Chinese financial institutions exposed to US$5.1 billion in forest-related risks due to palm oil financing

Chinese financial institutions provided a total of US$ 5.1 billion in loans and underwriting between 2013 and 2020 to Chinese companies involved in the palm oil value chain, new research from global environmental non-profit CDP finds. As a result, these financial institutions are either directly or indirectly exposed to forest-related risks through their lending and investment portfolios, since the expansion of palm oil production is one of the most significant drivers of forest loss in Southeast Asia.

CDP’s new research THE HIDDEN RISK: The implications for Chinese financial institutions of forest-related risk within the palm oil supply chain analyzed the financial flows from Chinese financial institutions to 31 companies most exposed to forest-related risks in the entire palm oil supply chain in China. The companies were selected based on the consumption of palm oil in key sectors, including edible oil, food and beverage, food service/restaurants, personal care and detergents, and cosmetics.

CDP’s findings reveal considerable amounts of finance that are potentially exposed to forest-related risks, with a total of US$28.7 billion in loans and underwriting services linked to palm oil in China between 2013 and 2020. Of this total, an estimated US$5.1 billion (18%) was provided by China’s own financial institutions, mostly to companies engaged in the production of edible oils (US$1.8 billion, 36%), followed by upstream and midstream segments of the palm oil value chain (US$ 1.7 billion, 33%) and the dairy industry (US$ 1.2 billion, 24%).

The top 15 creditors account for more than 85% of identified palm oil attributable loans and underwriting services. Chinese financial institutions provided more financial support through underwriting services to companies engaged in the sector than through loans, with the sum of underwriting services being six times higher than that of loans. Meanwhile, lenders in the palm oil sector are highly concentrated with five state-owned financial institutions, including one policy bank, providing more than US$100 million in loans.

Companies that produce or source uncertified palm oil are posing increasingly severe risks to their lenders and investors. These risks are attributed to more stringent regulations of agricultural commodity (palm oil) supply chains, changes in end-consumer preferences in favor of sustainably produced palm oil, as well as physical risks due to climate change. They can, for example, materialize in the form of non-performing loans (NPL), reduced value of collateral, lower solvency ratios and profitability.

Despite these potential impacts, CDP found most financial institutions have yet to integrate forest-related risks into their financial decision making or make substantial progress in quantifying environmental risks. The possible barriers include lack of tangible data, and the information gap between corporations and the financial sector. Furthermore, there may be a lack of awareness and understanding of the potential impact of forest-related risks on the financial sector.

Based on its findings and analyses, CDP recommends that Chinese financial institutions formulate systematic and transparent sustainability criteria to effectively manage their exposure to forest-related risks that results from their financing of companies active in the Forest Risk Commodities (FRC) value chain. CDP also recommends that policymakers further develop and specify taxonomies and guidelines of sustainable FRCs for Chinese financial institutions.

Thomas Maddox, Global Director of Forests and Land at CDP, commented: “Collaborative, multi-stakeholder and innovative approaches are required to balance fiscal and environmental commitments across policy and finance. Through our robust data and insights, CDP strives to not only empower governments and investors to quantify environmental risk, but more crucially formulate systematic and transparent solutions to achieve a sustainable future for people and planet.”

Fei Li, Interim Director at CDP China, commented: “China’s financial sector plays a crucial role not just in transforming the palm oil supply chain, but in our shared goal of achieving a climate-resilient future. Although financial institutions show encouraging signs of growing awareness of these issues, increased environmental reporting is necessary to measure the link between forest-related risks and financing activities. CDP is a key partner in the journey to bridge this information gap and disclosure is a positive first step in the race to protect our forests and ecosystems.”

To learn more about CDP and its report, visit their website at https://www.cdp.net/en or download the media pack including full report here.

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About CDP
CDP is a global non-profit that runs the world’s environmental disclosure system for companies, cities, states and regions. Founded in 2000 and working with more than 590 investors with over $110 trillion in assets, CDP pioneered using capital markets and corporate procurement to motivate companies to disclose their environmental impacts, and to reduce greenhouse gas emissions, safeguard water resources and protect forests. Over 10,000 organizations around the world disclosed data through CDP in 2020, including more than 9,600 companies worth over 50% of global market capitalization, and over 940 cities, states and regions, representing a combined population of over 2.6 billion. Fully TCFD aligned, CDP holds the largest environmental database in the world, and CDP scores are widely used to drive investment and procurement decisions towards a zero carbon, sustainable and resilient economy. CDP is a founding member of the Science Based Targets initiative, We Mean Business Coalition, The Investor Agenda and the Net Zero Asset Managers initiative.