investigation Green finance: an investigation | Part 2

How a project decried for its environmental impact became a flagship of European green finance

This is the second part of our investigation into the financing of rubber plantations in Indonesia that was orchestrated by Michelin and BNP Paribas through the green-bond mechanism. We reveal that the tyre manufacturer ignored the warnings of NGOs and local stakeholders and was not transparent about the responsibility of its local partner in the prior deforestation of the areas concerned.

Published on 9 November 2022 at 15:43

Chapter 2

Europe’s green finance at the expense of Indonesia’s fores

Michelin seeks a “green” partner in Indonesia

Fully established in Indonesia since 2004, in the early 2010s Michelin was looking for a local partner to strengthen its presence in Southeast Asia. The French tyre giant approached the Indonesian group Barito Pacific. Founded and directed by the billionaire Prajogo Pangestu, nicknamed the Indonesian "timber king", the conglomerate (now specialised in petrochemicals and energy) had a notorious reputation for environmental abuses. (See Chapter 1.)

According to Glenn Hurowitz, executive director of the NGO Mighty Earth, the first contact between the two companies took place in mid-2013. This was a few weeks before a first field visit by Michelin officials to Jambi province (on Sumatra Island) in October 2013. These dates, as he told Voxeurop, were confirmed to him by Hélène Paul, Michelin's purchasing manager at the time.

Contacted by telephone, Hervé Deguine, Michelin's public affairs director, described the birth of this Franco-Indonesian partnership as follows: "It all started when Barito's staff wanted technical advice on how to improve the efficiency of their natural rubber production. [...] We proposed a collaboration geared towards sustainable production so that the benefits would accrue not only to the companies, but also to the local communities."

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Deguine went on: "During my first visit to Jambi in March-April 2014, I witnessed massive deforestation largely due to mafia groups [...] who had cornered land on a large scale." He said, however, that he had not personally witnessed any deforestation operations specifically by Lestari Asri Jaya (LAJ), the Royal Lestari Utama (RLU) subsidiary in which Michelin would soon hold a 49% stake in a joint venture with Barito Pacific. "The question for us was not who cleared the forest, but how to convince farmers who had always lived off deforestation – mainly they were planting oil palms – to change their source of income by planting rubber trees in our production areas and protecting the remaining forest instead of clearing it further."

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

In October-November 2014, a month before launching its joint venture with Barito Pacific, Michelin arranged another site visit. This time the company was accompanied by representatives of WWF and the British environmental consultancy TFT (now transformed into a Swiss-based foundation called Earthworm). "We wanted to get their [WWF’s and TFT’s] independent opinion on the social and environmental aspects before committing to the project," said Deguine.

The warnings of NGOs and independent experts

Michelin had commissioned TFT to conduct an audit of Lestari Asri Jaya's (LAJ) operations, which it became aware of in November 2014. TFT/Earthworm provided us a copy of this report, which has not been made public. It shows clearly what Mr Deguine appears not to have seen.

The document includes visual evidence of LAJ's ongoing deforestation of future rubber plantation areas at that time, including photos and geographical coordinates of the machinery involved in clearing forest areas that should have been left intact. Some of these zones are located along rivers and are essential for local wildlife. Others are near the concession boundary, right on the edge of the Bukit Tigapuluh National Park.

Excavator in action at the LAJ concession on the edge of Bukit Tigapuluh National Park, November 2014.
Clearing areas in the Lestari Asri Jaya concession. | Source: audit submitted by TFT to Michelin in November 2014.

"After our audit, during which we observed excavators in action, we had to ask LAJ to suspend its land clearances and preparatory work to allow us to carry out the environmental and social assessments on behalf of Michelin," said Bastien Sachet, managing director of TFT/Earthworm, to Voxeurop.

As for the intention to plant rubber trees in place of a newly cleared forest, the TFT report concluded that "trying to portray the project in a positive light by presenting it as 'reforestation' would attract criticism." Sachet pointed out that, "although rubber trees are trees, growing them in an industrial plantation does not constitute reforestation."

Michelin was apparently not satisfied with these conclusions. The company declined Bastien Sachet's proposal to accompany RLU's green transition, and ended its relationship with TFT/Earthworm. It even announced in May 2015 in a press release that "the project involves the reforestation of three concessions [...] ravaged by uncontrolled deforestation." No details were given on who was responsible for this deforestation.

