The green gold rush
In the fight against global warming and its consequences, green finance looks like a formidable lever. Investing in sustainable, environmentally friendly projects rather than in fossil fuels – it is an obvious opportunity to respond to the increasingly pressing demands of public opinion and certain investors.
So it is not surprising that a growing number of companies are using green finance to develop their business. They are driven by a genuine commitment to ethics and ecology, as well as the wish to spotlight their virtue in corporate communication.
Developed in the 2010s and formalised by the Paris Climate Agreement in 2015 (the date is important, we will come back to it), the term “green finance” encompasses an array of tools, instruments and actors. It features acronyms and mechanisms that are not always easy to understand.
While we have endeavoured to make the following information accessible and understandable, the subject matter remains challenging. The good news is that by the time you get to the end of this story, your perspective on green finance should be as clear as a primeval forest razed by chainsaws.
Let's begin with Michelin. Among the European companies that pride themselves on their "sustainable" policies, the tyre giant highlights its commitment to "responsible and sustainable management of the rubber industry (rubber tree cultivation), [...its] ambition of zero deforestation, and its commitment to protecting biodiversity". This is how the firm reassures its shareholders and customers that its tyres are more eco-friendly than those of its competitors.
The flagship of Michelin’s commitment to sustainable natural rubber is the Royal Lestari Utama (RLU) project in Indonesia. Created in 2015, it is a joint venture between Michelin and its local partner Barito Pacific. The project is presented in commercial videos as the ultimate success story: planting rubber trees to reforest areas devastated by illegal logging, while creating jobs for local people and protecting flora and fauna – in particular, elephants, orangutans and baby tigers.
All this with the involvement of the World Wildlife Fund (WWF), the United Nations Environment Programme (UNEP) and the United States Agency for International Development (USAID), who together have presented it as a model of a sustainable value chain.
After an alarming report by the environmental NGO Mighty Earth in 2020, an investigation conducted by Voxeurop over more than a year and a half with our partners from Tempo magazine in Jakarta shows the limits of this operation financed by $95 million of "green bonds". From the hushed offices of Europe to the Indonesian forest, via the trading rooms of Singapore, our reporters have scrutinised documents, reports and correspondence, and interviewed the main players in the companies, NGOs and local communities concerned. The picture that emerges is not the happy one sold to European investors.
In June 2022 Michelin made a full takeover of the RLU joint venture. This led, two months later, to the early redemption of the green bonds issued by French bank BNP Paribas, more than 10 years before their scheduled maturity. Investors therefore no longer have a say in the matter. However, they will surely be interested to know the impact of the operation they helped to finance.
Beyond the actors directly concerned, and beyond the affair’s impact on Indonesian people and biodiversity, our investigation also lifts the veil on the structural problems of the young green-finance movement: opacity of the certification mechanisms, non-binding voluntary commitments, absence of independent audits, and hype for projects that are supposed to be emblematic of a – finally – sustainable economy.
It highlights the problems created by the lack of effective regulation at EU level that might have a real impact on biodiversity and the climate crisis, especially when European multinationals operate far from our shores. The European Union has taken up the issue and is currently working on a regulation concerning green bonds, but this will only come into force in 2023. Another concerning imported deforestation is also in the process of being approved.
Investment opportunity: “green” bonds
Officially, the story begins on 14 December 2014, when Michelin acquired 49% of Royal Lestari Utama (RLU), an agro-forestry company owned by the Indonesian conglomerate Barito Pacific Group. The latter was founded and led by the wealthy businessman Prajogo Pangestu, dubbed the "Timber King" of Indonesia. According to the Mighty Earth report cited above, the company already had a track record of deforestation, land grabbing, illegal logging and offshore tax evasion using a complex network of companies involved in timber, pulp and palm oil.
Michelin goes green
While the company of the Michelin Man had been present in Indonesia since at least 2004, the joint venture with Barito Pacific, formalised at the beginning of 2015, had the political support of the Indonesian government. It had very grand ambitions: to contribute in a sustainable way to around 10% of Michelin's global supply of natural rubber, by relying on local communities for production and protection of ecosystems. Several sites are involved, in the provinces of Jambi (Sumatra island) and East Kalimantan (Borneo island).
