The 16 selected large oil palm growers and traders attracted more loans per year in the period from 2006-2015 and issued more bonds.
SE Asia banks are the most important lenders to these palm oil companies.
Loans are becoming more important than bonds over time.
Stronger bank ESG policies the more their loan portfolio focuses on companies that appear to have improved their sustainability performance, 2010-2015.
Published by Chain Reaction Research, and written by Fenneke Brascamp, Aidenvironment; Alexandra Christopoulou, Profundo; and Gabriel Thoumi, CFA, FRM, Climate Advisers.
By financing the massive expansion of the palm oil sector, banks are contributing to deforestation, peat development and social conflicts. Analysis of bank financing – both loans and equity and debt underwriting – of 16 major palm oil companies from 2006-2015 shows that banks are more important financiers than equity and debt investors. This means that investors in these banks also are exposed indirectly to sustainability risks. The adoption of no deforestation policies by banks has an impact, but too many banks have not yet adopted such policies.
- More loans, more bonds and less shares. The 16 selected large oil palm growers and traders attracted more loans per year in the period from 2006-2015 and issued more bonds. Only share issuances showed a negative trend.
- Loans are becoming more important than bonds over time. Both new loans and new bond issuances are growing faster than the total assets of the companies, but the growth of loans is stronger. This means that banks have strengthened their position as the main external financiers of the sector. Investors in important banks are thus exposed indirectly to sustainability risks in the palm oil sector.
- SE Asia banks are the most important lenders to these palm oil companies, closely followed by East Asian and European banks. Banks from North America, Australia and other regions play a smaller role. Banks from different regions seem to respond similarly to upward and downward changes in the market.
- Malaysian and U.S. banks dominate underwriting.
Indonesian banks do not play as relevant a role in underwriting compared with Malaysian banks.
- Companies which improved their sustainability performance 2010-2015 may have attracted more loans and issued more bonds. Companies that did not improve their sustainability performance also attracted more loans, but did not issue bonds. These companies, which are lagging behind in terms of environmental and social commitments, avoid the bond markets and rely strongly on bank financing.
- Of the 17 most important banks, only three have adopted strong ESG policies on the palm oil sector. Another seven have a policy, which needs further improvement, while seven banks have a weak policy or no policy at all.
- The stronger the ESG policies of banks, the more their loan portfolio focuses on companies, which appear to have improved their sustainability performance, 2010-2015. Banks thus seem to bring their policies into practice.
- It appears companies that have not improved their sustainability performance, increasingly rely on loans from banks that have weak ESG policies. These banks mainly come from Indonesia, Malaysia, Singapore and the United States.
Palm oil growers and refiners surveyed include:
- Asian Agri, Indonesia
- Astra Agro Lestari, Indonesia
- Bumitama Agri, Singapore
- Felda Global Ventures, Malaysia
- First Resources, Singapore
- Genting Plantations, Malaysia
- Golden Agri-Resources, Singapore
- Indofood Agri Resources, Singapore
- IOI Corporation, Malaysia
- Kencana Agri, Singapore
- Kuala Lumpur Kepong, Malaysia
- Salim Ivomas Pratama, Indonesia
- Sawit Sumbermas Sarana, Indonesia
- Sime Darby, Malaysia
- Sinar Mas Agro Resources & Technology, Indonesia
- Wilmar International, Singapore
Banks Finance Palm Oil Sector Expansion 2006-2015
Banks play an important role in financing the expansion of the oil palm sector. Significant funds are needed to develop land, to plant seedlings and to build infrastructure, while oil palm trees only start to bear fruit after three-to-five years and only reach peak production after seven years. Upfront financing is therefore required.
Because of their crucial role in enabling the expansion of the palm oil sector – which has resulted in deforestation, peat development and social conflicts – media and NGOs have focused their attention on banks. In response to this pressure, some banks have adopted sound ESG policies for the palm oil sector. Also, the growth of the palm oil sector has seen its ups and downs, which deterred some banks from financing the sector further.
The objective of this research is to analyze how these different developments have impacted the role of banks in financing this sector. Based on three criteria, 16 palm oil companies were selected. The criteria are: total assets, market capitalization and land bank size. For these 16 companies, all new loans and stock issuances during the past ten years (2006-2015) were analyzed. The figures in this study refer to new loans and underwriting services attracted each year.
Loans to Palm Oil Companies Increased 78 Percent Annually, 2006-2015
Overall, the selected oil palm companies attracted more loans, issued more bonds and issued less shares in the period from 2006-2015. From 2006-2015, the annual volume of loans provided to the selected companies increased from USD 226 million to USD 2,321 million, with an average growth of 78 percent per year. As most loans are multi-annual, years in which the new loan volumes peak are followed by years with lower volumes in which the companies need less loans.
Figure 1, 2 and 3 below show how the development of the volume of new loans relates to the growth of the companies themselves, measured in total assets. Both indicators show an increasing trend, but loan volume growth outpaces total assets. As a result, the volume of new loans as a percentage of total assets doubled from 3 percent to greater than 7 percent.
Figure 1: New Loans 2006-2015
Figure 2: Total Assets 2006-2015
Figure 3: New Loans per Year, 2006-2015
Figure 4 below looks at the trend for the individual companies, which are getting more dependent on loans, as they saw an increase in the percentage of new loans relative to their total assets.
Figure 4: Companies with a Growing Percentage of Loans to Total Assets, 2006-2015
Figure 5 below looks at the companies that attracted less bank loans over the years. Partially this can be explained by the fact that some of these companies attracted more bonds (see Figure 5).
Figure 5: Companies with Declining Percentage of Loans to Total Assets, 2006-2015
Bond Issuance Up, Equity Issuance Down, 2006-2015
Apart from attracting bank loans, companies can also extract financing by issuing new bonds and shares. Share issuances were peaking in 2012, because Felda Global Ventures Holdings went public. This was the second-largest IPO worldwide in that year.
Despite this incidental peak, the volume of share issuances shows a decreasing trend over the past ten years, while the volume of bond issuances is increasing.
Figures 6 and 7 below shows how the development of the volume of new bond issuances relates to the growth of the companies themselves, measured in total assets. Both indicators show an increasing trend, but the bond volume grows stronger. As a result, the volume of new bond issuances as percentage of total assets increased from around 1.4 percent to about 2.1 percent. Bond financing is thus getting more important, but does not follow the same strong growth as new loans (Figure 3).
Figure 6: Underwriting Per Year, 2006-2015