Tree leaves won’t move without wind


  • Plantations
  • Thursday, 10 Oct 2019

Plantation big boy Kuala Lumpur Kepong Bhd (KLK) has recently borne the brunt of a foreign shareholder (Bloomberg assumed the investor to be First State Investment Management, UK which held a 3.72% stake) exiting the company vis-à-vis the disposal of its entire stake based on environmental, social and governance (ESG) concerns

WITH the hazy days over and with a clearer skyline, will the memory of having to breathe pollutants into our lungs be forgotten?

Granted that the haze issue has become almost a yearly affair, are we contented just to sit back and count our blessings? What if the haze makes a comeback next year?

Interestingly, this brings to mind the alleged involvement of major Malaysian plantation companies as provocateurs in the recent haze episodes.

My simple belief is that there is always some degree of truth over an allegation if it has become the talk of town. Hence, to dispel any further doubt warrants a thorough probe or a fair trial in which the public is privy to its outcome.

Plantation big boy Kuala Lumpur Kepong Bhd (KLK) has recently borne the brunt of a foreign shareholder (Bloomberg assumed the investor to be First State Investment Management, UK which held a 3.72% stake) exiting the company vis-à-vis the disposal of its entire stake based on environmental, social and governance (ESG) concerns.

To further rub salt to the wound, the foreign investor priced the sale of its 31.6 million shares at RM21/share which represents a 7.8% discount below KLK’s closing price of RM22.78 on Oct 3. The investor is believed to have acquired the shares in KLK at a price range of RM20.50 to RM21.20, according to Bloomberg.

“We believe that the sale of all of its shares in KLK by a foreign shareholder is a concern, ” commented AmInvest in its latest review of the company. “We are unsure if other foreign funds will follow suit.”

Recall that on Sept 14, KLK confirmed that its subsidiary, PT Adei Plantation and Industry was among the companies being investigated by the Indonesian authorities as a contributor to the haze-triggering forest fires in the Riau region.

KLK further confirmed the existence of a hotspot that had affected 2.8ha of its 14,400ha estate managed by PT Adei. All in, as much as 4.25ha of its plantation land – including an isolated area – had been sealed off pending investigation.

This is not the first time PT Adei ran into trouble with the authorities over forest fires. In 2014, PT Adei was fined 1.5 billion rupiah (RM404,814) while the firm’s general manager, a Malaysian, was sentenced to a year’s jail for causing forest fires in Indonesia which led to severe haze in Malaysia and Singapore. He was also fined two billion rupiah (RM539,507).

Ironically, PT Adei is a Roundtable on Sustainable Palm Oil (RSPO), Indonesian Sustainable Palm Oil (ISPO) and International Sustainability and Carbon Certification (ISCC)-certified company and complies with the strict requirements of these certification bodies which include no burning.

Never undermine ESG concerns

What happened to KLK is a glaring example of how the ESG criteria are fast becoming a set of business sustainability standards within a company’s operations that socially conscious investors use to screen potential investments.

Moreover, it goes to show that institutional investors can contribute to the above cause by putting forth a strong stance vis-à-vis boycotting investee companies that do not have serious concerns on the environment.

Elsewhere, it is heartening to learn that rating agencies, too, have become more proactive in validating the ESG commitments of companies under their radar.

A case in point is how RAM Sustainability which assigned KLK’s Gold Sustainability Rating sought clarification from the plantation firm to ensure the latter’s strong governance and firm commitment to sustainable practices.

RAM Sustainability’s comprehensive assessment incorporates 36 analytical areas towards forming a holistic view of a company’s environmental, social, governance and positive impact footprint.

Also noteworthy is for Bursa Malaysia to ensure that the Sustainability Report issued by companies are based on actual practice as opposed to be only aesthetically profound or with form thriving over substance.

Big-time players

Although the Malaysian Palm Oil Association (MPOA) has vehemently defended the innocence of our planters with Indonesian interest, it has to be borne in mind that Malaysian companies are major plantation players in Indonesia.