The TFT/Earthworm audit was not the first to sound the alarm on the environmental damage caused by Michelin's future partner. A report by a coalition of NGOs, including the Indonesian branch of WWF, warned in 2010 of the imminent danger to the virgin forest located in a Lestari Asri Jaya concession bordering the Bukit Tigapuluh national park in Sumatra. The report revealed that several villages in the area were concerned about the "upcoming deforestation by LAJ”. In November 2015, WWF's local team also co-authored an investigation proving that LAJ was illegally logging in an endagered-species protection area known as Daerah Perlindungan Satwa Liar, as well as outside its concession area. These revelations came months after Michelin and Barito Pacific signed their joint venture and adopted their no-deforestation policy.

Sign for a designated Wildlife Protection Area ("Daerah Perlindungan Satwa Liar/DPSL") on the edge of Block 4 of the Lestari Asri Jaya concession, January 2015. | Photo: WWF Indonesia
Felled tree trunks in Block 4 of the Lestari Asri Jaya concession, May 2015 Photo: KKI Warsi

Green bonds, at any price

Clearly, these elements did not prevent Michelin's managers from contacting the Tropical Landscapes Finance Facility (TLFF), an innovative financing platform for projects related to the Paris Climate Agreement that had just been co-founded by the French bank BNP Paribas with the support and environmental supervision of the United Nations Environment Programme (UNEP). The aim? To obtain financing via green bonds for a project whose profitability was under threat from the fall in natural rubber prices. (See Chapter 1.)

The structure of the Tropical Landscapes Finance Facility (TLFF). | Source: Mighty Earth

According to information obtained by Voxeurop, the tyre giant then failed to be transparent about the environmental history of the project. It simply claimed that prior illegal deforestation opened the way to "reforestation" and therefore to a project with positive impact. This rhetoric would later be enshrined in the green-bond prospectus.

According to Alex Wijeratna, campaign director at Mighty Earth, "the deliberate destruction of the environment by its onsite partner Royal Lestari Utama is not mentioned in any of Michelin's communications to its customers or green bondholders. Michelin was not legally involved at the time these deforestation operations were taking place, but due diligence reports show that Michelin knew what was happening." If true, such omissions could amount to misleading commercial practices under, for example, French consumer law.

Bastien Sachet of TFT/Earthworm told Voxeurop that he thought, "in a personal capacity", that "if green bonds are supposed to improve a situation from an environmental point of view – which is how Michelin presented the project to us, and I believe it how they presented it publicly – then investors should be informed in advance of the problems that the bonds will help to solve."

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Michelin never made the TFT/Earthworm audit public, and refused to tell Voxeurop whether the report had been shared with members of the Tropical Landscapes Finance Facility.

Asked about this, Satya Tripathi, who chaired the platform until 2018, told Voxeurop: "I do remember the report being mentioned at that time, but do not recall reading through it myself."

"The TLFF is committed to upholding transparency," said Johannes Kieft, secretary-general of the TLFF and senior land-use specialist at the United Nations Environment Programme (UNEP), to Voxeurop. "I was aware of TFT/Earthworm report and of deforestation by Lestari Asri Jaya. The company had the legal obligation to clear logged over forest as it was licensed by the government to use the land for industrial forestry purposes", i.e. rubber production (See Chapter 3).

"We only learned about the TFT/Earthworm audit after the Mighty Earth report was released [in 2020] because it was commissioned by Michelin and not shared," confirmed a source working for Asia Debt Management (ADM Capital), a Hong Kong-based investment firm that co-founded TLFF with BNP Paribas, which issued the green bonds. The source was speaking to Voxeurop on condition of anonymity.

The audits of BNP Paribas, “the bank for a changing world

A specialist who worked on the case, who also wished to remain anonymous, claimed that BNP Paribas was also aware of RLU’s deforestation. This expert suggested to Voxeurop that the UN sponsorship would have encouraged those involved in the deal not to look more closely: "Every member of the TLFF was confident since the deal had UNEP patronage and was properly documented."

Voxeurop also had access to the minutes of a meeting held in December 2020 between TLFF members and Alex Wijeratna of Mighty Earth. At that meeting, Robert Barker, then head of sustainable finance at BNP Paribas, denied any knowledge of Royal Lestari Utama's involvement in deforestation in Jambi at the time he was coordinating due diligence for the French bank.

"I don't think this case can be judged on the basis of 'if we had known then what we know now'," he said. "We're talking about a time when most of us were not yet involved in this project." Robert Barker is now an independent consultant.

Voxeurop tried to contact him through a number of channels before his departure from BNP Paribas, without any response to date. The BNP Paribas communications department did not wish to comment.

Screenshot of the BNP Paribas green bond webpage.

