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Sustainable commodities report


from sources that can be maintained continually, large buyers will simply look elsewhere. A case in point is the fate that befell Malaysian palm oil giant IOI earlier this year. In April, IOI was suspended from the Roundtable on Sustainable Palm Oil (RSPO) amid allegations that it wasn’t fulfilling obligations to stop deforestation in Indonesia. Immediately, a host of the world’s top commodity buyers, including Mars, Nestle and Unilever, dropped it as a supplier. Undeterred by the public outcry, IOI sued the RSPO, claiming no wrongdoing and that it had been “unfairly affected” by the suspension. In June, it dropped the case and agreed to take on an action plan to meet the RSPO’s highest level of accreditation by the end of this year. The episode shaved 17% from IOI’s share price and is a lesson to all parties not meeting their obligations. At a roundtable discussion held on the sidelines of the GTR event in Singapore, this financial cul de sac of sorts was seized upon by Perpetua George, assistant general manager for sustainability at Wilmar International. These tools, she said, are probably being pitched at the wrong organisations. “If you look at the transformation of sustainability on the ground, you are going to have to look at financing smallholders. There is no point in financing the likes of Wilmar or Olam, because they already have the ability to be sustainable,” she said. Wilmar is working with an unnamed Indonesian bank on a pilot which would offer lines of credit specifically for the sustainable replanting of oil palms. There is “considerable interest from the investment banking sphere”, and George says it will be beyond the microfinancing solutions often offered to smallholders in these industries. The problem with microfinancing is that farmers need to be financed for the first five years of replanting – the immature phase – in one shot. There is almost zero income in this phase, but thousands of smallhold farmers in a co-operative. In short, it’s anathema to the lending models of most commercial institutions. George’s assessment of the banking sector’s efforts is withering: “I wouldn’t say there are a lot of innovations right now. I think it’s been a struggle to even try and get this one. Many banks are not yet prepared to innovate.

“Traditional, local Indonesian banks can lend, but they will lend at 30% APR to the farmer. They can’t afford that, so how do you reduce that to make it more affordable to the farmer? You need to somehow upfront the risk sharing, which traditionally has only been done with the mill.” The suggestion is that traders are having to take matters into their own hands and drive innovation in the banking sector. Banks’ customers arguably don’t make the same demands of them as soft commodity traders. If Cargill isn’t providing sustainably sourced palm oil products, Unilever will go elsewhere. Banks do face similar pressures from their clients, but are usually grilled first on the cost of capital, rather than sustainability.

“You are going to have to look at financing smallholders. There is no point in financing the likes of Wilmar or Olam, because they already have the ability to be sustainable.” Perpetua George, Wilmar International

Is it reductive, then, to claim that banks will never be in the driving seat of sustainable financing? Does it require the leadership of commodity giants, along with government and NGOs, to instigate the changes required to meet Paris Agreement targets? It seems at this urgent stage to be a fair assessment.

Chinese banks unsure how to act China imports 60% of all the world’s soy beans and 11% of all palm oil – two of the most destructively-grown crops. Its importance to global supply chains is massive and growing. Deforestation is the second biggest culprit in carbon emissions after power emissions. It is thought that up to half of tropical deforestation is the result of illegal conversion of forested land into agriculture, much of the crop then being exported, and a lot of it ending up in China. In China, financial regulators have been looking at ways of “greening” the sector, with particular focus on these destructive soft commodities imports. A report authored recently by the CISL, BEI and the Research Centre for Climate and Energy Finance (RCCEF – a Beijing-based organisation) focuses

on the nascent progress. Verhagen, who helped write the report, tells GTR that CISL was approached by Chinese regulators to explore ways in which international practices can be implemented in China. He says the workshops were productive, but “clearly there is much to be done”. One of the key takeaways is the importance of regulators and authorities: banks in China are not acting fully on sustainability because they have not been told to by the powers that be. This reiterates the suggestion that banks will not change their modus operandi unless they’re cajoled into it. The report found that when it comes to overseas financing, the China Banking Regulatory Commission (CBRC) already requires Chinese banks to adhere to international sustainability norms. However, no guidelines exist on shortterm trade finance and the authors write that “without further specific guidance, Chinese banks are unclear what more is expected of them”. Furthermore, Chinese banks don’t necessarily subscribe to the various industry guidelines on palm oil, soya and so on. Will Chinese banks adopt these standards without being forced to do so by a government or regulatory diktat? We may never know, given the direction being pushed by the Chinese government, but history tells us it is unlikely. The negativity pervading this report is intentional. For years, talk has been cheap on the issue of sustainable financing but consequential action seems elusive. The Soft Commodities Compact, through which a group of banks agreed to finance products resulting in zero net deforestation, will be a huge boost if its targets are met: we await the results with interest. For now, banks are making baby steps in the right direction, without fully taking ownership of the problems: continuing to finance destructive projects and sectors with one hand, as they naval-gaze over how to be sustainable on the other. An example of the dichotomy is the coal sector, where in the wake of the Paris Agreement a number of banks have stopped directly financing new coal projects. The likes of BNP Paribas and Société Générale, however, will continue to finance coal projects in emerging markets. Consolidated action and thinking is required – and fast. If governments push through the required policies to meet the goals of the Paris Agreement, this is hopefully what we will get.

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November/December 2016 issue  
November/December 2016 issue