HSBC ratchets up sustainability risk policy

HSBC Agricultural Commodities Policy, March 2014, sets out details of the international bank's sustainability risk policies which requires key risky agri-commodity sectors: palm oil, soy, rubber wood and cattle ranching.

The focus is largely on palm oil. HSBC requires its existing grower, miller, refinery and trader customers to be 100% RSPO certification compliant by 31 December 2018 with the appropriate full information disclosures (notably on NPP and ACOP). New HSBC customers in this sector should have a clean track record and be fully compliant within 4 years.

Pushing bank customers for 100% compliance and disclosure
source: HSBC Agricultural Commodities Policy

The other high risk sectors - soy, rubber wood and cattle ranching - are on comparatively less stringent policies than palm. HSBC asks its soy sector clients to comply with RTRS (which is a simpler program than RSPO), rubber wood (FSC or PEFC which are voluntary and national standards respectively), and no details for cattle ranching set. No time schedules are mentioned for these other sectors versus palm as their programs are more flexible.

Soy, rubber wood and cattle ranching concerns, but less stringent
source: HSBC Agricultural Commodities Policy

The context

This major bank sets out quite detailed requirements on palm oil for its clients. Several including the World Bank Group, Standard Chartered and various other European banks already have broad policies on palm oil asking clients to be members. We can expect more banks to toughen up on such policies.

RSPO is notably different from RTRS, FSC and PEFC on various features including a) its requirement for 100% areal certification requirement and b) RSPO's upcoming HCV Compensation Liability, which sets environmental compensation at USD2,500-3,000 per hectare for post-1 Dec 2007 vintage estates for RSPO members and post-post 1 Jan 2010 vintage estates (then non-RSPO member controlled land) lacking appropriate HCV assessments and without land-use change (LUC) assessment submission. Those who do the LUC assessment, can multiply the liability by 0x, 0.4x and 0.7x depending on the status of the land in November 2005. Social compensation cost indicators have yet to be given, but some plantation sustainability experts tell us that if you spend $1 on environmental sustainability, you could also be spending $1 on social.

There is renewed urgency and tougher implementation of sustainability programs in the palm oil sector due to strong NGO campaigning and intra-NGO competition (also noted in the soybean sector) which has resulted in new stronger pledges from large producers and processors. Palm oil is now moving into a second phase of sustainability with sets out broader and deeper changes across the supply-chain for compliance with programs largely led by TFT-Greenpeace and RSPO-WWF principles.

Q&A on HSBC's new policy

Q: Will this have much of an impact on planters/refiners in Malaysia and Indonesia?
A: This is part of a trend of higher standards also being pressed by the large dominant plantation groups. As such, this change may not impact the category of large integrated producers as they are already making such promises and more within shorter timeframes. The impact will come as other supply-chain players have to comply with the procurement standards successfully campaigned by NGOs and taken up by producers and more buyers. The effect will cascade to small and mid-sized estates and independent processors. They will need to start moving with these voluntary sustainability programs.

Q: Will local Asian banks pick it up too?
A: The skeptics will say that if HSBC is less willing to lend, other banks will just step in. However, we hear from NGO sources that a handful of dominant plantation players have a new agreement that promises that they will ask their bankers to also comply. Thus, we can expect Asian banks to face more questions, not just from international NGOs but also from some of their own large plantation customers. If so, it may be sooner rather than later that more banks will be examining and issuing sustainability risk policies.

Q: Could this lead to a curb on further expansion of oil palm planting?
A: Expansion has been slowing among the large dominant players. Quite a few companies and analysts have noted the slowdown and attributed it to higher enviro-social standards. Thus, it is interesting to see statistics in Indonesia that shows relatively faster growth among smallholders in recent years. A senior adviser on sustainability note that sustainability has done a good thing in slowing expansion, as it has helped boost prices. But relatively high prices still signal for many to increase planting. Should we regard that as a paradox of the current sustainability policies or not? Also, buoyant prices and still good margins should make it easier for plantations to absorb higher cost for sustainability programs. While it may affect certain segments who need to adjust, the higher standards may or may not curb further global expansion of oil palm. Sustainability is one factor in many affecting palm oil supply and these policies can result in unintended and paradoxical changes.