Despite evidence that a very significant proportion of the area covered by the project had been deforested (see Chapter 1), none of the TLFF stakeholders seems to have objected to Michelin's ecological certification process.

At this stage, there is some reassurance for the investor who wants to make the world a better place. Didn't the process of obtaining a "green" certification rely on a thorough and independent analysis, taking into account the reports of the NGOs and TFT? Unfortunately, obtaining a green label is anything but a daunting challenge.

Getting a green label: the easy path to a green bond

Green bonds are becoming increasingly attractive to issuers and investors alike. "They sell for more than their non-green equivalents," said Caroline Harrison, research director at the Climate Bonds Initiative (CBI), the world's largest climate fundraising platform, to Voxeurop. "This means that the issuer pays a relatively lower cost to borrow money than it would have paid by issuing conventional bonds. In turn, the buyer sees the value of their investment rise more quickly."

Obtaining sustainability certification is a purely voluntary process. And it provides access to the magic of the "green" label that helps attract potential investors. All the applicant has to do is hire a qualified auditor from the International Capital Market Association (ICMA) to certify that the application complies with the association's green-bond principles. The reviewer's team examines the application based on documents provided by the applicant (who is also their client) as well as information available online. This is done without necessarily carrying out any on-the-spot checks.

A certification report is then issued. Known as a Second Party Opinion or SPO, it details why the project has benefits that meet ICMA's criteria on paper, but does not in any way guarantee that they actually do. The report should also mention any controversial issues that should be disclosed to investors.In 2017, TLFF appointed the social and environmental ratings agency Vigeo Eiris as its auditor.

The agency gave its green light in January 2018, a few weeks before the bonds were issued. The assets were technically qualified as sustainable bonds (a sub-category of the general ICMA definition of green bonds). Indeed, the Royal Lestari Utama project was not aimed at improving the environment per se, but rather at enabling sustainable agriculture that preserves biodiversity and strengthens local livelihoods.

Potential investors unaware of the environmental shenanigans

Subsequently, BNP Paribas, which was in charge of marketing the bonds, published a prospectus referring to the Vigeo Eiris bond certification report. To give the investment credibility, TLFF registered both documents on the Singapore Stock Exchange, Southeast Asia's main financial centre. This is where Barito Pacific and BNP Paribas have their regional headquarters. 

Transaction diagramme for bonds issued by the TLFF1 | Source: BNP Paribas

The Vigeo Eiris certification report and the BNP Paribas prospectus are the only two official documents that potential buyers of TLFF green bonds could refer to when deciding whether to invest.

According to information gathered by Voxeurop, Vigeo Eiris conducted interviews with BNP Paribas and Royal Lestari Utama, but not with Michelin. The auditor apparently considered that the Indonesian company was the only entity responsible for business operations.

"Our Second Party Opinions are [...] based on different types of information such as public sources or documents brought to our attention by issuers," said Tim Whatmough, VP of communications for sustainability and ESG (environmental, social and governance) at Moody's, one of the world's largest rating agencies, to Voxeurop. Moody's acquired Vigeo Eiris in 2019.

An auditor's analysis of the issues is based on the information available at the time of the assessment. Ultimately, it is the bond issuer that chooses which items to disclose. Royal Lestari Utama representatives did not share any information regarding deforestation. This would explain why the TFT/Earthworm audit never made it to the offices of Vigeo Eiris.

"The report was not ours. It was commissioned by and for Michelin", commented the communications department of RLU to Voxeurop. However, TFT's assessment does appear on the sustainability timeline published by Royal Lestari Utama.

Timeline of the RLU project in Jambi | Source: Royal Lestari

In terms of publicly available information, the only source used by Vigeo Eiris was Factiva, a business intelligence database. Their assessment states that "no ESG issues have been identified within RLU [...] in the last 48 months". However, Vigeo did not seek information on Lestari Asri Jaya (LAJ), the local RLU subsidiary responsible for deforestation in Jambi province (in Sumatra).

There is thus no mention of the track record of LAJ. Nor is there any reference to publicly available material, such as the reports by WWF and other NGOs mentioned above, which highlight LAJ's disastrous environmental record.

Despite the revelations, the (top) rating for green bonds remains unchanged

In a November 2020 email, a copy of which was obtained by Voxeurop, Alex Wijeratna sent the Mighty Earth report to Emilie Beral, at the time director of methodology for sustainable finance solutions at Vigeo Eiris. Her response came in January 2021: "We did not have access to the assessment report that Earthworm did for Michelin [in November 2014]. The Mighty Earth report has been added to the list of complementary sources [...]. Our teams have analysed and interviewed directly the companies mentioned in this report [...], this will underpin our assessment of the environmental, social and governance criteria of the project."

