AAK May See Financial Risks From Sustainability Shortcomings

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Includes: ARHUF
by: Chain Reaction Research
Summary

New report says AAK’s sustainability policies may counter forest policies of some of its financiers.

Upgrading its transparency on the palm oil supply chain would cost between $5 million to $10 million.

AAK may be sourcing from “leakage” palm oil refineries in Indonesia and Malaysia.

AAK, based in Malmö, Sweden, faces substantial revenue risk and limited financing risk as a result of its sustainability shortcomings. A new report from Chain Reaction Research finds that if AAK, a midstream palm oil company, were to upgrade the transparency and No Deforestation, No Peat, No Exploitation (NDPE) status of its supply chain, the extra annual costs could total $5-10 million. That amount would lead to a value loss equal to two percent of AAK’s market capitalization. Otherwise, market access risk could lead to a value loss of between 15 and 30 percent of its market capitalization. Of its financiers, particularly HSBC, Danske Bank and the Norwegian Government Pension Fund face conflict with their forest policies. Due to AAK’s balance sheet strength, the risk of volatility in the cost of capital is small. See here for the methodology.

AAK’s palm oil purchases are linked to at least 10 palm oil producers and/or refiners/traders that are non-compliant with best practice NDPE standards. These companies include the Prosper Group (Tee family), Just Oil & Grain Pte Ltd, Sarawak Oil Palms (SOP), Darmex Agro/Duta Palma, Dupont & Leosk and related parties, Evershine & Everbright, Incasi Raya, Musirawas, PT Sisirau and Samuel International.

The implementation of its NDPE policy falls short of sector best practices. AAK places the responsibility for addressing NDPE non-compliance with its Tier 1 suppliers, but does not name them. AAK may source from large “leakage” refiners and traders in Indonesia and Malaysia that do not have robust NDPE or responsible sourcing policies. The company also does not identify producer groups or apply its policy on company group level. As a result, AAK may inadvertently be part of the leakage market.

AAK has a group policy on sustainable palm oil and commits to HCV and HCS standards. It is a founding member of the Roundtable on Sustainable Palm Oil (RSPO). The company publishes and regularly updates a list of supplying mills. Its Mill List Grievance Addendum, published in December 2018, provides information about the status of 35 issues at mills that feature in AAK’s supply chain.

AAK processes various vegetable oils, including 1.7 percent of the world’s palm oil. AAK handled, traded and processed 1.3 million tonnes of palm oil in 2017, a 53 percent increase from 2013 (0.84 million). AAK primarily purchases refined palm oil, which it processes into specialized vegetable oils and fats for consumer goods products.

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