From Oreo cookies to shaving cream, palm oil is an ingredient in all our daily lives. Global production continues to grow, reaching about 72m metric tonnes last year. Its omnipresence exposes avowedly ethical investors such as BlackRock to charges of hypocrisy. Plantations operators sometimes destroy rainforest or wrest land from small farmers.
An environmental group has levelled the latter allegation at a subsidiary of Astra International, an Indonesian company whose third-largest shareholder is the US passive specialist. The claim is awkward for BlackRock, which participated last year in a shareholder revolt over aspects of Procter & Gamble’s supply chain.
The US consumer products giant says it sources “palm oil materials” from a wholesaler that buys in turn from the unit, Astra Agro Lestari.
Parent group Astra is majority-owned by trading house Jardine Matheson and has a strong business record. Over the past 64 years, it has grown to become one of Indonesia’s largest listed conglomerate.
Its activities are far from environmentally-friendly. Three quarters of sales come from cars, mining and mining equipment. Its machinery is often used in pits producing thermal coal, a polluting energy source.
Astra subsidiary United Tractors bought a majority stake in Indonesia’s Martabe Gold Mine to boost the portion of earnings from gold. That worked out well financially. But environmental campaigners have since claimed the Sumatra mine overlaps with the habitat of Tapanuli orang-utans, which face extinction.
Citigroup cut financing to Indonesian agribusiness company Indofood after it failed to meet sustainable palm oil standards. Disinvesting from Astra would be harder for BlackRock as a primarily passive manager. It bangs the drum for responsible investment. But it may not be able to sell shares in controversial companies when they are index constituents.
Astra trades at 12 times forward earnings, a steep discount to the region’s auto and heavy equipment peers. Its old-school businesses have hit a profit wall. Sales fell 26 per cent last year to a decade low.
Further weakness and the growing power of the ESG movement could cast a shadow on Jardine Matheson too. Astra accounts for nearly a fifth of Jardine’s underlying profit.
Old guard ethical investors, notably the Church of England with a history of investing in industries it condemned, must be watching BlackRock and muttering “welcome to our world”. It is easier to claim virtue than to preserve it.
The Lex team is interested in hearing more from readers. Please tell us what you think of palm oil and ESG investment in the comments section below.