Tuesday, October 13, 2015

Indonesian Company PT Astra International Tbk Placed Under Observation (Severe Environmental Risks) by the Norwegian Pension Fund Global (SWF) Investment Universe

(Wikipedia Commons; Black lory (Chalcopsitta atra), Gembira Loka Zoo, Yogyakarta 2015-03-15;Crisco 1492 )



The Norwegian Sovereign Wealth Fund has announced that it will be putting a company under observation for severe environmental risks) in a context in which the usual approach had been the exclusion of such companies from its investment universe. This Press Release from Norges Bank for the Norwegian Sovereign Wealth Fund

Today, Norges Bank has published its decision to place the Indonesian company PT Astra International Tbk under observation because of the risk of the company being responsible for severe environmental damage associated with the conversion of tropical forest into oil palm plantations.

On 15 January 2014, the Council on Ethics recommended the Ministry of Finance to exclude the company PT Astra International Tbk.

On 1 January 2015 new Guidelines for Observation and exclusion from the Government Pension Fund Global came into force. As set out in the new Guidelines, the Council on Ethics shall submit recommendations on the exclusion or observation of companies to Norges Bank. In its recommendation to the Bank dated 23 June 2015, the Council on Ethics updated its previous recommendation and recommended the observation of the company. The Council writes:

“The Council on Ethics for the Government Pension Fund Global (GPFG) recommends that PT Astra International Tbk be placed under observation due to the risk that the company may be responsible for severe environmental damage. The observation relates to the company’s plantation operation in Indonesia. On 11 June 2015, Astra announced that it would immediately be ceasing all logging and land conversion while developing a new sustainability strategy. The company has also stated that it will avoid deforestation in future. In view of the company’s previous policy and uncertainty as to the material impact of the change in the company’s strategy, the Council has concluded that the company should be placed under observation. The Council recommends an observation period of four years to allow the progress and impact of the company’s new policy to be assessed.”

Please find Norges Bank’s decision here http://www.norges-bank.no/en/Published/News-archive/2015/2015-10-13-company-under-observation/

Please find the Council’s recommendations here http://etikkradet.no/en/recommendation-from-2014-and-2015-on-the-exclusion-and-observation-of-pt-astra-international-tbk/
The post includes some thoughts on the decision and the Summary portion of the Ethics Council Recommendation. This action may represent a potentially substantial change in action outlook by the Norwegian SWF (compare IJM Corp Bhd, Genting Bhd, POSCO and Daewoo International Corp Excluded from Norwegian Sovereign Wealth Fund).


One of the most interesting things about this decision is what appears to be evidence that the changes initiated earlier this year are beginning to be felt int he work of the Ethics Council. In that context it is worth considering the differences between the Ethics Council's 2014 and 2015 recommendations (Please find the 2014 recommendation to the Ministry here; Please find the 2015 recommendation to Norges Bank here). This suggests that it may be more likely that the Ethics COuncil will open the door wider to the use by the Norges Bank of its shareholder power, rather than as has been more routinely the case in the case, move immediately from a finding of violation to a determination of exclusion.

To a large extent this movement, if it is one, will strengthen the influence of the Norwegian SWF within targeted areas of corporate governance and CSR. The old approach--severe punishment had the spectacular effects of an Old Testament approach to discipline, but was ineffective in the long run in changing behavior. Indeed, once companies determined that they could live and quite well outside the Norwegian Pension Fund Global's investment universe, the threat of exclusion lost much of its effect. On the other hand, the very few times that observation was used--and principally in the context of the Siemen's corruption scandals--it appeared to prove far more effective. Indeed, one might argue as a genera matter that the more effective way of leveraging public policy within corporate governance through markets is through the muscular use of shareholder power rather than through the use of investor authority. The only way that investor authority is useful (and in this context the use of exclusion as a tool) is only in those contexts where exclusion is used as a means of organizing concerted public-private action against an enterprise. Vedanta proved to be a singular example fo that (see, e.g., here). But precisely because Vedanta proved to be a singular experience, it seems that exclusion merits less emphasis and shareholder power more.

And yet, it should be noted that the Ethics Council's approach to observation appears peculiarly passive.  It is true enough that observation by its nature is passive.  But when exercised by a shareholder with a distinct governance program--like the Norwegian Kingdom--observation suggests something more than the sort of wait and monitor approach that the Ethics Council appears to have embraced. Indeed, the essence of observation inherent in the Ethics Guidelines themselves suggests something more active. Shareholder status ought to merit the Pension Fund some access to reports and some greater access to the sort of decision making that is at the heart of the investment decision.  Yet the Ethics Council appears to be  subjects to the same monitoring constraints as any small investor with an internet connection and little influence.  If observation is to become an effective policy tool to further the investment principles inherent in the Pension Fund Global, then both the Ethics Council and the administrators at Norges Bank will have to exercise substantially more robust engaged observation that appears likely form this decision. 

