(By Achmad Rabin Taim from Jakarta, Indonesia (P3260481) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons)
More interesting still was the extent to which decisions are based on the Council’s own research and the substantial leeway given to companies to provide explanations and supporting data. Though the company provided its own environmental impact assessment, the Council discounted that report in light of its own data collection. The Council continues to base its conclusions on its assessment of the credibility of evidence. In this case, the company’s explanation for land clearing by burning is a case in point.
Lastly, and curiously, Norges Bank declined to reject exclusion in favor of other measures, including the exercise of ownership rights. This might well have been a case in which significant exercise of shareholder rights might have produced some good effect (recall the use of such rights in connection with the SWF’s holdings in Siemens). In this case, however, that decision might well have been dependent on Norges Bank’s determination of the long term investment value in the excluded companies. It is likely that either Norges Bank decided that such investment was not worth the effort of exercising such rights or that the size of the investment necessary to make such exercise realistic would have been larger than Norges Bank might have been willing to invest. In the future, it may well be that Norges Bank may choose among response options on the basis of its investment designs on a company. It might be useful to make transparent Norges Bank’s algorithms for that sort of decision making.
POSCO and Daewoo are South Korean industrial companies. POSCO is a global steelmaker with an ownership interest of 60.3 per cent in Daewoo. Daewoo engages in steel and raw materials trading, oil and gas production, mine development, forestry and food production, among other things. Daewoo owns 85 per cent of the Indonesian plantation company PT BioInti Agrindo (PT BIA).At the end of 2014, the GPFG owned shares in POSCO valued at approximately 198.1million USD, corresponding to an ownership interest of 0.91 per cent, and shares in Daewoo valued at about 9 million USD, corresponding to a stake of 0.28 per cent.
What the Council on Ethics has assessed
The Council has assessed whether there is an unacceptable risk of POSCO and its subsidiary Daewoo contributing to or being responsible for severe environmental damage as per section 3, first paragraph, sub-paragraph 3, of the Guidelines for Observation and Exclusion of Companies from the Government Pension Fund Global.
Through its subsidiary PT BIA, Daewoo is currently converting tropical forest into oil palm plantations in the province of West Papua, Indonesia.
The preparatory works to the Ethical Guidelines for the Fund state that corporate structure shall not determine the ethical assessment regarding whether a company is contributing to or responsible for unethical conduct. Based on this starting point and the outcomes in previous recommendations, the Council follows the guiding principle that if a parent company is the controlling owner of a subsidiary, the parent company must also be excluded if the subsidiary breaches the guidelines. As the controlling owner, the parent company has deciding influence on the activities of the subsidiary. POSCO is Daewoo’s controlling owner, and indirectly also the controlling owner of PT BIA. Accordingly, this recommendation covers both Daewoo and POSCO. The GPFG has no shares in PT BIA.
Conversion involves the felling of trees and the removal of other vegetation before an area is used to set up plantations for the production of palm oil or lumber. Plantations are monocultures with little ecological value compared to natural forests.
The Council on Ethics’ findings and assessment
The assessment is based on the Council’s own research. In the present case, the Council has been in touch with Daewoo several times over the course of 2014. Both POSCO and Daewoo were given an opportunity to comment on a draft recommendation in September 2014. Daewoo has also replied on behalf of POSCO.
Daewoo’s concession area in Papua covers 32,500 hectares. The Council’s findings suggest that the conversion of forest into plantations began towards the end of 2012, and is ongoing. Plantation development is expected to be finalized in 2018.
The island of New Guinea has the world’s third-largest tract of contiguous rainforest, after the Amazon and the Democratic Republic of the Congo. It is home to an estimated five per cent of the world’s animal and plant species, and two-thirds of its species are only found on New Guinea. Although Papua is a biodiversity hotspot, its flora and fauna remain poorly documented, including in the vast tracts of forest where Daewoo’s concession area is situated. This raises the question of whether the conversion of rainforest in this part of Papua, and on such a large scale, is at all possible without running a high risk of irreversible damage to biodiversity and ecosystems in these unique areas.