To strengthen the credibility of its "green rubber" project, Michelin decided to involve WWF in its venture with Barito Pacific. Later WWF was co-opted into the Global Platform for Sustainable Natural Rubber (GPSNR), created by Michelin itself in 2018.
"We have long campaigned to stop deforestation in Sumatra, highlighting the extensive deforestation perpetrated by companies like Barito Pacific Group [...]. So when the opportunity arose in late 2014 [...] to influence what would become the Royal Lestari Utama project, we saw this as a valuable opportunity [...] to achieve a milestone," a WWF spokesperson told Voxeurop on condition of anonymity. "We partnered with Michelin [...] in order to help transform the natural rubber market, to reduce the company's global environmental footprint and to preserve priority ecosystems."
Michelin was at the time making substantial efforts to green its operations and its image, across the world. The firm received the highest score for corporate social and environmental responsibility among the companies audited under France's Duty of Vigilance law. It also committed to a biodiversity roadmap for 2030 and published data on the impact of its business on climate change.
It was in this laudable spirit that Michelin encouraged Barito to go green as well. In March 2015, the two companies signed a no-deforestation commitment: future expansion of RLU's rubber concessions would only be possible on existing farmland, respecting wildlife habitats.
A funding-starved project saved by the green-bond gong
Upon signature, Michelin aimed to increase production in the Barito Pacific concessions from 0.7 to 1.8 tonnes of natural rubber per hectare. The annual target was around 80,000 tonnes per year. Three quarters of this production would go to Indonesian factories supplying Michelin through its supply subsidiary, Société des Matières Tropicales (SMPT), with the rest going to external buyers.
Together, the two shareholders of RLU bet on a 23-year business plan until 2040. They put a combined $100 million of equity (following a subsequent recapitalisation, Michelin will have paid a total of 55 million) into the joint venture's coffers. This was less than necessary to sustain their risky project, given that their forecasted profits were cut by the drop in rubber prices in 2015.
Luc Minguet, a former board member of RLU, told Voxeurop that "the original plan was to have banks finance the project. However, despite WWF's involvement in the project, no traditional bank agreed to finance it. They didn't think it was profitable enough."(1)
Alex Wijeratna, senior director at Mighty Earth, agrees: “The banks' due diligence must have shown up extensive deforestation, reports of violent conflict with local communities and allegations of land grabbing during the pre-establishment phase of the RLU project in Jambi. Most likely these circumstances put them off these from financing it.” Only just launched, the project was floundering.
sFortunately for Michelin, in October 2016 a golden opportunity to bail out the joint venture presented itself when BNP Paribas bank co-founded the Tropical Landscapes Finance Facility (TLFF) with the support and oversight of the United Nations Environment Programme (UNEP). Approved by the Indonesian government and based in the capital Jakarta, TLFF describes itself as an innovative financing platform for commercial ventures related to the Paris Climate Agreement (just signed in 2015, more on that later) and the Sustainable Development Goals.
"Unless we persuade the private sector – using the prospect of profit – to look at production differently, nothing will change," said a source from Asia Debt Management (ADM Capital), a Hong Kong-based investment firm. The source, who wished to remain anonymous, was speaking to Voxeurop. As co-founder of TLFF alongside the UN and France’s BNP Paribas bank, ADM Capital was responsible for ensuring that the funded projects met specific performance conditions.
Satya Tripathi is the former TLFF secretary general and co-founder when he was the director of the Indonesian office of the United Nations UN-REDD (Reducing Emissions from Deforestation and Forest Degradation) programme. The current secretary general of the Global Alliance for a Sustainable Planet, he told Voxeurop that Michelin and its Indonesian partner Barito Pacific contacted the TLFF in November 2016.
