KUALA LUMPUR, Malaysia (July 9): According to the latest results from the non-profit CDP, Chinese financial institutions gave a total of US$5.1 billion in loans and underwriting to Chinese enterprises involved in the palm oil value chain between 2013 and 2020. The organization examined financial flows from Chinese financial institutions to 31 companies most exposed to forest-related risks in the entire palm oil supply chain in China in its latest report, titled “The Hidden Risk: The Implications for Chinese Financial Institutions of Forest-Related Risk Within the Palm Oil Supply Chain.”
The businesses were chosen based on palm oil use in major industries such as edible oil, food and beverage, food service and restaurants, personal care and detergents, and cosmetics.
Between 2013 and 2020, a total of US$28.7 billion in loans and underwriting were tied to palm oil in China, according to CDP.
China’s own financial institutions provided 18 percent of the total, or US$5.1 billion, to companies involved in the production of edible oils (US$1.8 billion, or 36 percent), followed by upstream and midstream segments of the palm oil value chain (US$1.7 billion, or 33 percent), and the dairy industry (US$1.2 billion, or 24 percent).
According to CDP, the top 15 creditors account for more than 85% of all palm oil-related loans and underwriting services.
According to the research, Chinese financial institutions gave more financial support to enterprises in the sector through underwriting services than through loans, with the total of underwriting services being six times that of loans.
Meanwhile, palm oil lenders are extremely concentrated, according to the report, with five state-owned financial institutions, including one policy bank, giving more over US$100 million in loans.
Companies who produce or source uncertified palm oil, according to CDP, are putting their lenders and investors at risk.
More strict regulations of agricultural commodity (palm oil) supply chains, changes in end-consumer preferences in favor of sustainably produced palm oil, and physical dangers due to climate change are all contributing to these concerns.
These risks might manifest as non-performing loans (NPLs), decreased collateral value, lower solvency ratios, and decreased profitability, according to the report.
Most financial institutions have yet to incorporate forest-related risks into their financial decision-making or make significant progress in measuring environmental risks, according to the non-profit.
The absence of actual data, the information gap between corporations and the financial sector, and a lack of knowledge and comprehension of the potential impact of forest-related risks on the financial industry are regarded to be significant impediments.
As a result, it advises Chinese financial institutions to develop systematic and transparent sustainability criteria to effectively manage their exposure to forest-related risks arising from their financing of enterprises involved in the Forest Risk Commodities (FRC) value chain.
It also suggests that governments continue to establish and specify sustainable FRC taxonomy and guidelines for Chinese financial institutions.
“To balance fiscal and environmental commitments across policy and finance, collaborative, multi-stakeholder, and innovative approaches are required. CDP aims to empower governments and investors not only to quantify environmental risk, but also to formulate systematic and transparent solutions to achieve a sustainable future for people and the planet, using our robust data and insights “Thomas Maddox, CDP’s global director of forests and land, said this.
Meanwhile, interim director of the CDP China, Fei Li, said: “Not only in altering the palm oil supply chain, but also in attaining our common objective of a climate-resilient future, China’s finance industry is critical. Although there are hopeful signals that financial institutions are becoming more conscious of these issues, more environmental reporting is required to assess the link between forest-related risks and financing activities.”/n
