investors express the sentiment that in the absence of binding industry-wide regulations, divestment will not change a company’s actions if they can simply find financing elsewhere.[135]
Now, more proactive investors are seeking to stimulate organizational change through engaging with errant companies. “Rather than divestment, it’s about future investment in these companies and how it can be directed,” Krosinsky said. “For example, if forest areas need to be preserved, companies can be encouraged not to place capital expenditures there.”[136] For institutional investors, divesting from a company generally involves a formal review process lasting one to three years; during this period, the investee company should be strongly incentivized to engage with investors.[137] Divestment, if performed, should be regarded as a last resort.
Though private companies are seen as harder to influence, some experts expressed hope that they, too, can be engaged, by using the corporate value chain.[138] Firstly, unsustainable private growers will be materially impacted by the “No Deforestation, No Peat, No Exploitation” policies of publicly listed traders.[139] Secondly, private companies often still need to borrow, which subjects them to corporate banks’ ESG screens and risk management policies.[140] Finally, private equity firms offer an additional channel through which to influence companies. Private equity investments are generally committed for a period of over five years, making divestment difficult; on the other hand, this creates an incentive for investors to take a proactive approach, using their majority stake to influence these companies’ operations and create lasting value.[141]
Citations:
[115] “Greenpeace Campaign Forces Unilever U-Turn on Palm Oil,” Greenpeace, May 1 2008. http://www.greenpeace.org/international/en/press/releases/greenpeace-campaign-forces-uni/
[116] Judith Walls (personal communication, October 13 2015).
[117] “Deutsche Bank Dumps Controversial Palm Oil Company,” Mongabay.com, May 27 2014. http://news.mongabay.com/2014/05/deutsche-bank-dumps-controversial-palm-oil-company/
[118] Judith Walls (personal communication, October 13 2015).
[119] The Palm Oil Financing Handbook: Practical Guidance on Responsible Financing and Investing in the Palm Oil Sector, WWF, 2008. http://assets.panda.org/downloads/the_palmoil_financing_handbook.pdf
[120] Environmental, Social and Governance Integration for Banks: A Guide to Starting Implementation, WWF, 2014. http://assets.panda.org/downloads/wwf_environmental_social_governance_banks_guide_report.pdf
[121] Sustainable Finance in Singapore, Indonesia and Malaysia: A Review of Financiers’ ESG Practices, Disclosure Standards and Regulations, WWF, 2015. http://d2ouvy59p0dg6k.cloudfront.net/downloads/wwf_frc_forest_risk_commodities_report_2015_online.pdf
[122] Benjamin McCarron (personal communication, October 23 2015).
[123] Cary Krosinsky (personal communication, July 30, 2015).
[124] Benjamin McCarron (personal communication, October 23 2015).
[125] Eric Wakker (personal communication, November 7 2015).
[126] Ibid.
[127] Chuck Eesely, Katherine DeCelles, and Michal Lenox, “Through the Mud or in the Boardroom: Examining Activist Types and Their Strategies in Targeting Firms for Social Change,” University of Virginia Darden Business School Working Paper No. 2574046, 2015, pp. 3-4. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2574046
[128] Ibid., p3.
[129] Principles for Responsible Investment, “Institutional Investors Call on Palm Oil Producers to Adhere to RSPO Principles as Next Phase of Engagement Begins,” July 16 2013. http://www.unpri.org/viewer/?file=wp-content/uploads/2013-07-16PalmOilmediarelease.pdf
[130] Eric Wakker (personal communication, November 7 2015).
[131] Cary Krosinsky (personal communication, July 30, 2015).
[132] Benjamin McCarron (personal communication, October 23 2015).
[133] Judith Walls (personal communication, October 13 2015).
[134] Benjamin McCarron (personal communication, October 23 2015).
[135] Palm Oil Investor Review, p31.
[136] Cary Krosinsky (personal communication, July 30, 2015).
[137] Palm Oil Investor Review, p32.
[138] Iain Henderson (personal communication, October 29 2015).
[139] Eric Wakker (personal communication, December 4 2015).
[140] Iain Henderson (personal communication, October 29 2015).
[141] Palm Oil Investor Review, p31.