In a study titled “Managing Palm Oil Risks: A Brief for Financiers”, advisory group Landscape Indonesia, multistakeholder body Roundtable on Sustainable Palm Oil (RSPO), the World Agroforestry Center (ICRAF), the Center for International Forestry Research (CIFOR) and Profundo said financiers grapple with greater financial risks today than before, especially in Indonesia, the world’s top palm oil producer, amid stricter environment regulations globally and increased awareness of the public worldwide about consumption of sustainably produced palm oil.

Failure to comply with the new policies may prompt the financiers to struggle with higher nonperforming loans, declining collateral value and bad reputation.

“Law enforcement is getting stricter here. Firms are sanctioned heavier than ever for deforestation and forest fires. These sanctions would affect their financial condition and potentially cause bad debts for the financiers,” Landscape Indonesia CEO Agus Sari said in a media briefing on Tuesday.

In 2014, the Banda Aceh High Court ordered palm oil company PT Kalista Alam to pay Rp 366 billion (US$26.9 million) in fines for causing forest fires, the largest such fine in Indonesia’s history at that time. Later in 2015, another plantation firm, PT National Sago Prima, was fined Rp 1.07 trillion for a similar incident.

In recent years, the government has also halted giving new concessions for oil palm plantations and banned new peat land clearance so assets obtained through illegal processes will cause the financing institutions to lose collateral from the illegal land.

In the financial sector, the Financial Services Authority (OJK) also issued a regulation in June that obliges all financing bodies to require their debtors to have sustainable businesses in order to get funds.

The moves echo the development occurring globally. Many companies in the palm oil supply chain, for instance, have also committed to sourcing only from businesses that comply with No Deforestation, No Peat and No Exploitation (NDPE) prerequisites and develop their traceability and monitoring systems, to be fully implementated by 2020.

Indonesia has a larger amount of buyers committed to the NDPE globally, including food producers Unilever and Nestlé. The firms are pushing for palm oil products made through sustainable practices, from financing to processing.

Failure to comply with the NDPE risks a firm losing the number of clients by 5 to 15 percent, the report said.

Agus of Landscape Indonesia said now is the time for banks and financing institutions to take business sustainability into account when assessing a loan and other funding applications.

“Despite being rhetorically committed to supporting sustainable palm oil, many of the banks and financiers still continue to fund firms that are doing unsustainable practices -- those who still cause deforestation or don’t apply good practices, or those who still have land conflicts with owners,” he said.

RSPO country director for Indonesia operations Tiur Rumondang noted that only a few banks operating in Indonesia demanded business sustainability as a requirement to access funding.

“Many [banks] have yet to put a sustainability aspect in the funding requirement,” she said.

The groups recognized state-owned lender BNI as the only local financier that funnels funds to firms that pay attention to social, environment and biodiversity impacts from oil palm plantations.

World Wildlife Fund (WWF) and OJK have been training other banks, including state lenders Bank Mandiri and BRI and private lender BCA, to support more sustainable palm oil businesses.

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