2016 Sustainability Benchmark: Indonesian Palm Oil Growers Chain Reaction Research 1320 19th Street NW, Suite 400 Key Findings Washington, DC 20036 United States The sustainable purchasing policies of main traders/processors have strengthened Website: www.chainreactionresearch.com the sustainability policies and practices of 4 of the 10 largest palm oil growers listed Email: [email protected] on the Indonesian stock exchange (IDX). Authors: Albert ten Kate, Aidenvironment Gabriel Thoumi, CFA, FRM, Climate Advisers Most of the IDX-listed palm oil growers still have poor sustainability standards. Eric Wakker, Aidenvironment December 2016. The IDX-listed palm oil growing companies PT Tunas Baru Lampung and PT Sawit Sumbermas Sarana are presently clearing forests and/or peatlands. The world’s top food processing companies Nestlé and Unilever are among their customers. The methodologies used for scoring The sustainability policies and recent practices of 10 largest IDX-listed palm oil growers the companies in this report are were analyzed and ranked. Together these companies harvest around 10 percent of the described in Appendix 1 and world’s oil palm. Climate change, biodiversity loss and human rights abuses were the Appendix 2. key elements of screening. The companies could score a total of 12 points (Appendix 1): Aligning with No Deforestation, No Peat, No Exploitation (NDPE) policies (maximum 6 points) Active membership of the RSPO (maximum 3 points) Recent practices (maximum 3 points) The scores were transferred into the categories red (policies and practices inadequate), orange (should be improved), and green (likely not perfect, yet on the way). Figure 1 below shows the final scores (largest palm oil growers mentioned first). Figure 1: IDX-listed palm oil growers, Palm Oil Grower (IDX Ticker) Sustainability Score sustainability scores. PT Astra Agro Lestari (AALI) PT Salim Ivomas Pratama Tbk (SIMP, part of Indofood) PT Sinar Mas Agro Resources and Technology (SMAR) PT Dharma Satya Nusantara Group (DSNG) PT Sampoerna Agro (SGRO) PT Eagle High Plantations (BWPT) PT Sawit Sumbermas Sarana (SSMS) PT Tunas Baru Lampung (TBLA) PT Austindo Nusantara Jaya (ANJT) PT Bakrie Sumatera Plantations (UNSP) The companies were also scored for revenue at risk for not achieving buyers’ NDPE procurement policies (Appendix 2). 2016 Sustainability Benchmark: Indonesian Palm Oil Growers | 2016 Material Risks Facing the Sector All ten companies reviewed for this analysis experienced severe harvest reductions in 2016, compared to 2015. The lower harvest figures, up to 30 percent, were caused by the severe drought and catastrophic haze in July to October 2015. The drought was accelerated by climate change. The haze made Indonesia one of the largest GHG emitters globally in 2015. In early November 2015, President Widodo issued a presidential instruction ordering companies to stop developing new palm oil plantations on the fire prone peatlands. On December 5, 2016 the protection of peatlands became law. However, of the 10 largest IDX-listed palm oil growers, five (SGRO, BWPT, SSMS, TBLA and UNSP) have yet to publicly commit to ending peatland development. Among them, TBLA was found to continue peatland development in 2016, and SSMS plans to do so within one of its recent greenfield acquisitions. Only a few of the 10 largest IDX-listed palm oil growers specifically refer to global principles for social issues, such as the right of local communities to Free, Prior and Informed Consent (FPIC), the core conventions of the International Labour Organisation (ILO) and the United Nations Guiding Principles on Business and Human Rights. Two companies are presently subject to severe legal and/or government screening related to environmental issues. On August 11, 2016 judges of the South Jakarta District Court ordered SGRO to pay more than $80 million for compensation and environmental restoration. TBLA did not comply with the terms of a permit granted by Indonesia's Environment and Forestry Ministry in 2012. Risk exposure due to NDPE-policies Since June 2015, the market force from the NDPE-policies by main traders/processors has led to the strengthening of sustainability policies and practices by 4 of the 10 largest IDX-listed palm oil growers. Two IDX-listed growers (AALI, DSNG) issued stronger sustainability policies, and another two (BWPT, ANJT) suspended their operations in contested areas after buyers’ intervention. In June 2015, Chain Reaction Research estimated that six out of the 10 largest IDX- listed growers had a high-risk exposure (chance of losing main buyers) due to the sustainability standards of their buyers. Our new estimate is that four out of the 10 companies have a high-risk exposure: SGRO, TBLA, BWPT, and UNSP. PT Tunas Baru Lampung (TBLA) and PT Sawit Sumbermas Sarana (SSMS) are presently clearing forests and/or peatlands. The main NDPE-buyers of SSMS in 2016 were Louis Dreyfus and Unilever. The main NDPE-buyers of TBLA were Nestlé, Louis Dreyfus, Musim Mas, Wilmar, GAR, ADM, and Asian Agri/Apical. 