investigation Report Green finance: an investigation | Part 3

How Michelin and its Indonesian partner sidestepped the rules for green bonds

Royal Lestari Utama, Michelin's Indonesian partner (which it now controls), enticed environmentally-responsible investors to finance its rubber plantations in Sumatra by disguising its responsibility for deforestation. It thus flouted the international rules on green finance to which it had signed up. The story is a textbook case of greenwashing.

Published on 17 November 2022 at 12:54
This article is reserved for our members

Chapter 3

Behind the green curtain, biodiversity is being destroyed

In the previous chapters, we saw how in 2018 Michelin used green bonds to finance the rubber plantations of its new Indonesian partner Royal Lestari Utama (RLU) in the Indonesian province of Jambi, on the island of Sumatra. The bonds, designed to support sustainable projects and marketed by BNP Paribas, were issued by the new sustainable-finance platform Tropical Landscapes Finance Facility (TLFF). They were also endorsed by a number of third parties who were found to have based their assessments solely on documents.

Michelin and its partners also ignored warnings from grassroots organisations about the industrial-scale deforestation previously carried out by RLU's local subsidiary.


👉 Read chapter 1: European green finance is paying for deforestation in Indonesia: the case of Michelin
👉 Read chapter 2: How a project decried for its environmental impact became a flagship of European green finance

In order not to jeopardise the success of a model project, Michelin and the founders of the TLFF failed to communicate these facts to potential investors, who might have been less enthusiastic if they had known about them. We will now look at how all this was possible – and why it should not have been, given the rules of green finance and the situation on the ground in Sumatra.

It was the "visa" granted in January 2018 by the ethical-investment ratings agency Vigeo Eiris, certifying compliance with the principles of the International Capital Market Association (ICMA), that allowed TLFF bonds to be registered in the database of Climate Bonds Initiative. CBI is the world's leading certifier of climate fundraising, and Vigeo Eiris is a CBI-approved auditor.


Receive the best of European journalism straight to your inbox every Thursday


The accreditation of the bonds in the CBI's Climate Friendly Investment Showcase helped their reputation and visibility to potential investors. "Our database is searched to see what is green. If bonds do not meet the criteria of our database, they cannot be included in the green-bond indexes," explained Caroline Harrison, research director at CBI, to Voxeurop. This was confirmed by Alex Wijeratna of the environmental NGO Mighty Earth: "Portfolio managers can assume that if TLFF bonds are part of a reputable green index, then the investment is good to go."

CBI considered that Royal Lestari Utama's plantations provided benefits for climate protection, since the cultivation of rubber trees was a form of carbon sequestration. Furthermore, the involvement of local farmers in rubber production, alongside food crops, improves their living conditions and prevents them from having to further expand their agricultural land at the expense of forest areas.

Relying on the flawed Vigeo Eiris assessment (see Chapter 2), CBI endorsed the TLFF's obligations without taking into account the greenhouse gases released by past deforestation. CBI could not have been aware of this, given that RLU and BNP had failed to report it to Vigeo Eiris. Moreover, CBI’s methodology in the agricultural sector considered that a reduction in emissions during the period of the investment - which in this case officially began in 2018 (the date of the transaction by TLFF) - was sufficient. However, we learned (see Chapter 1) that the green bonds were partly used to finance, retroactively, the clearcutting that took place prior to the joint venture between Michelin and Barito. Rather than sequestering carbon, this deforestation contributed to carbon emissions.

A breach of the principles of green bonds

In a letter to the Climate Bonds Initiative in March 2021, Mighty Earth asked it to remove the TLFF bonds from its database. The environmental NGO argued that "this failure to disclose [...] the known key information that the subsidiary of Michelin's local partner [...] was one of the major causes of the land clearing and deforestation on its concessions in Jambi [...] constitutes an extremely serious - and ultimately misleading - omission and [...] a gross violation of Green and Sustainability Bond principles" established by ICMA. These require transparent disclosure of the environmental risks associated with funded projects (1).

According to an ICMA expert on sustainable finance who wished to remain anonymous, "it should be clear that land conversion and deforestation are not in the spirit of green bonds, even assuming that the final [outcome] is green, as in the case of sustainable agriculture for example. External auditors and investors would doubtless not endorse this [as] their reputation could suffer." Indeed, ICMA principles require that the sums collected through green bonds be invested, among other things, in the “environmentally sustainable management of living natural resources and land use (including environmentally sustainable agriculture; [...] environmentally sustainable forestry, [...] and preservation or restoration of natural landscapes).