It was just weeks after this funding platform’s launch by the UN’s environmental arm and BNP Paribas. The French bank, whose declared objective was to “unlock private finance [...] that reduces deforestation and forest degradation and restores degraded lands”, had been looking for an emblematic first project to attract green-minded investors. RLU's candidacy came at the right time. For all concerned, it was a golden opportunity.
Following a certification process whose transparency and sincerity raise many questions (see Chapter 2), TLFF launched its pilot offering (TLFF I) of long-dated bonds in the spring of 2018, to "help finance a sustainable natural rubber plantation [...] in two provinces in Indonesia" (2).
BNP Paribas took over the marketing of the green bonds issued by TLFF, which would use the proceeds of the bonds to provide a loan to RLU. This loan would allow the Indonesian company to invest so as to increase the yields of its plantations, and thus boost financial profitability of the bonds. And BNP Paribas and ADM Capital received a nice commission in the process (3).
Royal Lestari Utama’s partners, investors and advisors
Now imagine an environmentally conscious European investor, who drives an electric car with Michelin tyres. They skim over the phrases in the BNP Paribas prospectus (4) that convinced them to buy green bonds: "this once fully forested landscape has suffered severe deforestation in recent years"; "the Borrowers have already planted approximately 18,076 hectares of rubber trees by December 2017"; "[they] plan to generate [...] natural forest areas providing habitat for tigers, elephants, and orangutans" and "carbon sequestration through the development of rubber plantations". The investor’s money is actively fighting climate change, while at the same time holding out the prospect of profit. Win-win.
Deforesting, then “reforesting” with green bonds
Alas, that is not the full story. Our investigation reveals that the story did not begin in 2014 with a handshake between Michelin and Barito. It started several years earlier. The signing of the joint venture came just a few months after the end of a vast forest clearance operation initiated in 2010 by one of Royal Lestari Utama's subsidiaries, Lestari Asri Jaya (LAJ), at the gateway to the Bukit Tigapuluh national park in Jambi province (on Sumatra).
Michelin was already fully aware of this deforestation (see Chapter 2) when it began discussions with Barito Pacific that led to the 2014 agreement. This was well before it sought to have its rubber plantations financed by green bonds, under the banner of reforestation.
Michelin staff had in fact visited the LAJ concession several times since 2013, when the strategic partnership with Barito Pacific was launched (5). But while the French multinational was conducting field surveys and negotiating its deal with the Indonesian conglomerate, in RLU-owned concessions in Jambi bulldozers belonging to a Barito subsidiary were relentlessly destroying lush vegetation in order to replace it with rubber trees. These operations mainly took place in the LAJ concession, but the smaller neighbouring Wanamukti Wisesa (WMW) concession was also affected (6).
What investors could therefore not know is that a large proportion of the supposedly sustainable rubber plantations – the product of fundraising orchestrated by a UN body and BNP Paribas – grew out of the ashes of native trees cut down by Royal Lestari Utama's subsidiaries in Jambi, prior to the Michelin-Barito Pacific joint-venture.
The equivalent of over 8,000 football fields razed by 2015
In the run-up to its joint venture agreement with Barito, Michelin commissioned an audit from the British non-profit environmental consultancy TFT (now transformed into a Swiss-based foundation called Earthworm). According to the findings of this study, which Michelin did not wish to make public (see Chapter 2) and of which Voxeurop obtained a copy, RLU had deforested about 3,500 hectares of forest in the LAJ concession between 2012 and 2014. And this figure, calculated on the base of LAJ's annual operating plans, is in fact grossly underestimated.
A better estimate of the extent of the environmental destruction only recently emerged, just before Michelin completed the redemption of the so-called green bonds in August 2022.
The latest independent report on the environmental status of the LAJ concession, published by Remark Asia and Daemeter Consulting in May 2022, cites official government data: between 2011 and the end of 2014, the company converted 5,782 hectares of forest into rubber plantations - the equivalent of almost 8,260 football fields.
Even this figure seems to be a gross underestimate according to Leo Bottrill, CEO of the geospatial technology company MapHubs and the first person to draw public attention to the situation. His satellite calculations were included by the NGO Mighty Earth in its October 2020 report (and again in the 2021 one).
