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Another blow to the palm oil industry came on March
11 when JP Morgan Asia Pacific Equity Research revealed that the
Norwegian Government Pension Fund Global (GPFG) had disposed of its
stakes in 23 Asian palm oil companies in 2012, including several
Indonesian companies committed to the sustainability movement.
The GPFG, the world’s largest sovereign wealth fund, was reported to have
divested out its stakes, citing concerns about unsustainable palm oil
production.
The divestments appeared to be a blanket sell-down of the sector without
due consideration of company-specific plantation management practices.
Some of the companies are publicly known to have progressively been
adopting sustainability standards and certifications.
There is a notion that the GPFG’s decision may be driven by environmental
pressure groups that singled out the palm oil industry as the cause of
deforestation. Discriminating against an industry without due process is
unwise in advocating for sustainability, and specifically in promoting
good corporate governance and socially responsible
investments.
Fund managers and investors should be good owners, not just traders.
Contrary to public beliefs that investors are only looking for profit in
their shareholdings, there has been strong signs of shareholder activism
in the wake of many corporate scandals since the 1990s. Even in the
1960s, many investors, through the corporate governance mechanism,
actively involved and engaged in setting the company’s social and
environmental policies.
There are three terms that have close links in shareholding practices:
corporate governance, shareholder activism and socially responsible
investment. Basically, shareholder activism is related to the make
positive use of the rights of shareholders and to align the company with
the shareholders’ interests, usually in terms of corporate governance,
social and environmental goals.
While, socially responsible investment is the use of ethical, social and
environmental criteria in the selection and management of investment
portfolios, including more proactive practices such as shareholder
activism.
Many fund managers and institutional investors believe that shareholder
activism is instrumental in socially responsible investments. Whereas,
screening companies to invest through either “negative” or “avoid” lists
is no longer considered adequate under current corporate governance
circumstances.
There are two options for investors, particularly big
institutions such as pension funds, in exercising their roles in
corporate governance practices, which are either to “voice” or “exit”.
The “voice” means investors can actively shape up the direction of the
company by sponsoring shareholders’ resolutions, nominating
executives/committees, voting at Annual General Meetings (AGMs) to
discuss the proposal, or seeking proxies from other big investors to
force the company to adopt certain policies.
The second option is “exit”, to sell the shares and walk away, leaving
negative publicity for the company’s shares, expecting that the threat of
lower stock prices will force the company to adopt certain policies.
However, there has been a general agreement that the investor must
preferably adopt the “voice” option when time and resources permit, to meaningfully
shape up the company’s direction.
Take the example of Rev. Sullivan, who was a prominent black civil rights
activist in the US. Since the 1960s, he and his church groups had been
actively investing in car manufacturer stocks, campaigning for companies
to adopt shareholder proposals on the equal treatment of employees,
regardless of their race.
As a result of the campaign, in 1971, Rev. Sullivan was invited to join
the General Motors’ board of directors and became the first
African-American on the board of a major corporation. He succeeded in
introducing the equal employment policy in the car manufacturer. The
policy was then formalized in 1977 as The Sullivan Principle, as a code
of conduct for companies operating in Apartheid South Africa. The
principle was instrumental in ending Apartheid in 1984.
How should we analyze the case of blanket divestment of the Norway GPFG?
First, we need to take note that the partnership and synergy are now
becoming the underlying principles for any sustainability works. The
government of Norway has signed a memorandum of understanding (MoU) with
the government of Indonesia to support a program on Reducing Emissions
from Deforestation and Forest Degradation (REDD). This is a good example
of active engagement, collaboration and synergy between governments for
advancing social and environmental goals.
Second, it seems that the Norway GPFG is intentionally overlooking the
fact that one of the most advanced sustainability movements is happening
in the palm oil industry. The RSPO (Roundtable on Sustainable Palm Oil)
is an international multi-stakeholder organization and certification
scheme of sustainable palm oil, founded by farmers and oil palm growers
(Indonesia and Malaysia), mills, processing plants (including food
producers), banks and NGOs (Oxfam, Conservation International, WWF and
the Zoological Society of London).
If palm growers want their business units to be certified as sustainable
palm oil producers, they must comply with the principles and criteria, which
are audited by credible independent auditors.
With this collaborative process between companies and NGOs, the adoption
of an RSPO certification scheme since it was introduced in 2009 is
astonishing. About 15 percent (and increasing) of the palm oil produced
is sustainability certified and rewarded with a premium price above the
market.
JP Morgan stated that the Norway GPFG divestment appeared to be a blanket
sell-down of the sector, without researching some companies publicly
known to have progressively been adopting the sustainability
certification.
There is an ethical question of how the Norway GPFG “exited” from
companies that actively invested in the sustainability movement and were
certified producers of sustainable palm oil producers. This is contrary
to the government of Norway actively engaging itself in the
sustainability arena.
The “exit” from shares of companies that are not producing RSPO-certified
sustainable palm oil (CSPO) is understandable. But they also “exited”
from sustainability-committed companies that abided by sustainability
principles and criteria. This clearly shows that the Norway GPFG acts
more like a trader than a good owner, which may hurt the sustainability
movement.
Third, in terms of an active “voice” and a submissive “exit”, has the
Norway GPFG exercised its legitimate rights as shareholder to “voice” its
environmental concerns, instead of just walking away? I believe it can be
meaningfully engaged in advancing sustainability goals by exercising its
legitimate shareholder rights, such as actively preparing shareholders’
resolutions for company that holds the stock, to adopt the RSPO.
Norway can also actively nominate an executive or propose a
sustainability committee that is responsible for the sustainability issue.
Norway can also vote at an AGM to discuss its proposal, or dismiss
executives that do not want to adopt the RSPO. And lastly, Norway can
also seek proxies from other institutional investors to force companies
to adopt the RSPO and its sustainability standards.
I strongly believe that any investors have an ethical shareholding
responsibility to advance sustainability, with shareholders having the
potential to exert their power and ownership rights to encourage
companies they invest in to live up their roles as corporate citizens. We
may see growing public scrutiny of how investors behave.
The public will expect more shareholder responsibility to engage with
rather than to surrender and “exit” from the fight for the common global
agenda of environmental stewardship and social justice. ●
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