2016 Sustainability Benchmark: Indonesian Palm Oil Growers | December 2016 |2 PT Astra Agro Lestari Tbk (AALI:IJ) Oil palm revenue IDR 13,100 2015 billion Astra Agro Lestari (Astra) is the second largest publicly traded palm oil company in Indonesia in terms of CPO production. The company is majority-owned by Jardine CPO-production 1,737,000 Matheson Holdings, which is controlled by the Scottish Keswick family. As of December 2015 tons 2015, Astra managed 298,000 ha of oil palm plantations with concessions scattered over Kalimantan, Sumatra and Sulawesi. Sustainability policy and recent practices Since 2014, Astra has been active in downstream palm oil refining. In 2015, its refinery KLK, Musim business generated 41% of its revenue. Together with the Malaysian oil palm giant NDPE Buyers 2016 Mas, Asian Kuala Lumpur Kepong (KLK), it has formed a marketing joint venture for palm oil Agri/Apical, products from West Sulawesi. In January 2015, Astra bought a 50% stake in the refinery GAR, Wilmar company PT Kreasijaya Adhikarya, located in Dumai, Riau province. KLK is the joint NDPE Buyers 2016 venture partner. Percent Revenue 70% AALI Sustainability Policy and Recent Practices Adopted a NDPE-policy in September In June 2015, Climate Advisers ran the She’s Not a Fan campaign engaging Astra for its 2015, moratorium on land conversion deforestation-linked palm oil. As a result, Astra introduced a moratorium on land conversion across all its operations in Indonesia. In September 2015, it published a NDPE policy. Astra is not a member of the RSPO. As shown below in Figure 2, spatial analysis has showed that, between June 2015 and mid-August 2016, Astra cleared no peatlands and there has been no deforestation for plantation development inside Astra’s concessions. However, since the publication of its NDPE policy, Astra has not made visible progress with its policy goals on supply chain transparency and suppliers’ compliance. Astra‘s supply chain mainly comprises smallholders. Yet, it does also source from large companies such as PT Austindo Nusantara Jaya (ANJT:IJ) to fill its refineries. Astra’s supply chain has social conflict. In September 2016, the Indonesian NGO KKI WARSI stated: “The indigenous Orang Rimba people in Jambi are suffering as a result of Astra’s palm oil plantations. Because Astra expropriated their lands, they live in extreme poverty and despair. We urge Astra to return land to the 400 Orang Rimba within Astra’s plantation so they can live a decent life.” Figure 2: During Indonesia’s 2015 haze disaster, about 2,400 ha of forests were lost due to fires inside Astra’s largely undeveloped peatland concession of PT Cakung Permata Nusa in Tabalong district, South Kalimantan. The red dots are recorded hotspots. No evidence was found on any intentional burnings by Astra. 2016 Sustainability Benchmark: Indonesian Palm Oil Growers | December 2016 |3 PT Salim Ivomas Pratama Tbk (SIMP:IJ) Oil palm revenue IDR 13,800 2015 (includes sugar billion PT Salim Ivomas Pratama (SIMP) is the parent company of PT PP London Sumatra and rubber revenues) Indonesia Tbk (LSIP:IJ). Indofood Agri Resources Ltd. (IFAR:SP) is the parent company of CPO-production 1,002,000 SIMP. It trades on the Singapore Stock Exchange. Both SIMP and LSIP trade on the 2015 tons Indonesian Stock Exchange. Sustainability policy SIMP is the upstream oil palm plantation, manufacturer, and refiner for Indofood and recent practices Sukses Makmur (INDF:IJ), Indonesia's largest food company. As of Q3 206, SIMP has a 247,000 ha plantation landbank, primarily in Sumatra and Kalimantan. SIMP is the third Wilmar, largest publicly traded palm oil company in Indonesia in terms of CPO production. Its NDPE Buyers 2016 Musim Mas, GAR cooking oil brand Bimoli is the market leader in Indonesia. The company also has businesses in sugar, rubber, oil palm seeds, and timber. NDPE Buyers 2016 Percent Revenue 20 to 30% SIMP Anthoni Salim, the third richest Indonesian according to Forbes, controls Indofood’s operations. Indofood is one of the world’s largest instant noodle producers. He also has Since 2015, no apparent changes in land- stakes in businesses other than Indofood, some of which are also involved in oil palm use policies to mitigate risks plantations. Sustainability Policy and Recent Practices SIMP is the largest publicly traded palm oil company in Indonesia without an NDPE policy. The company has yet to commit to the protection of High Carbon Stock (HCS) forests. Moreover, it has no official policy for complying with the United Nations Guiding Principles on Business and Human Rights or the ILO core conventions. In 2013, IFAR announced its policy to refrain from planting on peat. The company has been in compliance with this specific policy. In 2015 and 2016, SIMP did not expand its oil palm planted area. SIMP is a member of the RSPO. As of Q3 2016, 388,000 tons of its CPO production (39 percent of its total production) was RSPO-certified.