Recently, Bottrill shared with Voxeurop an updated map. It shows that an estimated total of 8,468.46 hectares had been deforested by Royal Lestari within the LAJ and WMW concessions in Jambi prior to the 2014 joint venture. (To date, rubber plantations have not yet covered all of the deforested area.)
According to RLU's 2020 sustainability report, the green bonds financed the first 19,000 hectares of rubber trees planted since 2008. These are mostly located in the province of Jambi, Sumatra, and to a lesser extent in East Kalimantan province, Borneo.
The conclusion that can be drawn from these figures is that about one third of the rubber plantations financed by the green bonds are located in the area that was deforested in Jambi province before the joint venture between Michelin and Barito Pacific was signed – deforestation of which Michelin was fully aware according to our investigation. One third of 19,000 hectares is precisely a middle ground between the figures quoted in the Remark Asia and Daemeter Consulting report and Bottrill's estimates.
Did green bonds pay for deforestation?
The fact that Royal Lestari Utama used a loan financed by green bonds to plant rubber trees on the site of a newly deforested tropical forest raises many questions. Moreover, RLU used one third of the borrowed money to repay earlier bank loans, which had financed rubber plantations prior to Michelin's involvement. This is confirmed by the BNP Paribas prospectus and other documents examined by Voxeurop (7).
It turns out that about a third of the area of the plantations financed by the green bonds had already been cleared and partially planted with rubber trees by RLU, using bank loans. This took place before the joint venture with Michelin. RLU then used a third of the value of the bonds to repay the loans.
"Essentially, it appears that a significant portion of the $95 million TLFF loan was used to cover expenses incurred by Royal Lestari Utama to deforest and plant rubber trees in a globally important wilderness area," says Alex Wijeratna, of Mighty Earth in response to the Voxeurop revelations. "It is safe to conclude that green bondholders have unwittingly rewarded environmental destruction with about a third of their investment."
A seemingly legal greenwash
None of this is necessarily illegal. In 2010, RLU received a government permit to plant timber and rubber trees for up to 60 years based on an environmental impact assessment from 2009. The company has also been awarded a certificate of sustainable forest management by the Indonesian government (see Chapter 3 of our survey, coming soon).
Officially, the investors thus had an unquestionable right to receive income from the sale of rubber, including from rubber trees grown in an industrially deforested area that was previously home to elephants, orangutans and tigers. All three animals are on the International Union for Conservation of Nature's Red List of threatened species.
Yet, "what investor would want to invest in a 'green project' that has deliberately eradicated a pristine rainforest inhabited by indigenous people and home to three iconic species, all while releasing huge carbon emissions that contribute to climate change?" laments Alex Wijeratna of Mighty Earth. "Michelin's customers would be shocked to learn that elephant habitat has been cleared to grow the rubber needed to make their tyres," adds Leo Bottrill of Maphubs.
Investors who get their money back are less likely to complain
In February 2022, TLFF, the green financing platform of the United Nations and BNP Paribas, itself requested repayment of the loan, citing RLU’s failure to meet the annual interest payment deadline. TLFF persuaded the bondholders to accept Michelin's proposal for early repayment (the maturity date was February 2033). It is conceivable that, with rubber production facing financial difficulties, Barito offered Michelin full ownership of RLU in return for settlement of its debts.
"Michelin initially went for the green bonds despite the rather high interest rate, because it had no interest in investing more of its own money in a company it did not control," notes a well-informed source. This remark underlines the fundamentally commercial nature of this eco-finance operation. "After taking full control of RLU, Michelin found it more convenient to repay the loan and then borrow at lower rates in the market."
The project's stakeholders want to reassure investors: "As part of the purchase of Barito Pacific's shares in Royal Lestari Utama, the Michelin Group has committed to continuing to meet RLU's environmental and social objectives over the long term, beyond the repayment of the TLFF bonds," says the official statement.
ADM Capital and UNEP, who were among the architects of the TLFF financing platform, have indicated that they will each retain seats on RLU's advisory board on sustainability. Their intention is to ensure that independent audits continue to check progress against promised outcomes.
