Haze prompts Singapore banks to debate rainforest loan standards

The haze situation at City Hall on Oct 1, 2015.
The haze situation at City Hall on Oct 1, 2015. PHOTO: LIM YAOHUI FOR THE STRAITS TIMES

SINGAPORE (BLOOMBERG) - A Singapore banking group has embarked on a review of ethical lending practices as haze caused by forest fires in Indonesia envelops the city for a fifth week.

The Association of Banks in Singapore said on Monday (Oct 5) its members are working on measures that will improve responsible lending, without spelling out specifics, while the central bank said those guidelines will be issued "soon."

Only four major banks in Indonesia, Malaysia and Singapore have embedded environmental factors as part of their credit-decision process, the World Wildlife Fund said in a May report.

As Indonesian farmers burn some of the world's oldest rainforest, the pollutant standards index at Palangkaraya in central Kalimantan province reached 1,990 two weeks ago, while Singapore's air quality hit "hazardous" levels around the same time. The moves by banks would mirror efforts by regional companies to clean up their act, after a consumer backlash against using palm oil in Europe and other developed economies.

 

"The idea is appealing but it would probably have to be on a voluntary basis similar to some institutional investors having environmental, social and governance criteria as part of the investment decision," said Mak Yuen Teen, an associate professor in accounting at the National University of Singapore. "Certainly, the government can encourage lenders and investors to do so, but it may be difficult to make it mandatory as many of the irresponsible practices occur further down the supply chain."

The WWF said that, unlike regulators in Brazil and China, there are no "green" guidelines for lending in Singapore, Malaysia and Indonesia.

"Earlier this year, the association, together with several banks, formed a task force to develop a set of industry guidelines that will provide a framework for banks in Singapore to advance responsible financing through a more structured and transparent approach," said Ong-Ang Ai Boon, a director of the association, adding that details will be announced on Thursday. Its 158 members include the three largest Singapore banks and most international lenders operating in the city.

According to the US National Aeronautics & Space Administration (Nasa), the fires are set to become the worst on record, surpassing 1997 when forest burning caused an environmental disaster that cost an estimated US$9 billion.

"If companies involved in the haze - either doing the burning themselves, or trading or buying commodities from operators using open burning - find themselves shut out from certain pools of capital" they may act quicker, said Jeanne Stampe, a finance and commodities specialist at the WWF in Singapore.

DBS Group Holdings' Indonesian unit is the biggest lender to Jakarta-based palm plantation company PT Provident Agro, followed by PT Bank Mandiri Persero, the company's semi annual report shows. Provident Agro is the majority owner of PT Langgam Inti Hibrindo, which had its permit suspended last month pending an investigation into forest fires.

"When making loans to companies, we do conduct assessments of how such companies address material risks, including where relevant, their exposure to environmental or social risks," DBS said Monday in an e-mailed response to queries. "Of the palm oil plantation companies we bank, all have zero burning policies. In the event they are found to be in breach, we are prepared to re- assess the banking relationship."

DBS declined to comment on loans specifically to Provident Agro, citing client confidentiality. The lender said it doesn't finance paper, pulp and logging companies in Indonesia. It has some palm-oil companies as customers, mostly processors, mills and refineries, it said. The bank plans to enhance disclosure on responsible financing and is evaluating adopting Equator Principles Association practices.

Officials at Jakarta-based Bank Mandiri didn't immediately respond to two e-mails seeking comment. Langgam Inti Hibrindo has issued a statement to say it wasn't responsible for the fires and will cooperate with the authorities.

Some 100 other companies are being investigated by the Indonesian government for blazes found on their land and authorities last month named four, freezing or revoking their permits. Commodities trader Wilmar International Ltd. said last week it continues to review its links with two palm oil suppliers that are being probed for their participation in the blazes. Two years ago, Wilmar said it was cutting ties with Indonesian suppliers that clear land using illegal fires.

Wilmar said via e-mail Oct. 2 it has engaged auditors to visit one concession and is awaiting a report, while it's seeking information from the other supplier. Wilmar also said it has seen "increased interest from the financial community on sustainability issues," though obtaining loans or funding isn't a concern.

Wilmar has two Singapore dollar-denominated bonds outstanding - a S$250 million 3.5 per cent note due 2017 and a S$100 million 4.1 perc ent debenture that matures in 2019, according to data compiled by Bloomberg. Both were arranged by DBS. Wilmar also has a US$730 million revolving U.S. currency loan facility due March 2017 that was led by Oversea-Chinese Banking Corp. The 2017 notes, sold to investors at par in 2012, are trading at 99.239, down from 101.189 per cent at the start of the year.

OCBC does "consider environment, social and governance factors in our lending," Vincent Choo, the bank's chief risk officer, said in an e-mailed statement on Monday. "We have, in instances, turned down opportunities in financing companies."

Indonesian President Joko Widodo said his firefighters might not be able to put out the blazes before November, and it could take three years before any regulatory efforts to stop the burning take effect. The nation is the world's biggest palm oil producer and the government predicts 33.5 million metric tons of production this year, doubling since 2007.

"Financial institutions have a role to play in supporting efforts to promote sustainable development," the Monetary Authority of Singapore said in an e-mailed response to queries on Monday, adding that progress is being made.