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Stranded Assets in Palm Oil Production: a Case Study of Indonesia Working Paper July 2016

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Stranded Assets in Palm Oil Production: a Case Study of Indonesia Working Paper July 2016 Fall 08 Stranded Assets in Palm Oil Production: A Case Study of Indonesia Working Paper July 2016 Authors: Alexandra Morel | Rachel Friedman | Daniel J. Tulloch | Ben Caldecott About the Sustainable Finance Programme The Sustainable Finance Programme at the University of Oxford’s Smith School of Enterprise and the Environment was established in 2012 (originally as the Stranded Assets Programme) to understand how finance and investment intersects with the environment and sustainability. We seek to understand the requirements, challenges, and opportunities associated with a reallocation of capital towards investments aligned with global environmental sustainability. We seek to understand environment-related risk and opportunity, both in different sectors and systemically; how such factors are emerging and how they positively or negatively affect asset values; how such factors might be interrelated or correlated; their materiality (in terms of scale, impact, timing, and likelihood); who will be affected; and what affected groups can do to pre-emptively manage risk. We recognise that the production of high-quality research on environment-related factors is a necessary, though insufficient, condition for these factors to be successfully integrated into decision-making. Consequently, we also research the barriers that might prevent integration, whether in financial institutions, companies, governments, or regulators, and develop responses to address them. We also develop the data, analytics, frameworks, and models required to enable the integration of this information into decision-making. The Programme is based in a world leading university with a global reach and reputation. We work with leading practitioners from across the investment chain (including actuaries, asset owners, asset managers, accountants, banks, data providers, investment consultants, lawyers, ratings agencies, stock exchanges), with firms and their management, and with experts from a wide range of related subject areas (including finance, economics, management, geography, anthropology, climate science, law, area studies, psychology) within the University of Oxford and beyond. Since 2012 we have conducted pioneering research on stranded assets and remain the only academic institution conducting work in a significant and coordinated way on the topic. We have created the Stranded Assets Research Network, which brings together researchers, research institutions, and practitioners working on these and related issues internationally to share expertise. We have also created the Stranded Assets Forums, which are a series of private workshops to explore the issues involved. Stranded Assets in Palm Oil Production – Working Paper – July 2016 i About the Authors Alexandra Morel is a Postdoctoral Researcher on the recently launched ECOLIMITS Ecosystem Services for Poverty Alleviation (ESPA) project. Alexandra completed her MSc and DPhil through Oxford’s Environmental Change Institute, with theses on food security, biofuels, and the carbon balance of commodity production (e.g. palm oil) in India and Malaysia respectively. Rachel Friedman is a PhD candidate at the University of Queensland, Australia, working on land management decisions in socio-ecological systems and reconciling trade-offs between ecological and socio-economic factors. She completed an MPhil at the School of Geography and the Environment, Oxford, exploring climate change vulnerability among cocoa farmers in Ghana. Daniel J. Tulloch is a Postdoctoral Research Associate in the Sustainable Finance Programme. Daniel holds a PhD in finance at the University of Otago, New Zealand. He also holds an MSc in International Accounting and Financial Management from the University of East Anglia, Norwich. Ben Caldecott is Director of the Sustainable Finance Programme. The Sustainable Finance Programme incorporates and builds on the Stranded Assets Programme that he founded in 2012. He is concurrently an Adviser to The Prince of Wales’s Accounting for Sustainability Project, an Academic Visitor at the Bank of England, and a Visiting Scholar at Stanford University. Acknowledgements We would like to thank Craigmore Sustainable for providing a grant to support this research. We would also like to thank Duncan Macdonald-Korth (Oxford Smith School) for his research assistance. University of Oxford Disclaimer The Chancellor, Masters, and Scholars of the University of Oxford make no representations and provide no warranties in relation to any aspect of this publication, including regarding the advisability of investing in any particular company or investment fund or other vehicle. While we have obtained information believed to be reliable, neither the University, nor any of its employees, students, or appointees, shall be liable for any claims or losses of any nature in connection with information contained in this document, including but not limited to, lost profits or punitive or consequential damages. Stranded Assets in Palm Oil Production – Working Paper – July 2016 ii Table of Contents ABOUT THE SUSTAINABLE FINANCE PROGRAMME .................................................................................................. I ABOUT THE AUTHORS ............................................................................................................................................... II ACKNOWLEDGEMENTS.............................................................................................................................................. II EXECUTIVE SUMMARY ........................................................................................................................................ 1 ENVIRONMENT-RELATED RISKS IN THE PALM OIL VALUE CHAIN IN INDONESIA ....................................................... 1 INITIATIVES AIMING TO REDUCE ENVIRONMENT-RELATED RISK ................................................................................ 2 ASSESSING INVESTOR AND COMPANY EXPOSURE ....................................................................................................... 3 CONCLUSIONS.............................................................................................................................................................. 4 1 INTRODUCTION ............................................................................................................................................. 7 1.1 INDONESIA ........................................................................................................................................................ 8 1.2 STRUCTURE ....................................................................................................................................................... 9 2 THE PALM OIL INDUSTRY IN INDONESIA .......................................................................................... 10 2.1 THE INDONESIAN PALM OIL INDUSTRY ....................................................................................................... 14 3 ENVIRONMENT-RELATED RISKS IN THE PALM OIL VALUE CHAIN ......................................... 16 3.1 METHODS ........................................................................................................................................................ 16 3.2 PHYSICAL DRIVERS ........................................................................................................................................ 18 3.2.1 LAND DEGRADATION, DEFORESTATION, AND HABITAT LOSS ................................................................... 18 3.2.2 FIRE AND AIR POLLUTION ........................................................................................................................... 20 3.2.3 WEATHER VARIABILITY AND CLIMATE CHANGE ....................................................................................... 22 3.3 ECONOMIC DRIVERS ...................................................................................................................................... 24 3.3.1 GREENHOUSE GAS REGULATIONS ............................................................................................................... 24 3.3.2 BIOFUEL POLICIES ......................................................................................................................................... 28 3.3.3 LAND USE AND PATRONAGE POLICIES ....................................................................................................... 29 3.3.4 REPUTATIONAL RISK..................................................................................................................................... 32 4 INITIATIVES AIMING TO REDUCE ENVIRONMENT-RELATED RISK ........................................ 35 4.1 ROUNDTABLE ON SUSTAINABLE PALM OIL (RSPO) ................................................................................... 35 4.2 INDONESIAN SUSTAINABLE PALM OIL (ISPO) ............................................................................................ 38 4.3 INTERNATIONAL SUSTAINABILITY AND CARBON CERTIFICATION (ISCC) ............................................... 39 4.4 HIGH CARBON STOCK (HCS) ....................................................................................................................... 40 4.5 BANKING ENVIRONMENT INITIATIVE (BEI) & CONSUMER GOODS FORUM (CGF) ................................ 41 4.6 CARBON DISCLOSURE PROJECT (CDP) ........................................................................................................ 42 4.7 UN PRINCIPLES FOR RESPONSIBLE
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