As unveiled by Voxeurop through analysing official documents (see Chapter 1), RLU used a third of the borrowed money to repay previous bank loans, with which it financed land clearing and rubber plantations developed before Michelin joined the game. These activities certainly do not represent an example of "sustainable management" as defined by ICMA.

On the subject of Mighty Earth's initiative, Sean Kidney, executiver director of CBI, told Voxeurop: "We don't do field checks, we rely on independent reviewers. In this case, the bonds had received a second opinion [the assessment of Vigeo Eiris, a ratings agency specialised in ethical investments] and the original documents made no reference to any deforestation. On the other hand, if we find out from our own sources in Indonesia that there has been a problem, then we will simply remove the bonds from our list. Indeed, under our retrospective period, no deforestation must have taken place in the last ten years." Michelin has already repaid the bonds to investors, so any action by CBI would now come a little late.

Sean Kidney, CEO and co-founder of the Climate Bond Initiative, speaks at the Climate Investment Forum at COP27 in Sharm el-Sheikh, Egypt, on 14 November 2022. | Photo: Emanuela Barbiroglio

Paul Vermaak, director of standards at CBI, told Voxeurop: "Our database can accept bonds that support the sustainable transition of agribusinesses with a history of land conversion – i.e. it must have taken place long before – but not those that might support companies that have cleared the forest just before publishing a 'no-deforestation policy'. This would be a manipulation of the system to unfairly extract money from investors. It would be up to ICMA's qualified reviewers to avoid such an unintended consequence."

Vermaak confirmed that "if the company has deforested the land, this means that it has generated significant [carbon] emissions and removed a high-carbon-sequestration habitat, before replacing it with lower-sequestration agricultural production activities. Such a scenario is implicitly inconsistent with our taxonomy" (2). He added that the CBI is committed to revising its assessment criteria to exclude, in the future, any project that does not comply with the "Do no significant harm" (DNSH) principle (3).

To hide the clearcutting that preceded the joint venture between Michelin and Barito Pacific could thus reasonably be described as a breach of the green-bond guidelines set out by the International Capital Market Association and the CBI. It also compromised RLU's adherence to the Environmental and Social Sustainability Performance Standards of the International Finance Corporation (IFC), the private investment arm of the World Bank.

Indeed, the environmental, social and governance (ESG) criteria mentioned in the green-bond prospectus proclaim full compliance with the ICMA principles as well as with the IFC standards. Royal Lestari Utama should therefore have been subject to the same environmental and social requirements as those for companies applying for IFC funding. In its Second Party Opinion – a form of audit – Vigeo Eiris made it clear that the environmental benefits of the project "are conditional on the implementation of the [...] IFC performance standards".

Among these, the chapter on conservation blacklists projects that result in a net loss of biodiversity – a concept that includes any natural forest that represents an important habitat for threatened species or for indigenous communities.

Without referring specifically to RLU, the IFC press office suggested that its venture might well fall under this non-compliance clause. In an email exchange with Voxeurop, it said that "the implementation of the national legal framework" and "the company's non-deforestation policy do not come into play [...], i.e. it does not matter whether or not the company had such a policy or a clearing permit (where it has degraded the habitat), it still has to prove [...] that its project resulted in no net loss (of biodiversity) [...]" to comply with the IFC standards.

In particular, the IFC considers that companies are liable for any biodiversity loss they cause by deliberately degrading a natural habitat "in anticipation of obtaining financing from a lender [...] for the project".

Deforesting and replanting, as quickly as possible

This seems to be exactly what happened. The confidential report of the auditing firm TFT/Earthworm, seen by Voxeurop, shows that Lestari Asri Jaya (LAJ), the RLU subsidiary that operates the Jambi concessions, continued to clear land until late 2014. Indeed, according to both the green-bond prospectus and the latest independent report on environmental protection in the LAJ concession, published in May 2022 by Remark Asia and Daemeter Consulting, rubber planting in fact exploded (4) between early 2013 – when Michelin first visited the site – and late 2014, when the joint venture was signed.

Lestari Asri Jaya and Wanamukti Wisesa in Jambi province, Sumatra.

Are you a news organisation, a business, an association or a foundation? Check out our bespoke editorial and translation services.

On the same topic