January 2020

… the financial sector continues to fuel Indonesia’s plantation and forestry sectors with vast sums of credit. Financing behind some of the culprits of this year’s fires, such as the Sinar Mas Group, Royal Golden Eagle Group, and Salim Group, is traceable back to the Japanese megabanks - most notably Mitsubishi UFJ Financial Group (MUFG) and Mizuho Financial Group (Mizuho)…

... The country’s National Audit Agency (BKP) report in 2019 found that 81% of oil palm plantations are in breach of a range of regulations. This included companies operating without Cultivation Use Rights (HGU) and planting in protected and conservation areas such as carbon-rich peatlands which are highly combustible and drive the annual fire and haze during the dry season. MUFG and Mizuho, as well as Sumitomo Mitsui Financial Group (SMBC Group) are also linked to such companies.

The three megabanks have significant exposure to some of the largest palm oil and pulp & paper companies operating in Southeast Asia, as well as companies engaged in the natural rubber and timber sectors. Given all three banks are aggressively expanding their business in Southeast Asia, particularly Indonesia, their exposure to Environmental, Social and Governance (ESG) risks in these forest-risk commodity sectors will most likely increase unless accompanied by more robust due diligence in their financing activities.

Unfortunately, the financing practices by the megabanks show that finance to these high risk sectors are being provided without credible checks on client compliance with legality or sustainability standards, nor without adequate sustainability performance criteria - like no deforestation, fire prevention or peatland restoration - built into loan agreements…

While all three megabanks adopted their very first forestry and palm oil sector financing policies over the past year and a half, their due diligence is highly reliant on weak certification systems, and they are failing to even uphold minimal commitments to not finance illegal activities…

The megabanks’ irresponsible financing is undermining key international initiatives, namely the Sustainable Development Goals (SDGs) and the Paris Climate Agreement, both of which the megabanks have committed to align business strategies with by endorsing the UN Principles for Responsible Banking (PRB)…