One sees these ideas peeking out of the Ethics Council's 2015 Recommendation, which follows:


To Norges Bank
23 June 2015
UNOFFICIAL ENGLISH TRANSLATION
Recommendation to place PT Astra International Corporation Tbk under observation

Summary

The Council on Ethics for the Government Pension Fund Global (GPFG) recommends that PT Astra International Tbk be placed under observation due to the risk that the company may be responsible for severe environmental damage. The observation relates to the company’s plantation operation in Indonesia. On 11 June 2015, Astra announced that it would immediately be ceasing all logging and land conversion while developing a new sustainability strategy. The company has also stated that it will avoid deforestation in future. In view of the company’s previous policy and uncertainty as to the material impact of the change in the company’s strategy, the Council has concluded that the company should be placed under observation. The Council recommends an observation period of four years to allow the progress and impact of the company’s new policy to be assessed.
1 Introduction

On 27 March 2014, the Council on Ethics recommended to the Ministry of Finance that PT Astra International Corporation Tbk (Astra) and its subsidiary PT Astra Agro Lestari (AAL) should be excluded from the Government Pension Fund Global (GPFG).1 The Council was of the opinion that there was an unacceptable risk of Astra, through its subsidiary AAL, being responsible for severe environmental damage in connection with the company’s conversion of tropical forest into oil palm plantations. The Ministry of Finance did not make a decision on the matter.

In 2015, the Council on Ethics has assessed whether the company’s activities and conduct have changed to such an extent that the grounds for the exclusion recommendation no longer apply.
Astra is an Indonesian group operating in a number of different business areas. AAL operates the plantation business and currently has oil palm plantations on Sumatra, Kalimantan and Sulawesi.2
Astra has a 79.7% stake in AAL. AAL is listed on the Jakarta Stock Exchange, but the GPFG currently holds no shares in AAL. At the end of 2014, the GPFG owned shares in Astra with a market value of almost USD 72.9 million, corresponding to an ownership interest of 0.3%.
2 About the grounds for the Council on Ethics’ recommendation from 2014

The Council on Ethics assessed the risk of severe environmental damage in connection with the conversion of forest and peatlands through Astra’s development of oil palm plantations. In its assessment, the Council emphasised the scale of conversion, the degree to which the company’s concessions overlapped with areas containing important ecological values, and the consequences of conversion for endangered species and their habitats.

The Council’s assessment concentrated on 12 concessions totalling approximately 90,000 ha in Kalimantan and on Sulawesi, where the company had recently converted or was in the process of converting forest and peatlands into plantations. The Council assumed that the company’s concessions appeared to lie in important global ecoregions known for their unusually rich biodiversity and large number of endemic species. One of the concessions appeared to overlap with areas identified as habitats for orangutans and, probably, other endangered species. In seven of the concessions, it appeared that the company was in the process of converting contiguous forest in a good condition, and possibly also primary forest that had not been logged previously. It was concluded that the development of oil palm plantations would contribute to severe fragmentation of an almost untouched contiguous block of forest containing unique ecological values.

Astra did not provide any information on the location of AAL’s concessions, the vegetation covering the areas or the impact of conversion on nature and the environment. On its website, AAL stated that the company had surveyed the conservation values present in the concessions and implemented measures to preserve these following conversion (i.e. conducted High Conservation Value (HCV) assessments), but neither the reports nor the survey methods were published. Accordingly, there was no basis for assessing whether the measures would be adequate to protect the conservation values in the concessions. The Council on Ethics also emphasised that AAL appeared to have converted HCV areas listed for conservation in one of the concessions. The Council concluded that this, coupled with the fact that the company had not disclosed the HCV assessments, weakened the credibility of the company’s efforts to preserve biodiversity. The Council concluded:

“The basis for assessing the state of the forest, species diversity and ecosystems has been limited in this case. The Council finds that the lack of data and transparency on the part of the company, the scale of conversion and the fact that the concessions appear to lie in areas of unusually rich and unique biodiversity present an unacceptable risk that conversion will result in complete and irreversible changes to ecosystems and vegetation. The measures proposed by the company will, in the Council’s view, be insufficient to reduce the risk of severe environmental damage associated with current and future conversion of forest into oil palm plantations.”

3 The Council on Ethics’ investigations in 2015

It is still the case that little information is available on the company’s concessions. Among other things, the Council on Ethics has attempted to verify Astra’s ownership of four concessions on Sulawesi, which the recommendation identified as somewhat uncertain.3 The Council engaged local consultants to write to the relevant authorities (the National Land Agency) to confirm whether Astra’s subsidiary is in fact the concession-holder, but the authorities have not responded. This issue therefore remains unresolved.

