Whereas Musim Mas, Indonesia’s largest palm oil exporter, stated within the press launch it issued final month that “respected assessors” will yearly evaluate its efficiency towards its chosen key efficiency indicators (KPIs) to make sure “transparency and accountability”, it didn’t specify who these third-party verifiers can be.
In response to Eco-Enterprise queries, Rabobank – the sustainability coordinator for the transaction – stated that there can be two post-issuance exterior reviewers: Netherlands-based certification physique Management Union and one other yet-to-be-confirmed agency.
A Rabobank spokesperson stated that “there isn’t any requirement pre-signing to establish the verification firm because the measurement and verification will happen at a future date,” based mostly on the SLL rules by the London-based Mortgage Market Assocation (LMA), alongside the Asia Pacific Mortgage Market Affiliation (APLMA) and the Mortgage Syndications & Buying and selling Affiliation (LSTA).
For the excellent reviewer, the spokesperson assured Eco-Enterprise that “there’s enough time to assign a verifier,” since efficiency on the set KPIs is just resulting from be reported in September 2025.
Eco-Enterprise understands from Musim Mas that the second reviewer will most probably be one of many Massive 4 accounting companies Ernst & Younger (EY), which has been its sustainability report auditor for the previous three years.
The explanation why Musim Mas hesitated to publicly reveal this in its launch was due to a “technical” situation, as it’s pending a contract settlement renewal with EY, stated Carolyn Lim, the corporate’s group company communications lead.
Regardless of not conducting a pre-issuance exterior evaluate – which international mortgage market pointers suggest with a view to assess the rationale and degree of ambition of proposed targets – Musim Mas has referred to its KPIs in its media launch as “formidable, significant and measurable”.
SLLs supply a decrease value of borrowing for companies that meet sure sustainability targets, like reducing carbon emissions or enhancing gender variety.
The three KPIs authorized by Rabobank require Musim Mas to make sure that the impartial smallholders it contracts are licensed by the Roundtable on Sustainable Palm Oil (RSPO), that it trains these smallholders, and that it maintains a deforestation-free palm oil provide chain.
Nonetheless, Merel van der Mark, coordinator of Forests & Finance, a coalition of non-governmental teams, stated that the KPIs set for the SLL are usually not formidable.
“A deforestation-free palm oil provide chain ought to be the baseline for any mortgage, not an ambition for a SLL. As well as, monetary establishments ought to do their very own due diligence and be cautious about utilizing certifications schemes as a proxy for sustainability. We’re involved about actions to weaken the RSPO requirements,” stated van der Mark.
Gemma Tillack, forest coverage director of advocacy group Rainforest Motion Community (RAN), which is a member of Forests & Finance, instructed Eco-Enterprise that because the palm oil producer has but to attain a deforestation-free provide chain, “the KPI on ‘sustaining a deforestation-free provide chain’ ought to be strengthened to require Musim Mas to attain an independently-verified 100 per cent deforestation-free provide chain by the tip of 2024.”
“Additional KPIs ought to be set that require Musim Mas to make sure the remediation of deforested lands in its provide chain because the palm oil sector deadline of December 31, 2015,” Tillack added, referring to the agency’s dedication to keep up zero-deforestation in its operations since end-2015.
“The inclusion and coaching of impartial smallholders to stick to accountable palm oil benchmarks is a crucial indicator particularly given Musim Mas’s repeated publicity of sourcing unlawful palm oil from small-scale land speculators which have destroyed peat swamps contained in the orangutan capital of the world.”
Lim stated that Rabobank and HSBC – a co-lender of the mortgage – have “their very own inside sustainable financing panels” to evaluate the materiality and degree of ambition of Musim Mas’ KPIs. However Rabobank didn’t reply to Eco-Enterprise queries on how they assessed the ambition of the KPIs and whether or not dependable baselines have already been chosen to trace its sustainability efficiency, in step with worldwide finest observe steering.