The concession area is largely covered by dense, continuous forest which the company describes as rainforest. The concession area lies within the Southern New Guinea Lowland Forests Eco-region, which is considered to be one of the Earth’s most biologically valuable areas. It is a region of particularly rich and unique biodiversity, and is home to numerous threatened and protected flora and fauna species. Many species are only found in this region, which is considered critically endangered by logging, the conversion of forests into plantations and other activities.
The Council has requested information from Daewoo about the environmental and biodiversity impacts associated with the clearing of forests. The information Daewoo has provided to the Council provides few answers.
According to the environmental impact assessment for the concession which Daewoo has sent to the Council, most of the concession area is covered by shrubs, bushes and secondary forest. This is inconsistent with the Council’s findings. Maps from the Indonesian Ministry of Forests show that almost half of the concession area – 15,800 hectares – appears covered by primary forest which has not been logged previously. The Council assumes that the company’s activities will entail the conversion of primary rainforest and forest in good condition into plantations.
The company’s environmental impact assessment contains little information on the condition of the forest, ecosystems or species diversity in the concession area. The actual number of threatened, protected or endemic species appears to have been underestimated. Flora, fauna and ecosystems have not been surveyed, and the company has not carried out assessments to identify high conservation values in the concession area. The company’s actions have focused on safeguarding protected species, and comprise the establishment of three limited buffer zones along waterways. It is unclear to the Council which species these actions are designed to protect, and how narrow strips of forest in a large plantation landscape will help to preserve ecological values in the concession area. Moreover, the company is obliged to preserve these areas under Indonesian national requirements in any event.
In the Council’s view, Daewoo is doing little to preserve biodiversity and important ecological values in the concession area. The company has emphasised that areas were excluded from the concession area on environmental grounds before Daewoo was granted permission to develop plantations. This, however, is insufficient to protect important conservation values in the concession area. Although Daewoo has also written that it plans to conduct a high conservation value (HCV) assessment, it has not specified any timetable for the assessment, the methods to be used, or the consequences of the assessment for ongoing or future conversion. The conversion of forest does not appear to have been suspended pending the HCV assessment. In the Council’s view, this measure is therefore inadequate to prevent severe environmental damage. Neither Daewoo nor PT BIA are members of the Roundtable on Sustainable Palm Oil (RSPO).
The Council has also given weight to the fact that satellite images show an abnormally large number of fire hot spots in Daewoo’s concession area, which suggests that land is being cleared by burning. This practice is illegal in Indonesia, and regarded internationally as unacceptable due to the air pollution it entails. The company has denied that it uses such methods, and has claimed that the fires are caused by the negligence of workers or local people. This cannot be ruled out. Nevertheless, the Council finds it unlikely that so many fires would occur in the concession area without any connection to the land clearing. In the Council’s view, the sheer number of fires and the fact that the burning has been ongoing for several years should have prompted the company to investigate the cause of the fires, and to consider whether its measures are adequate to prevent fires from occurring.
There is no information about the condition of the forests, biodiversity or ecosystems in the 32,500 hectares of forest slated for conversion into plantations. Accordingly, no information is available on the extent and nature of the biodiversity loss that conversion will cause in these ecologically important areas. The Council finds that the scope of conversion, which includes large tracts of pristine forest, and the fact that the concession area lies in a region of exceptionally rich, unique biodiversity present an obvious risk that conversion will cause irreversible environmental damage. The lack of data reinforces the risk. Further factors emphasised by the Council are that illegal land clearing methods appear to have been employed in the concession area and that the company does not appear to have taken significant steps to rectify the environmental damage. Overall, the Council finds that there is an unacceptable risk of severe environmental damage through the company’s conversion of tropical forest into oil palm plantations. The Council on Ethics therefore recommends theexclusion of POSCO and Daewoo from the GPFG