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Why Your Money May Be Driving the Palm Oil Industry's Human Rights Abuses and Environmental Destruction

Top banks, institutional investors and several major pension funds have palm oil in their portfolios.

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Bumitama deliberately acquired much of this land shortly before its initial public offering in April 2012; in its prospectus to investors, the company made it clear that its money-making strategy was to exploit these assets. Prospective investors were informed that Bumitama’s expansion plans included preferential rights to harvest from lands without the required licenses, and that the Hariyanto family — the majority owner of Bumitama Agri would bear the liability risk.

A year later, in April 2013, several dying orangutans were rescued from one of Bumitama's concessions. After a complaint was made to the RSPO, Bumitama pledged to stop clearing land until ecological assessments had been carried out. But satellite imagery revealed that Bumitama continued to clear forests and peat swamps for several more months in the area where the orangutans were found. When the allegations hit home, shortly after an RSPO meeting this October, the director of Bumitama, Gunardi Hariyanto Lin, resigned.

Lucrative commodity

While it's both illegal and unethical, Bumitama’s forest destruction is fully justified by economic logic. Everywhere, there are strong and growing incentives to grow more palm oil: the US Food and Drug Administration's 2006 mandate that all food labels list trans fat content led to a spike in US palm oil consumption. The FDA is now considering a total ban on trans fats, which will likely give US palm oil imports a further boost. Likewise, palm oil consumption for biofuels in the EU has increased by 365 percent since 2006; Indonesia too is increasing its reliance on palm oil as a biofuel feedstock, with other countries sure to follow.

But a clear-eyed assessment of how the industry has achieved its rapid growth shows that consumer choice and government mandates are not the only drivers. It is true that palm oil enjoys natural advantages over its competitors, such as producing more oil on less land; and that it is low in trans fats (though high in saturated fats, which are of equal concern). But it cannot be denied that a key factor in cheap production — and thereby, in its rapid growth and high returns — is sector-wide disregard for environmental and human rights standards and animal welfare, and easy access to financing with few environmental and social strings attached.

According to the Malaysia Estate Owners Association, development of new palm plantations in Malaysia can bring up to 22.5 percent return on investment, while investing in established plantations can give nearly 10 percent. Such returns might explain why some of the top banks and institutional investors in the US and Europe —Citigroup, JPMorgan Chase, Barclay’s and Fidelity Investments, as well as several major pension funds —have palm oil in their portfolios.

Ironically, without the financial markets, palm oil wouldn’t be so solvent: every 10,000 acres of new palm oil plantations requires roughly $100 million in capital investments. Since 2008, major financial institutions have extended more than $20 billion in financing to the industry, including more than $14 billion in loans, and smaller amounts through bonds and equity.  

A recent report by HSBC Global Research confirms the role of banks in driving the palm oil boom: in 2002 the Southeast Asian palm oil sector sought $3 billion in external financing; in 2012, it sought $55 billion. And there is no question that the money is flowing: Indonesia’s largest bank disbursed more than $4.4 billion USD to large palm oil growers this year, and plans to lend more next year. According to the Jakarta Globe, the Indonesian Palm Oil Producers Association has called for investment of 300 trillion rupiah by 2020 to “replace” 7.5 million acres of forest with new palm oil plantations.

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