Apollo Investment Management

Gaps in the canopy: suggestions for HSBC's forest policy

HSBC’s forest policy of May 2004 required its clients to have legal and sustainable operations by 2009¹. A Global Witness report in October 2012 noted that several companies notorious for rainforest destruction and human rights abuse continue to claim HSBC as a principal banker. We raised our concerns with HSBC: see post of 21 Nov 2012. HSBC replied that its 'forestry lending policy remains in place and valid... 99% of clients in the sector are compliant or near-compliant. Of the 1% of clients in the sector that are non-compliant, we are in the process of exiting those relationships'.

HSBC's answer implies that the policy generally works, and that relationships with the odd client that remains non-compliant are terminated. However, in practice it maintains commercial relationships with some disconcerting customers. There may be gaps in the policy, or the policy may be hard to apply in practice. Let's review both possibilities, and three pillars of the policy, in the context of another HSBC client, Wilmar International.

HSBC's policy is based on:

  1. the Sustainability Framework of the International Finance Corporation (IFC)²,
  2. independent certification, eg by the Forest Stewardship Council (FSC)³, and
  3. the Equator Principles, voluntarily extended, but not comprehensively4.

The gaps in the latter are evident: loans can fund any activities of a violator, so long as they do not relate to a specific project? Global Witness recommended that HSBC extend its sector policy to 'all commercial relationships' and 'all financial services'. We second this recommendation. Any material commercial relationship, by any part of the HSBC group, should comply with its sustainability principles.

Ongoing business with a company dropped by the IFC seems hard to explain. Wilmar was found to have contravened many of the IFC policies and standards. NGOs and other complainants alleged numerous violations including clearance of primary forests, clearance without permits, and illegal land seizures. The complaints were investigated by the Compliance Advisor/Ombudsman (CAO), which acts to uphold the environmental and social accountability of the IFC. The CAO audit report of June 2009 determined that the IFC incorrectly classified its (trade finance) loans to Wilmar as 'projects expected to have minimal or no adverse impacts' because 'commercial pressures were allowed to prevail and overly influence the categorization and scope and scale of environmental and social due diligence'. It noted that 'a narrow interpretaion of the investment impacts - in full knowledge of the broader implications - is inconsistent with IFC's asserted role... and a commitment to sustainable development'. After this, the IFC made no further loans to Wilmar5 - but HSBC continued the relationship. HSBC acted as a lead arranger for Wilmar’s US$1.5bn revolving credit facility in July 2011, and lead manager for a S$250m note issue in Jan 2012.

HSBC may have less leverage than the IFC, but pretending that it upholds IFC standards while flouting them in practice - or on activities which it chooses to exclude - makes a mockery of the stated policy.

Moreover, the policy's stated reliance on independent certification may be hard to apply in Asia. When HSBC's forest policy was promulgated in 2004, the FSC standards were not widely recognised, so clients were allowed five years for implementation - but nine years later, FSC certifications remain rare in Asia. Only 0.5m hectares in Malaysia and 1.6m ha in Indonesia (2.6% and 1.9% of total forest land, respectively) are under some type of FSC certification.6

If HSBC does not want to withdraw entirely from the sector, it could adopt a disclosure-based forestry policy, denying funding to the worst violators while allowing funding to the best performers in respective fields. This approach could be applied to all relationships of the HSBC group.

As an example, a revised policy could specify that, in countries where less than 15% of all forest is FSC certified, and for projects in those areas where FSC standards do not apply (eg plantation forestry), funding could be provided only to companies providing full ongoing public disclosures about their raw material supply chain, and levies/taxes paid. Companies that have most to hide, disclose least: such a policy would at least be effective in denying funding to the poorest performers.

Over time, better disclosure would also put pressure on governments to uphold their own laws, where they do not currently do so. Effectively implemented, this revised policy should be more effective in governing lending, and could make a positive contribution towards better forest governance.

Relevant disclosures vary from business to business. Suggested minimum disclosures covering the raw material supply chain for forest-related companies are as follows. The principles can be applied to logging companies, tree plantations, and other plantations requiring forest clearance. The numerical data should be presented in clear tabular form for the last few reporting periods, and updated on a consistent basis in subsequent periods.

Minimum suggested disclosures for forestry and plantation companies
Landbank:
  Name, location, size, licence (date obtained, years remaining in lease or licence period)
  Current status of all land held: concession / plantation / pending development / other7
  Breakdown of landbank by soil type and forest stocking (tree density)
Concessions:
  Name, location, size, licence (date obtained, years remaining)
  Amount harvested from the concession
  Harvesting permits
  Estimated standing stock / density
  Levies paid
Plantations (crop or forest):
  Name, location, size, licence (date obtained, years remaining)
  Breakdown of area by terrain and soil-type
  Net plantable area
  Land area cleared in reporting period
  Land clearing permits
  Planting activity: hectares planted for each crop
  Breakdown of stands by maturity
  Area harvested
  Realised harvest volume and yield
  Levies paid
Log production:
  Logs from selective harvesting
  Logs from land clearing
  Logs from plantations
  Logs from other sources, with description

By way of example, we have compared Wilmar's disclosures with this checklist, and explain why the provision of more detailed information would be helpful. That comparison is on a spreadsheet here.

Masya Spek, 22 Jan 2013

  1. Press release 28 May 2004: http://www.hsbc.com/news-and-insight/2004/hsbc-launches-forest-sector-guideline - unfortunately we cannot currently find the policy document itself on the HSBC website. A copy of the 2004 policy was downloaded on 27 Dec 2012, but neither this nor any subsequent version were found by a search on 21 Jan 2013. HSBC's Sustainability Report 2011 mentions (p.16, pdf-p.18) five sector policies including one for forest land and forest products, and says that summaries of all policies can be viewed at www.hsbc.com/sus-risk - but alas, no longer.
  2. HSBC announced in 2004 that it would follow the IFC Safeguard Policies in respect of forestry. The IFC replaced these with a Sustainability Framework in 2006 and revised this in 2012.
  3. HSBC 'requires independent certification that operations are legal and sustainable. We accept Forest Stewardship Council (FSC) certification for this purpose.' HSBC Sustainability Report 2011 (p.17, pdf-p.19).
  4. The Equator Principles 'apply to project finance where the project's capital costs are US$10million or more. Since 2004, HSBC has voluntarily taken this a step further by being one of the first banks to extend the Principles to export credit and corporate loans, where the proceeds are known to be designated for a particular project.' HSBC Sustainability Report 2011 (p.17, pdf-p.19).
  5. According to a search of the IFC website on 21 Jan 2013, the IFC's last loan to Wilmar was made on 17 Jul 2008.
  6. https://ic.fsc.org/download.facts-and-figures-january-2013.a-1301.pdf
  7. Concession: forest land from which trees may be harvested. Plantation: land that will be cleared and replanted, possibly with different species.
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