A case in point is that 54% of KLK’s total oil palm plantation area (95% of its 225,617ha landbank) are situated in Indonesia vis-à-vis 43% in Malaysia, according to the company’s latest annual report.

Likewise, Sime Darby Plantation Bhd, through its Indonesian subsidiary Minamas Plantation, owns 201,012ha of oil palm planted area compared to 299,984ha throughout Malaysia.

What this means is simply that even if their smallholding neighbours started the fires, Malaysian planters are perceived to have both a direct and indirect involvement in the recent transboundary haze affair which has become almost an annual routine.

ESG-conscious investors are ever curious on what mitigation measures have been taken to curtail such incidents from recurring in the future.

In this regard, Malaysian-own plantation companies have no better option than to be transparent in their land-clearing process disclosure. Paying lip-service by merely claiming innocence can be interpreted as having something to hide.

Likewise, they should also initiate a long-term solution with the Indonesian authorities (i.e. the Environment Ministry) on ways to fight the tendency of open burning by their so-called smallholding neighbours. Perhaps this measure is best executed at the government-to-government (G2G) level to ensure implementation efficiency.

G2G solution

If the government opts to ignore any involvement in irresponsible land-clearing activities that will trigger forest fires and haze, Malaysians will be the ones that suffer the most. At the same time, this will deal a severe blow to the sustainable development of the palm oil industry with mounting opposition from anti-palm oil lobbyists.

Thankfully, Energy, Science, Technology, Environment and Climate Change Minister Yeo Bee Yin has been cited as saying that Malaysia is leaving it to Indonesia to investigate and prosecute companies that have contributed to the ongoing forest fires in Sumatra and Kalimantan, even if those companies are subsidiaries of Malaysian-owned firms.

Considering that Asean does not have a regional-level transboundary haze act, enforcement has to be meted out according to the country, she added.

Pointing to the haze menace which has somehow become an annual routine, our Prime Minister Tun Dr Mahathir Mohamad, too, has boldly put it that the federal government may pass a law which makes companies responsible for fires in their property even if it is outside Malaysia.

This is likely in the form of a Cross-Border Pollution Act which will apply to Malaysian companies and individuals overseas. The Energy, Science, Technology, Environment and Climate Change Ministry is believed to be pushing hard for the law to be implemented soonest.

Such law bears similarity to Singapore’s Transboundary Haze Pollution Act which empowers the local enforcement authorities to take action against companies involved in irresponsible activities that trigger transboundary haze instead of pushing the responsibility to Indonesia.

Additionally, the government must ensure that all Malaysian oil palm plantation companies in Indonesia as well as Papua New Guinea comply with the certified sustainable operational procedures, as they do in Malaysia. This includes procedures certified by the RSPO and ISCC.

Moreover, the government must exercise its power as the major stakeholder to demand listed oil palm plantation companies under its jurisdiction to reinforce internal supervision and law compliance to ensure their overseas subsidiaries implement an across-the-board “zero burning” policy.

Currently, the government is the biggest shareholder in the world’s largest oil palm grower and palm oil producer vis-à-vis Sime Darby Plantation with Permodalan Nasional Bhd holding 51.3% of stake in the company, followed by the Employees Provident Fund (EPF) (9.6%) and the Retirement Fund Inc (6.9%).

As for TDM Bhd whose 1,201ha of oil palm plantation run by its Indonesian unit Rafi Kamajaya Abadi had been sealed off by the authorities to facilitate the investigation on the cause of fire, the company is a direct investment arm of the Terengganu state government (61.49%).

Above all else, the EPF also has more than 10% share in KLK and IOI Group Bhd, another major regional plantation company.

Lya Rahman is the adviser/secretary to the Institutional Investors Council of Malaysia. She was also formerly the general manager of the Minority Shareholders Watch Group. She can be reached at lyarahman@me.com. The views expressed here are the writer’s own.


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