The Chain: Sime Darby New Responsible Agriculture Charter May Boost Net Income

by: Gabriel Thoumi, CFA

Summary

Sime Darby's New Responsible Agriculture Charter May Be Accretive to Net Income.

BlackRock Calls Out Deforestation as Climate Risk.

SE Asia 2015 Haze Death Toll Could Top 100,000.

Sime Darby's New Responsible Agriculture Charter May Boost Net Income

On September 21, Sime Darby Plantation launched its Responsible Agriculture Charter. In a news release, Sime Darby President and Group Chief Executive Tan Sri Dato' Seri Mohd Bakke Salleh said, "This Charter represents a new starting point and an important juncture in Sime Darby's sustainability journey as we seek to progress further. We believe that responsible agriculture plays a critical role to ensure food security needs are met and can provide a pathway to alleviate rural poverty and improve livelihoods, sustainably."

Sime Darby's decision to launch its Responsible Agriculture Charter commits it to achieving Roundtable on Sustainable Palm Oil (RSPO) certification on its directly owned plantations. Over the long term, this may be accretive to net income. This is because, as reported in Sime Darby's Q2 2016 financial results, its fresh fruit bunch yields decreased in Malaysia, Indonesia, and Papua New Guinea & Solomon Islands by 29%, 37% and 9% respectively, against the same quarter last year due to climate change-related El Nino impacts. At the same time, its plantation division posted a 2% higher profit before interest and tax (PBIT) at RM499.3 million in Q2 2016 versus RM498.4million Q2 2015 because it realized higher average crude palm oil prices as RSPO certification improves its supply chain transparency and stability. Moreover, it is important to note that RSPO-certified crude palm oil often trades at a higher price than non-certified crude palm oil.

Finally, while the charter applies to all of Sime Darby's palm oil operations immediately, it has future deadlines for third-party palm oil supply chains and other agriculture products.

BlackRock Calls Out Deforestation as Climate Risk

BlackRock (NYSE:BLK), the world's largest asset manager with close to $5 trillion under management, published "Adapting Portfolios to Climate Change." In this analysis, BlackRock states that companies, including consumer goods companies, who fail to address deforestation risks in their supply chains face possible financial risks from climate change.

According to the report, climate factors are under-appreciated and under-priced because they are "less visible" to investors. Yet, this may be rapidly changing.

Haze Health Impacts and Numbers Dispute

Harvard and Columbia universities published estimates this week suggesting that SE Asian 2015 forest fires and haze may have resulted in 100,000 fatalities in Indonesia, Malaysia, and Singapore. The study only focused on "fine particulate matter," referred to as PM2.5.

PM2.5 can penetrate the lungs and other organs, causing respiratory disease, birth defects, premature delivery of babies, premature death, asthma, and lung cancer.

Often, but not always, palm oil plantations and smallholders clear existing forests using fire. These fires create haze, a toxic chemical soup that can include hundreds of airborne dangerous chemicals.

Other estimates suggest that during "fire season" in El Nino years,11% of the population in SE Asia have been repeatedly exposed to pollution levels significantly above World Health Organization safety limits.

Competing figures compiled by SE Asian governments are significantly lower.

The differences are due to many factors. Specifically, the number of deaths is based on complex estimates of the increases of potential PM2.5 related illnesses versus baseline.

The Government of Indonesia has recently begun prosecuting publicly traded companies associated with haze. On August 15, the Government of Indonesia fined Sampoerna Agro $81 million for 2014 forest fires on 3,000 hectares on its concessions in Riau Province, Indonesia. The $81 million fine is slightly less than Sampoerna Agro's revenue in the first six months of 2016.

This newsletter is a product of Chain Reaction Research, a consortium effort of AidEnvironment, Climate Advisers, and Profundo.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Article written for Chain Reaction Research.