Hans Nicholas Jong, Jakarta – Consumer goods behemoths such as Unilever, PepsiCo and Nestle that buy palm oil from Indonesia may be exposed to the environmental and social fallout from a seemingly unrelated industry there: coal mining.
That's because of the substantial overlap between the mining and palm oil industries, with at least 13 corporate groups having both large mining and palm oil businesses, according to a report by Washington, D.C.-based sustainability risk analysis organization Chain Reaction Research (CRR).
It shows that six of the 10 largest oil palm companies in Indonesia also have mining businesses, while five of the 10 largest coal miners in the country also have palm oil businesses.
Report co-author Albert ten Kate, a researcher at Amsterdam-based sustainability consultancy Aidenvironment, said the information showing this overlap isn't readily available to the public, and thus the researchers decided to compile them in the report. He said this situation might be unique to Indonesia and, to some extent, Malaysia. The two Southeast Asian countries produce 85% of the world's palm oil, a ubiquitous ingredient in processed foods, cosmetics and biodiesel.
"For Mid and South America, Africa and Thailand [which grow palm oil], there is no such overlap," ten Kate told Mongabay. "In Malaysia also less than in Indonesia, yet for example the Sarawak conglomerate Rimbunan Hijau has mining activities."
CRR's report identifies 13 groups in Indonesia that are heavily invested in both industries as: Sinar Mas (whose palm oil arm is Golden Agri-Resources); Keswick family (Astra Agro Lestari); Harita Group (Bumitama); Salim Group (Indofood Agri Resources); KPN Corp (KPN/GAMA Plantation); Bakrie Group (Bakrie Sumatera Plantations); Adaro Energy; Indika Energy (Teladan Prima Agro); the Indonesian government (PTPN); LG; Rachmat family (Triputra Agro Persada); Chairil family (Palma Serasih); and Kayan Patria Pratama.
Most of the plantation companies in the list have "no deforestation, no peatland, no exploitation" (NDPE) policies. And yet their affiliated mining operations have long been associated with environmental destruction, such as deforestation.
Except for the Salim group, which has chosen not to have any NDPE commitments or comply with the Roundtable on Sustainable Palm Oil (RSPO), the main oil palm growers all supply palm oil to global fast-moving consumer goods (FMCG) companies such as Unilever, Nestle, PepsiCo and Procter & Gamble.
Ten Kate cited Sinar Mas, Astra and the Harita Group as the most prominent examples of how mining and palm oil businesses can overlap in Indonesia. This is because the three conglomerates are among the top 10 Indonesian palm oil growers and have significant mining interests.
"Harita and Astra are linked to risky tailings dams, [and] Astra [also] invests in an extra coal power plant," he told Mongabay. "There is the spotted deforestation inside Sinar Mas's PT Berau Coal" concession, he added, but noted that he knew of no NGO that has linked them to that deforestation before now.
Sinar Mas, one of Indonesia's biggest conglomerates, is among both the top 10 palm oil growers and top 10 coal miners in Indonesia. It has a 60% stake in PT Dian Swastatika Sentosa and 80% in PT Berau Coal Energy, both of which are publicly listed coal miners.
Sinar Mas's palm oil arm, Golden Agri-Resources (GAR), is the largest private oil palm grower in Indonesia, with a planted area of 536,000 hectares (1.32 million acres), or about three times the size of London. GAR is also among the largest palm oil refiners in Indonesia, with 47 mills, and has an NDPE policy. Another arm of Sinar Mas, Asia Pulp & Paper (APP), is Indonesia's largest pulp and paper producer.
Berau Coal cleared at least 1,100 hectares (2,700 acres) of forests since June 2016, an overlay of satellite imagery with the 2016 forest cover map from the Ministry of Environment and Forestry shows. The deforestation took place at the miner's Binungan block 8 site.
Jardine Matheson Holdings Ltd., incorporated in the offshore tax haven of Bermuda, is a multinational company controlled by the Scottish Keswick family. The company has sprawling businesses in Indonesia through its subsidiary, PT Astra International Tbk, the sixth-biggest listed company in Indonesia, with a market cap of more than $15 billion.
