Alex Morrice & Tom Bregman
Financial institutions have an important role to play in encouraging more sustainable business — and this is particularly the case in South East Asia, where the production of soft commodities such as palm oil and seafood have been linked to environmental and social impacts.
These industries play an important role in global food supplies and regional food security, as well as ensuring local livelihoods.
But, by financing companies operating unsustainably in these supply chains, banks are exposed to a number of risks. To help ensure their loans are not contributing to the destruction of natural and social capital, they should develop robust policies on palm oil and seafood. Yet new research by Global Canopy finds that these policies are often not in place.
Global Canopy evaluated the sustainability policies of financial institutions in South East Asia looking particularly at policies for the seafood sector (including fishing and aquaculture/fish farming) and for palm oil. For seafood, 24 regional banks were assessed. For palm oil, 28 regional banks were assessed.
The seafood sector faces significant sustainability risks, including illegal, unregulated, and unreported (IUU) fishing, declining marine biodiversity, destruction of mangroves, and human rights violations. New Global Canopy research demonstrates that each of these impacts can harm the bottom line of financial institutions which lend or invest in the sector.
None of the 24 regional banks assessed for seafood in South East Asia have specific sustainability policies for aquaculture or fisheries.
Nine of the institutions assessed have a policy to only finance legal operations, and two explicitly state that they will not finance trade in protected species.
Despite some safeguards against labour rights issues, none of the 24 banks in the region assessed have a seafood-specific lending policy. This contrasts with the eight large global banks that have operations in South East Asia who all have some form of sustainability policy on seafood.
Global Canopy believes regional banks should be at least asking companies to operate legally and to avoid IUU fishing specifically. All banks operating in the seafood sector need to recognise the interlinkages between risks in the fisheries and aquaculture sectors, and include requirements for aquaculture companies in their seafood financing policies.
Palm oil production is linked to a number of sustainability risks including tropical forest clearance, biodiversity loss, land rights issues, forced labour and peatland burning. Over several months in 2015, CO2 emissions from fires in Indonesia were greater than the CO2 produced by the entire economy of the USA.
Of the 28 regional banks assessed eight have sustainable lending policies that explicitly apply to palm oil. Three of these policies request a time-bound plan from companies to meet the objectives of the plan, one requires zero deforestation, two cover peatlands, three require no burning and five have explicit protection for primary or high conservation value forests.
No regional bank requires companies to have free, prior and informed consent (FPIC) from communities for palm oil.
All nine of the global financial institutions with investments in palm oil operations in South East Asia have a policy for financing palm oil companies which includes the protection of priority forest types, requires companies to ensure FPIC from affected communities, and requires companies to have time-bound plans to meet the requirements.
Regional banks need to recognise the risks that they are exposed to, and put in place palm oil specific policies. At a minimum these should require companies to be operating legally. Global banks need to expand their policies so they all cover workers’ rights, peatlands, zero burning, and primary forests, instead of the current piecemeal status of their policies.
Examples include protection for key habitats such as peatlands and primary forest, requiring FPIC for new developments, and ensuring companies have time-bound plans to meet these. For comprehensive guidance on suggested company expectations in soft commodity supply chains, read our briefing with CDP here.
Looking to the future
The risks in the palm oil and seafood industries impact company revenues and profitability, which, in turn can reduce returns on investment for financial institutions exposed to companies operating unsustainably.
While some of the global financial institutions operating in South East Asia have recognised these risks and introduced policies, regional institutions appear to be less aware of the risks they face. This may hurt profitability, and limit the ability of financial institutions to take advantage of the opportunity presented by sustainable investment in these sectors.
For more guidance on policies, best practice and company engagement on seafood, read our joint report with WWF here.