Blogs: Supply Chain

Last week I wrote about Morgan Stanley’s report which advised investors to look at GAR’s share price from the perspective of sustainability – they recommended GAR as a good buy due to improvements it has made in the last few years in sustainable palm oil production.

Two other developments prompted me to reflect further on how sustainability is increasingly having a real financial and economic impact on companies.

The first was an RSPO report entitled “Correlating Economic and Financial Viability with Sustainability for Palm Oil Plantations,” and the second was a session dedicated to Responsible Financing at the Third Singapore Dialogue on Sustainable World Resources organised by the Singapore Institute of International Affairs (SIIA).

Although many of the big palm oil companies have in recent years adopted sustainability policies, there is still a lingering perception that sustainability is a costly extra which does not add to a company’s profitability especially for smaller companies. As long as this perception continues, companies will find it hard to justify investing the additional resources towards sustainable palm oil production including ensuring responsible environmental management, reducing the use of toxic pesticides and ensuring that the interests of the community are properly safeguarded during the development of palm oil plantations. Make no mistake, carrying out responsible social and environmental practices properly is not cheap.

But stacked against this argument is growing evidence that adopting responsible practices does pay off.

According to Dr Steffen Preusser who studied 34 palm oil companies for the RSPO report, those companies who had a larger portion of their plantations certified by the RSPO were able to command higher prices for their product. Using 2014 data he found that those with over 40 percent of their areas certified by RSPO were able to earn MYR158 (USD40) more per metric tonne. In fact he concluded that every MYR1 invested in complying with RSPO certification standards was able to generate an additional MYR1.50 in revenue. A one and a half times increase in revenue that can be linked to complying with sustainability standards should be an encouraging indicator especially for companies still wondering if the cost of adopting sustainable practices is really justified.

Workers harvesting Palm Oil Fresh Fruit Bunch on GAR estate

So far we’ve looked at sustainability in relation to share price valuation and sustainability and its link to profitability. A third aspect is sustainability in relation to Responsible Financing and the ability to secure credit.

The Association of Banks in Singapore released a set of Guidelines on Responsible Financing last year. Under these guidelines banks in Singapore will be expected to publish their policy frameworks on supporting responsible financing. This means they have to take into account Environmental, Social and Governance (ESG) issues when considering whether to extend credit. Not surprisingly, these guidelines come in the wake of Singapore’s Transboundary Haze Pollution Act which was passed in 2014 and the public outcry over the impact of the haze in 2015.

With the agricultural industry highlighted by the ABS as a sector with elevated risk, this means that a palm oil company trying to secure loans will be facing more scrutiny regarding its ESG performance and may lose out to other companies if it has problems in those areas.

Lastly, the SGX – Singapore’s stock exchange – will be requiring all Singapore-listed companies to publish Sustainability Reports starting in the financial year ending 2017. SGX says that a survey of institutional investors carried out in mid-2015 indicated that 90 percent of respondents consider ESG factors when making investment decisions.

The concept of sustainability is clearly making its way into the lexicon of financial institutions and investors and it is there to stay. The bottomline is that adopting responsible and sustainable practices does matter and has the potential to impact a company’s financial viability. And this potential is only going to grow over time.