One of its many subsidiaries, Astra Agro Lestari, is the third-largest private oil palm grower in Indonesia, with 288,000 hectares (711,700 acres) of planted area. Another Astra subsidiary, United Tractors, owns several coal and gold mines in Indonesia and is among the largest contractors in the coal mining industry.
Astra is also investing in a new coal-fired power plant via United Tractors' 25% stake in a consortium building the 2,000 megawatt facility in Central Java province. The new plant will reportedly need 7.5 million metric tons of coal per year.
Secretive tycoon Lim Hariyanto Wijaya Sarwono and his family own businesses in mining, mostly nickel and bauxite, and plantations in Indonesia. The family holds a majority stake in Singapore-listed palm oil producer Bumitama Agri, estimated to be the No. 10 oil palm grower in Indonesia, with a planted area of 188,000 hectares (464,600 acres).
Through Lim's Harita Group, the family controls four nickel concessions in eastern Indonesia and a bauxite mine in the island of Borneo. It has also invested in two nickel smelters as a part of Indonesia's effort to become a regional hub for electric vehicle production.
Call for greater transparency
With so much overlap between mining and palm oil businesses in Indonesia, ten Kate of Aidenvironment said efforts to mitigate environmental and social risks should be made across business operations, not only in palm oil.
This is because mining in Indonesia comes with large environmental and social risks. The burning of coal is the single largest contributor to global climate change through CO2 emissions, while the mining pollutes rivers on which farmers, fishers and other communities depend.
Recent flooding in Indonesia has also been associated with mining activities, with green groups saying decades of unchecked mining has silted up rivers and deforested watershed areas, compromising the ability of both rivers and land to absorb high volumes of rainwater runoff.
Ten Kate said the overlap between palm oil and mining in Indonesia makes things difficult for companies trading in palm oil to rid their supply chains of deforestation. "[T]he producers of palm oil may have their right hand clean, but what about their left hand? Palm oil buyers should be sure that Indonesian conglomerates are responsible business partners for all their operations," he said.
Mining companies in Indonesia are also often not transparent about their activities, particularly how they address the environmental and social risks of their mining operations.
"The present information by conglomerates on their mining activities is very poor," ten Kate said.
The report cites the example of the Harita Group's two nickel smelters in North Maluku province: PT Halmahera Jaya Feronikel and PT Halmahera Persada Lygend (HPAL). The latter says on its website that it has conducted an assessment on human rights risk and impact from its operations, but doesn't give details.
"The assessment is however not available on the website, so the company is not transparent about how it addresses the issues," the report says. "On the other nickel smelter, PT Halmahera Jaya Feronikel, no information could be found online with regard to due diligence on human rights."
Ten Kate called on Indonesian conglomerates to publish information identifying environmental and social risks of their businesses at the group level, as well as the mitigation measures being taken.
Material financial risk
The banks and investment firms that fund plantations and the FMCGs that buy palm oil from them should also factor in environmental, social and governance (ESG) issues like deforestation by affiliated companies within the conglomerates.
The overlap between palm oil and mining leaves them exposed to the risks posed by the latter in Indonesia, according to report co-author Gerard Rijk, an equity analyst at Amsterdam-based sustainability consultancy Profundo. Banks and investors with zero-deforestation policies, for instance, can be linked to deforestation by one of their sourcing companies, creating reputational risk, he said.
"Although the palm oil [business partner] might be NDPE, working with a business partner that deforests elsewhere can hurt the good reputation of financers," Rijk said. "Their clients might look for other banks and asset managers, leading to lower income for the financers with these deforestation links."
The same applies to FMCG companies, whose shareholders, bondholders and funders include institutions with zero-deforestation or other sustainability policies, he added.
With NGOs and social media increasingly attuned to the issue of deforestation, financers are trying to steer clear of it, according to Rijk.
"Financers might avoid the FMCGs with a weak execution of NDPE," he said. "Equity valuation might decline, and financing costs might go up. Also, consumers might avoid buying certain brands, which hurts the profits of a brand manufacturer which has weak execution of NDPE policies. This all creates financial risk which can be material."