The project's achievements were assessed annually from 2018, when the bonds were issued, based on environmental, social and governance (ESG) criteria to which RLU has signed up, including those stipulated in the TLFF guidelines. Compliance with these criteria is however entirely voluntary and cannot be enforced by public authorities. The prospectus accompanying the green bonds also states that the ESG principles mentioned "are not [...] legally binding on the issuer or any other party (including RLU, currently a subsidiary of Michelin)".
The weakness of the commitments made through the bond issue is now all the more obvious given that the investors, having been reimbursed for their outlay, are out of the picture. "The less outside investment there is in a project, the less transparent it will be and the less say stakeholders will have in its progress," a lawyer specialising in business law told Voxeurop. "I don't know if this is what motivated Michelin to buy back the green bonds, but the consequence is that these bondholders will be very unlikely to pressure the company to live up to what it originally announced."
In other words, Michelin has no obligation to generate future social and environmental benefits in return for the funding obtained through the bonds, to offset the environmental devastation perpetrated by Barito Pacific in the past.
WWF's withdrawal from the project in March 2020 does not point to a happy - green - outcome. "We have concerns about their commitment to conservation and their lack of transparency," said a WWF spokesperson in explaining the decision to walk away from Michelin. "All our concerns have been passed on to the highest authorities at Royal Lestari and Michelin so that they may act accordingly."
End of Chapter 1
In the next chapter of our investigation, we reveal how Michelin concealed, or deliberately ignored, evidence of Royal Lestari Utama's responsibility for deforestation prior to the joint venture with Barito Pacific, so as to pave the way for “green” certification that would allow the project to be financed by green bonds.
1. The cost of planting was quite high ($5,000 to $10,000 per hectare), while the price of natural rubber was already extremely low ($2 per kilo, six times lower than in 2006). Rubber production will only reach large volumes from 2022/2023 onwards and it will take another 20 years before it becomes profitable, assuming that the price rises to at least US$4 per kilo.
2. After developing a mechanism to meet RLU's funding needs, the TLFF has not undertaken any other such project since.
3. According to a source who wishes to remain anonymous, BNP Paribas received a fixed commission of approximately 1% of the value of the transaction, or approximately $950,000. ADM Capital declined to disclose its share of the proceeds.
4. Technically called the Offering Circular, it refers to the Vigeo Eiris bond certification report. To make the deal look robust compared to average private investments, TLFF listed the green certification, with the accompanying prospectus, on the Singapore Stock Exchange - Southeast Asia's main financial centre, where Barito Pacific's headquarters and the regional branch of BNP Paribas are located. See Chapter 2.
5. Their first agreement was to build a $435 million factory to produce synthetic rubber on the island of Java.
6. Barito Pacific has been the deus ex machina of this industrial clear-cutting from the start, through an opaque Russian-doll-like corporate structure. Although formally taken over by RLU in 2011 and 2014 respectively, LAJ and Wanamukti Wisesa had been indirectly majority owned since 2008 by Prajogo Pangestu, who also took control of RLU in the same year.
7. A closer look at the BNP Paribas prospectus reveals that the TLFF loan, financed by $95 million in bonds, was largely allocated to the commercial component of the project (including 'direct and indirect costs' and 'essential plantation expenses'). RLU declined to provide a precise breakdown of these expenses. However, the prospectus cites RLU's financial statements, which include both expenses related to the development of rubber production between 2011 and 2016, and interest on mortgages provided by Bank Negara Indonesia (BNI), an Indonesian state-owned bank, to finance the operations. The total amount is $36 million, or 33 percent of the value of the bonds ($95 million). In its June 2017 environmental audit, USAID states that "the loan [provided by TLFF] will be used [...] as a debt swap against an existing loan with [...] Bank Negara Indonesia." The Vigeo Eiris report states that "no more than one third" of TLFF's loan to RLU would be used to repay BNI and confirms that BNI's mortgages "appear to have been used primarily for planting" (which includes land clearing).