A new NGO report on Astra’s plantation operation was published in May 2015. It documented the company’s continued conversion of forest, most likely including primary forest and peatlands, in its concessions in 2014.4 According to the report, this has had a severe negative impact on biodiversity in these areas and, for example, contributed to the destruction of habitats for endangered species. The report covers some of the same concessions as investigated by the Council on Ethics, but also describes several other concessions, including some on Sulawesi. The report thus confirms the Council’s findings on which the recommendation of January 2014 was based. As at 11 June 2015, Astra had not published significant new information about measures to protect biodiversity. In a letter to NBIM of 8 June 2015, the Council therefore maintained its recommendation to exclude Astra International from the GPFG due to an unacceptable risk of severe environmental damage in connection with the company’s plantation operation.

On 11 June 2015, AAL announced on its website that it was introducing a moratorium on all land conversion with immediate effect: “Astra Agro Lestari (“AAL”) has today introduced an immediate moratorium whereby it will stop all land conversion. Accordingly, AAL will ensure that there will be no clearance of any natural forest either by the Company or any of its contractors across all its operations in Indonesia.” Further: “Consistent with the principles of no deforestation, respect for community rights and the conservation of peat lands, AAL is now in the process of formulating a detailed sustainability policy which will include the need for carrying out High Conservation Value (HCV) and High Carbon Stock (HCS) assessments prior to any future expansion.”5

4 The Council on Ethics’ assessment

Astra is ceasing all logging and land conversion during its development of a new sustainability policy, and the company has stated that it will also avoid deforestation in future. This may entail a reduction in the risk of future environmental damage. The basis for the Council on Ethics’ recommendation to exclude the company from the GPFG has thus been altered.

The moratorium indicates a positive change in Astra’s future plans for the development of its plantations. The company has stated that it will formulate a detailed sustainability strategy that includes the need for HCV assessments and assessments of forest carbon stocks. As yet, the specific content of the company’s policy is unclear, as are the concrete consequences of the policy for the company’s plantation operation. The key question is whether the measures implemented by the company will be adequate to safeguard biodiversity and important ecological values in the concessions.

Astra has also previously adopted strategies for surveying and protecting high-value areas. In 2012, Astra informed the Council on Ethics that it “strongly supports the preservation and conservation of the natural environment in Indonesia”6 and, further, that it “applies the concept of High Conservation Value Forest” when developing new plantations.7 AAL has also stated “that its mission in conducting conservation is to develop a model of conservation area and biodiversity management in oil palm plantations”.8 In the Council’s view, the company’s stated strategies and intentions are not in accordance with the environmental consequences apparently triggered by the development of plantations. The Council has emphasised that, prior to the announcement of the moratorium, the company appears to have done little to alleviate the environmental damage associated with the conversion of forest into plantations.

In view of the company’s previous policy and uncertainty as to the material impact of the change in the company’s strategy, the Council on Ethics has concluded that the company should be placed under observation. The Council recommends an observation period of four years to allow the progress and impact of the company’s new policy to be assessed.

If, during the observation period, the company’s measures are found to be inadequate to protect biodiversity and important ecological values in the concessions, the Council on Ethics will consider whether there are grounds for excluding the company from the GPFG.

5 Recommendation

The Council on Ethics recommends that PT Astra International Tbk be placed under observation for a period of four years due to the risk that the company may be responsible forsevere environmental damage

NOTES:

1 The Council's recommendation is available at www.etikkradet.no.
2 Astra International: http://www.Astra.co.id/index.php/business/detail/46.
3 In the recommendation made in 2014, the Council on Ethics referred to four concessions on Sulawesi which maps from the National Land Agency (BPN), showing oil palm plantations in Indonesia, indicated were owned by AAL’s subsidiary PT Gunung Sejahtera (PT GS).3 These concessions were not listed in AAL’s annual report. Astra was sent a draft of the recommendation in 2013, but did not comment on this matter.
4 Aidenvironment 2015: Sustainability assessment of Astra Agro Lestari, available at http://www.regnskog.no/en/publications/reports/_attachment/44283/binary/41048. The Rainforest Foundation Norway commissioned the report, which has since been used in an international campaign against Astra International. See Climate Advisers, Forest Heroes and Rainforest Foundation Norway 2015: She’s not a fan, available at http://www.shesnotafan.org/.
5 http://www.Astra-agro.co.id/index.php/indonesian-palm-oil-pledge-ipop. Astra has also stated that it will join the Indonesian Palm Oil Pledge (IPOP), an agreement between four palm oil companies (Wilmar, Golden AgriResources, Cargill and Asian Agri) and the Indonesian Chamber of Commerce concerning the production of palm oil in a more sustainable manner. See file:///C:/Users/FIN/Downloads/indonesia_palm_oil_pledge_in_un_climate_summit_ny_240914_final%20(3).pdf.
6 Astra’s letter to the Council on Ethics of 13 June 2012.
7 See footnote 6.
8 http://www.astra-agro.co.id/index.php/biodiversity.




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