Musim Mas stated that these KPIs – which deal with impartial smallholders – had been chosen as a result of small-scale farmers account for about 41 per cent of Indonesia’s palm oil plantations and “there’s a want to enhance the yield of those farmers.”
The mortgage comes as main exporters of commodities, resembling palm oil, espresso and timber, are working to offer proof that their merchandise haven’t led to forest degradation by late-2024, with a view to adjust to the European Union’s deforestation legislation, which kicked in final Could.
Indonesia and Malaysia, which collectively account for 85 per cent of worldwide palm oil exports, have contended that the brand new guidelines threat marginalising smallholders. However environmental teams have argued that this may be prevented with focused help to transition smallholder farmers to make use of extra sustainable strategies, which Musim Mas has had a monitor file for doing.
SLLs underneath contemporary scrutiny
Final June, the UK’s Monetary Conduct Authority (FCA) warned of potential conflicts of curiosity, the place banks could also be incentivised to just accept weak KPIs in mortgage agreements with a view to hit sustainable finance targets which are tied to their remuneration advantages.
The monetary regulator additionally flagged that relationships, somewhat than the borrower’s sustainability credentials, “disproportionately drive” the selections of most banks to take part in SLLs.
The FCA at the moment has no plans to introduce regulatory requirements for the SLL market, however has not dominated out reconsidering this stance “if the market wants it”.
Primarily based on van der Mark’s observations, “SLLs usually lack transparency and a robust monitoring framework.”
“With out that, there’s a robust greenwashing threat. We name for extra regulatory oversight round their issuances,” she stated.
Final month, MUFG got here underneath fireplace for lending hundreds of thousands in SLLs to a different Singapore-based palm oil and paper firm, Royal Golden Eagle (RGE), after satellite tv for pc evaluation by RAN alleged that deforestation was being carried out in its concessions.
In response to those accusations, MUFG has reiterated its “rigorous” evaluation of purchasers, whereas RGE has refuted RAN’s findings.
As a result of extra non-public nature of mortgage markets in comparison with bond markets, SLLs – which first got here to market in 2017 – have been hit by credibility considerations in recent times.
“The problem is that there are not any laws demanding lenders observe a set process when issuing SLLs,” stated a Singapore-based government acquainted with the way in which such loans are structured in one of many world’s largest banks. He selected to withhold his identification.
Usually, “nationally recognised and respected third celebration assurance distributors ought to be recognized upfront earlier than the SLL is signed,” he added.
Individually, Musim Mas’ mortgage was additionally transformed from an present revolving credit score facility utilizing what is called a “sleeping SLL”, or a mortgage settlement the place the borrower is allowed to delay the setting of KPIs till after the deal’s deadline.
LMA has stated that such preparations ought to solely be allowed “in distinctive cases, and the place the borrower already has a transparent sustainability technique in place.” The SPTs can then be “switched on” inside 12 months and “events should make sure that the SPTs bear the identical scrutiny and a spotlight as they’d have had they been proposed on the outset of the transaction.”
The banking government instructed Eco-Enterprise that any purchasers choosing a sleeping SLL “ought to have a documented historical past of ESG technique,” and that it has “a devoted staff to evaluate all SLL offers’ KPIs and a score system to find out if a deal is go or no go from a KPI perspective.”
“Any deviation from this customary would require escalation and senior degree approvals, ought to they resolve to go forward with out it,” he added.
Notable sleeping SLL preparations in Asia embody Chinese language fintech behemoth Ant Group’s US$6.5 billion deal, which was coordinated by Dutch financial institution ING and stays the biggest of its sort regionally.
Globally, SLL volumes have declined from their 2021 peak. However the mortgage instrument continues to develop in Asia and added to the sustainable finance targets of many regional banks, together with DBS, OCBC and UOB.
For example, Southeast Asia’s second-largest lender OCBC – which met its S$50 billion (US$38 billion) goal over two years forward of schedule in 2023 – is trying to double the variety of SLLs to regional enterprises. Final 12 months, it prolonged 24 SLLs, together with a £200 million (US$262 million) mortgage to Singapore property large CDL.
