IFI governance

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Breaking the chains?

IFC backs out of palm oil

22 September 2009

By Hadiru Mahdi, Bretton Woods Project

Violations of the IFC’s performance standards in a palm oil project in Indonesia could have far reaching effects, drawing attention to the responsibility for the impact of whole supply chains, as a review of their social and environmental standards gets under way.

In August, the Compliance Advisor Ombudsman (CAO), an internal watchdog, published a report exposing that the International Finance Corporation (IFC), the private sector arm of the World Bank, favoured commercial interests over environmental and human rights concerns in palm oil extraction in Indonesia.

The charges levied against the IFC stem from complaints filed by Indonesian NGOs related to loans made between 2003 and 2008 for palm oil processing facilities and trading companies operated by the Wilmar Group. The case focused on the IFC’s failure to apply its performance standards and procedures, as well as allegations that Wilmar subsidiaries were illegally using fire to clear primary forests and high conservation value areas and seizing indigenous peoples’ lands without their consent.

The CAO found that despite being “aware for more than 20 years that there were significant environmental and social issues and risks inherent in the oil palm sector in Indonesia [the] IFC did not develop a strategy for engaging in the oil palm sector. In absence of a tailored strategy, deal making prevailed.”

The relevant IFC social and environmental performance standard states that “the impacts associated with supply chains will be considered … where the resource utilised by the project is ecologically sensitive.” Oil palm is listed as ecologically sensitive.

In the Wilmar case, the IFC is accused of taking a “de minimis approach so as to exclude assessment of the supply chains”, arguing that the project was only a trade facility and not a plantation. Two of the four loans were made to a Wilmar subsidiary for the development of a crude oil palm refinery in the Ukraine. The other two loans were for Wilmar’s Indonesian trading subsidiary to provide capital for the purchase and export of palm oil. The projects’ social and environmental risk was downgraded from A to B, meaning that management decided that an assessment of the plant’s supply chain was not needed.

The CAO report makes it clear that the assessment should not have been based on the incorrect assumption that only Wilmar-owned parts of the supply chain should be examined, as this is “inconsistent with the IFC’s performance standards, which require a broader assessment of suppliers and supply chains.”

Marcus Colchester of NGO Forest Peoples Programme commented, “it has taken us more than five years to get the IFC to take these issues seriously. Given the urgency of halting forest loss and human rights abuses, we call on the World Bank president to take personal proactive steps to ensure this never happens again.”

IFC taps out

Initially, it seemed that the IFC was determined to resist cutting back on investment in palm oil, arguing in August that “the sector has considerable potential for job creation and economic growth”. In response to the CAO, the IFC did acknowledge that it lacked a strategy for engagement in the palm oil sector which it promised to develop by October. It also agreed that in the future palm oil should be categorised as being higher risk.

Then, in a surprise statement released in September, World Bank president Robert Zoellick backed down, saying “until we have a new strategy in place, the IFC will not approve any new investments in palm oil.”

Further to the initial weak management response, the IFC has agreed to formulate a comprehensive strategy to guide its involvement in the palm oil sector by February 2010. They will develop an advisory services programme for the palm oil sector in Indonesia and revise the IFC’s environmental and social review procedure to clarify categorisation of trade finance investments. They also plan to strengthen implementation of the existing prohibition against clearing critical habitat or high conservation value forest and assess the status of Wilmar’s environmental and social performance.

Norman Jiwan of the Indonesian NGO Sawitt Watch welcomed the IFC’s intentions but is reserving optimism. He hopes that the process will be “open and participatory and lead to the IFC applying performance standards more stringently to the whole supply chain.”

The Wilmar saga has come to a head just as the IFC officially launches its three year review of performance standards on social and environmental sustainability (see Update 67, 67). The question that remains is whether the review will tackle the major weaknesses this case has shown exist with the performance standards framework.