Norway's Government Pension Fund Global (GPFG), the world's largest sovereign wealth fund, has dropped 11 companies because of connections to deforestation, the fund said in its 2015 annual report.
The fund's decision shows the growing clout of the finance sector in pushing firms to improve their environmental practices by setting higher standards for investment.
Four firms were formally excluded by the fund's council on ethics after investigations showed that their oil palm plantations caused serious environmental damage in Indonesia, including fires in at least one case. The excluded companies are South Korea's Posco and its subsidiary, Daewoo International Corp, and Malaysia's Genting Berhad and IJM Corp. The fund held nearly US$200 million (about S$270 million) of Posco shares at end-2014.
Firms linked to bad environmental practices
Last year, Norway's sovereign wealth fund formally excluded two South Korean and two Malaysian companies after investigations by its ethics council showed the firms' oil palm plantations had caused serious environmental damage in Indonesia. The council publicly released its detailed findings and presented them to each of the companies.
POSCO AND DAEWOO INTERNATIONAL CORP
Posco, a South Korean steel-maker, holds a majority stake in Daewoo International Corp, a South Korean conglomerate with interests in forestry and food production. Daewoo's majority-owned Indonesian subsidiary, PT Bio Inti Agrindo, has been developing oil palm plantations totalling 32,500ha in Papua province, in a remote area with virgin rainforest.
Investigations by the council showed widespread forest clearance and a large number of fires within one of the two concessions, according to satellite imagery. This suggests the land was being illegally cleared by burning, the council said. The firm denied this in a reply to the council.
The council criticised Daewoo for failing to provide sufficient information about the environmental impact of its plantation development, and its lack of detailed surveys of the area's plant and animal species.
The council first recommended excluding Genting Berhad and its subsidiary, Genting Plantations, in 2014 over forest loss in Genting's oil palm concessions in Kalimantan. The 10 concessions cover more than 150,000ha, or slightly more than twice the size of Singapore.
The council's investigations showed clearance of dense rainforest, and conversion of deep peatlands and areas mapped as potential orang utan habitat.
It criticised Genting for its lack of transparency, saying the company did not respond to requests for information on the condition of the forests and peatlands or the levels of biodiversity in its concessions.
In a 2015 follow-up, the council further assessed the risk from Genting's conversion of forests into oil palm plantations.
The company did not respond to requests for information. The council later found that it might have underestimated the scale of deforestation in some of Genting's concessions.
In 2014, the ethics council investigated four Indonesian oil palm concessions in East Kalimantan province being developed by IJM Plantations, a subsidiary of IJM Corp. The concessions cover about 35,000ha.
The council found large areas of rainforest had been cleared and that, in one of the areas investigated, forest in buffer zones outside the concession boundary had been cleared, in violation of the IJM Corp standards stated on its website.
The council said it contacted the company several times with questions about its operations, including steps the firm was taking to reduce environmental damage, but received no answers.
In a 2015 follow-up, the council maintained its recommendation to exclude IJM Corp from any investments, saying it had not detected any major changes in the company's operations.
The fund formally excluded the four because of deforestation in rainforest areas, including primary forest areas critical to wildlife. The council used satellite imagery, government maps and information on company websites, as well as research that it commissioned.
IJM did not respond to repeated requests for comment. Spokesmen for Posco-Daewoo and Genting said they were unable to comment on the council's findings.
Stakes in another seven firms were divested by the fund, the GPFG said in its annual report on March 9, citing deforestation and lack of environmental safeguards. It did not name these firms, which included two palm oil firms, four pulp and paper firms and an Indian coal miner.
Green group Rainforest Foundation Norway (RFN), which monitors the fund's investments, identified the two palm oil firms as Kulim Malaysia and Hong Kong-listed First Pacific, the majority owner of Indonesian food giant PT Indofood that owns Singapore-listed Indofood Agri Resources.
"Our approach to responsible investment management may in some cases lead to divestments from companies where we see elevated long-term risks," a spokesman for GPFG told The Straits Times in an e-mail. "We divested from 73 companies last year. Of these, seven... were related to deforestation and 42 were related to greenhouse gas emissions."
First Pacific and Kulim did not reply to requests for comment. Indofood Agri Resources also did not reply, but it has been the focus of non-governmental organisations critical of its environmental practices, labelling it a laggard.
With assets of about US$830 billion, the fund's actions are closely monitored by investors and environmental groups. It invests in over 9,000 firms, but in recent years has taken a tougher approach to those involved in environmental destruction, labour rights abuses, corruption and driving climate change.
Since 2012, the fund has divested 50 firms for their deforestation practices and formally excluded eight for severe environmental damage in rainforest areas, RFN said. Among palm oil firms dropped are Singapore-listed Wilmar and Golden Agri-Resources.