Some of the US’ leading institutional investors, including pension funds, are potentially fuelling environmental and social harm by ploughing billions of dollars into the palm oil industry through opaque financial arrangements, a new report claims.
Large investment firms are lagging behind commitments made by consumer brands such as Nestlé, Unilever and McDonald’s by failing to identify whether they are investing in palm oil, which palm oil companies they are involved with, or to hold them accountable over deforestation and land grabbing, the Friends of the Earth US (FoE) report states.
Burgeoning demand for the cheap vegetable oil, increasingly from China and India, is putting pressure on rainforests that are cleared to make way for the crop. According to the FoE report, BlackRock, the Vanguard Group, JPMorgan and Fidelity Investments have almost $13bn in holdings in palm oil between them.
In the report, FoE claims that pension funds CalPERS and TIAA-CREF also have investments of more than $100m each in palm oil activity, with overseas land and agriculture “widely perceived as low-risk asset classes” for investor portfolios.
Joe DeAnda, a spokesperson for CalPERS, said: “We don’t have anything specific to palm oil – as such holding[s] are likely de minimus in the portfolio.” However, DeAnda says CalPERS has an extensive and detailed investment policy, which includes environmental considerations like climate change.
TIAA-CREF did not wish to comment.
Jeff Conant, senior international forest campaigner at FoE, said: “Investments in palm oil producers and other companies that drive tropical deforestation and land grabbing are largely hidden in the portfolios of asset managers and institutional investors […] who generally have no processes in place to deal with companies that commit human rights and environmental abuses.”
“Investors need to undertake greater due diligence and ask some obvious questions, such as ‘does the company I’m investing in have legally acquired permits for land?’, ‘does it have the consent of local people?’ and ‘what is its financial structure?’ US companies should show leadership – if they do, others will follow. But it’s fairly new territory for them.”
US investors are under no legal obligation to consider the potential environmental harm of overseas palm oil activity, even though many have voluntary policies on issues such as climate change. JPMorgan will no longer finance new coal mines due to concerns over climate change, while a CalPERS shareholder resolution in May demanded that Rio Tinto explain the climate risk of mining. Land-clearing for palm oil is considered a significant contributor to greenhouse gas emissions.
The situation is complicated by the fact that many investors hold palm oil assets through index funds – a type of fund that automatically selects companies to invest in based on fluctuations in a market index. The result is that complex financial instruments can mask much of the money flowing to land clearing in Indonesia, Malaysia and parts of Africa because those investing are not making active decisions about what they’re investing in.
FoE and As You Sow have developed a new database where members of the public can search for the name of their fund to see what palm oil holdings, and the value of the assets, are in the portfolio.
Asked why BlackRock does not have a policy on palm oil and if any action would be taken against unethical companies, spokesperson Ed Sweeney said: “Third party index providers determine the companies that are included in passively managed mutual funds and ETFs [exchange traded funds]. BlackRock manages about $1.8tn in passive strategies on behalf of our clients [and] approximately $200bn in investment strategies for our clients that utilise screens to align clients’ portfolios with their values.”
Nicole Kennedy, a spokesperson for JPMorgan, provided a link to the company’s environmental and social policy framework, which outlines the procedures that JPMorgan requires for transactions that involve palm oil production.
Steve Austin, a spokesperson for Fidelity, said: “It’s our longstanding practice not to discuss specific fund investments or investment decisions. We respect everyone’s right to choose how they invest their money”.
The Vanguard Group is yet to reply to the Guardian’s request for comment.
Several banks including Santander and Rabobank have taken a stand on palm oil, although HSBC, which says it is committed to supporting the “legal and sustainable” growth of the industry, has been previously accused of bankrolling rainforest destruction.
Some investors have also responded to what they say is growing public pressure over palm oil, spurred on by disasters such as last year’s forest fires in Indonesia, which covered much of the country, Singapore and Malaysia in a thick, acrid haze.
In June last year, for example, at least 80 investors managing more than $5tn in assets put their name to a letter criticising the Roundtable on Sustainable Palm Oil (RSPO) for “lagging behind” commitments made by some consumer brands.
At the time, the RSPO – which aims to improve the sustainability of the sector – responded to the letter saying it acknowledged the importance of the issues raised: “We are, and will continue taking all constructive comments on board. We are confident that with a commitment to continuous improvement and with the support of all committed players we will be able to truly achieve our vision of market transformation.” The RSPO has since produced new, stricter standards.
California-based Sonen Capital, one of the signatories of the letter, said that most investors are dangerously removed from what occurs within companies in their portfolios. “Palm oil isn’t a new issue, it’s been cooking for a while and now asset owners are taking a look under the hood, they aren’t always liking what they are seeing,” says Will Morgan, director of impact at Sonen Capital.
“We’ve got a much greater sensibility on climate change and even conflict minerals, but on palm oil we are really playing catch-up, which is terrible because the destruction is already underway. The policies around palm oil are woefully inadequate.
“The directive is to maximize returns […] That’s a perfectly reasonable goal, but if you add an asterisk that adds ‘without ruining the planet or people’s lives’, most investors would agree with that.”
Morgan believes there needs to be “definitive guidelines” within the investment industry around palm oil, similar to those that have helped reduce unsustainable logging. These rules would be formulated and overseen by a third party, with regular audits and removal of companies from portfolios that breach these standards. Investors need to be made aware of the potential harm caused by palm oil operations and there should be an independent third party, other than the RSPO, that accredits palm oil suppliers, Morgan added.
This article was amended on 29 July 2016. A previous version referred to the RSPO as an “industry-driven group”. It was further amended on 2 August 2016 to refer to the launch of RSPO’s new standards aimed at improving sustainability.
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