Sustainability Pays: HSBC Predicts Better Financial Performance for Sustainability in Palm Oil Sector

By Climate Advisers
Forests & Lands

The palm oil industry is a risky business – currently, palm oil production is a leading cause of tropical deforestation in developing countries like Indonesia, where land grabs, biodiversity loss, and forest destruction threaten the way of life of local communities and drive global climate change.

How does the palm oil industry get away with clearing and burning tropical forests?

End users and financiers haven’t always demanded responsible sourcing of their palm oil. Palm oil companies with poor records of social and environmental performance faced little consequence for their bad behavior. And the investors that funded these companies saw little risk in their returns.

But now, one of the largest banks financing palm oil development is saying that’s all changing.

Global demand for responsibly produced palm oil will increase, according to a new report from banking giant HSBC. “Increasing demand for higher sustainability standards from key stakeholders – customers and capital providers – should start reflecting in valuations going forward,” concludes the HSBC analysis, authored by Thilan Wickramasinghe.

As the palm oil industry grows, it is increasingly turning to global capital markets to fund expansion costs. In today’s post-recession world, capital providers are wary of investing in a risky business like the palm oil industry. Investors are ready to reward sustainability and will look to palm oil producers to demonstrate strong environmental and social governance before funding their expansion. Consumers, too, are increasingly aware of their environmental footprint when buying products that contain palm oil, especially in developed country markets like the European Union. Even India and China are poised to increase demands for deforestation-free palm oil soon, as the number of middle class consumers grows by millions each year – and environmentally conscious consumption is increasingly seen as a signifier of wealth, sophistication, and coolness.


HSBC’s report also breaks new ground for the finance sector in noting that the current palm oil sustainability standards developed by the Roundtable on Sustainable Palm Oil (RSPO) are not preventing the deforestation and human rights abuses associated with palm oil production. “RSPO membership in and of itself is not enough to ensure companies are performing well in sustainability or that their part of the palm oil value chain is sustainable,” according to the HSBC analysts. The report highlights ongoing problems with burning forests, developing on carbon-rich peatlands, and a lack of transparency on the part of palm oil producers. All of these problems have yet to be fully addressed by the RSPO.

Companies that address the risks noted by HSBC and source their palm oil sustainably “will likely outperform the rest in the long term… risk to a company’s environmental and social governance reputation has a tangible impact on its capital market valuations.” In other words, HSBC thinks sustainability will pay off for palm oil producers – and continued deforestation will gouge their profits.

HSBC’s overall analysis is a major and welcome shift for the palm oil finance community. More problematically, HSBC then goes ahead and predict winners based on palm oil companies’ current levels of disclosure and growth. Yet many of the palm oil producers they highlight have little chance of being sustainable if they continue current practices.Bumitama, for instance, has recently been associated with large-scale deforestation and displacement of orangutans. In addition, HSBC also predicts First Resources and Kuala Lumpur Kepong will become future leaders in sustainability, even though the former recently took and cleared land without community consent in Indonesia and the latter has been investigated for forced labor.

While we might disagree with the findings on specific companies, the HSBC report is a milestone on the road to responsible investment in palm oil. When one of the world’s largest banks says that sustainability will pay – and deforestation won’t – investors should take note and re-direct their investments towards truly responsible palm oil production.

Image from the World Bank. Graph from HSBC report. The report and an accompanying video can be downloaded here.

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On November 14, 2013

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