To date, Vigeo Eiris/Moody's has not revised its assessment.

Was LAJ’s deforestation a controversial issue that the project's stakeholders should have disclosed to Vigeo Eiris? Or one that Moody's should now report to investors, given subsequent developments? Voxeurop asked these questions to Tim Whatmough of Moody's. He did not wish to respond.

It should be noted here that Moody's is the rating agency that has assigned the highest rating – AAA – to the Class A bonds issued by the TLFF. This rating is the most coveted by investors. It should also be noted that BNP Paribas was one of the founders of Vigeo Eiris and was a shareholder until its takeover by Moody's. "This is clearly a conflict of interest that casts doubt on the credibility of the voluntary-governance regime for green bonds," said Alex Wijeratna of Mighty Earth to Voxeurop.

"We believe that not interviewing Michelin was a serious mistake, given its central role in the joint venture with Royal Lestari Utama since 2014. But the fact that Vigeo Eiris did not verify Lestari Asri Jaya is even more unbelievable, when we know that the prospectus issued by TLFF clearly identifies LAJ as an operating subsidiary of RLU in Jambi."

Voxeurop consulted other auditors certified by the International Capital Market Association. Several agreed to respond on condition of anonymity. According to one of them, "issuing green bonds creates a lot of expectations among investors, so we encourage issuers to make full disclosure. Our due-diligence process encourages us to find out what the land was like before we started trading. If any hidden information were to surface after our assessment, we would take responsibility for it, and we would inform the public, so that investors could ask the bond issuer why that information was not there."

According to another ICMA auditor, "the question of whether Second Party Opinions should be audited or subject to review is currently being discussed. Deliberately misleading investors is not a long-term strategy and damages the reputation of the parties involved."

Christa Clapp of Cicero Shades of Green, a consultancy specialising in green bonds, confirmed that "the bond issuer usually informs the investor of the impact of the project". However, she said, "this does not necessarily include past deforestation. I think this is a weakness in the market." However, she added: "If any new information came to our attention after our assessment, we would be obliged to update our Second Party Opinion.

"Environmentally minded investors can only deplore the fact that the current guidelines of the International Capital Market Association require the review of SPOs only when the bond issuer itself requests it.

In Europe, the historic success of RLU green bonds

During the bond offering campaign, WWF International refrained from any public criticism of the secrecy maintained by Michelin and TLFF regarding the history of deforestation. In a 2019 report evaluating its partnership with Michelin, WWF at no point mentions Royal Lestari Utama's responsibility for clearcutting forests, referring simply to "a largely deforested wildlife-hostile environment".

Cover of the 2019 interinal report on the WWF-Michelin partnership.

According to Alex Wijeratna, "there was a split within WWF between the international office and the Indonesian branch. The Indonesian branch was very concerned about the destruction of the landscape." In March 2020, WWF withdrew from the project due to "concerns about [Michelin's and RLU's] commitment to conservation and [the] lack of transparency," a WWF spokesperson said.

None of this has prevented the whole venture from being lauded in high places far from the forests of Indonesia. Indeed, it is now presented as an emblematic achievement of Europe's naissant green-finance sector.

In February-March 2018, the TLFF closed its pilot transaction (TLFF I) of $95 million long-dated bonds (a second tranche of $120 million was planned but never completed).This landmark deal allowed BNP Paribas to prove that it was a global pioneer in green finance. In December 2017, under the patronage of French president Emmanuel Macron, BNP Paribas and the United Nations Environment Programme (UNEP) partnered to create their Sustainable Finance Facilities (SFF) programme.

The aim was to attract $10 billion of private investment by 2025 to support sustainable business projects in developing countries. At the launch ceremony, the TLFF was presented as the kick-off of UNEP's collaboration with BNP Paribas.

French President Emmanuel Macron speaking at the One Planet Summit in December 2017. It was at this event that BNP Paribas and UNEP partnered to create their Sustainable Finance Facilities programme, inspired by the TLFF. | Photo: French Government

The UN has partnered with Michelin to make the green bond marketing campaign a success. Gabriela Flores, Senior Associate of the UN-REDD programme, stated publicly in 2018 that the Royal Lestari Utama rubber plantation project had been judged against international standards for sustainable bonds.

To top it all off, the United States Agency for International Development (USAID) guaranteed to cover 50% of the net losses on two-thirds of the TLFF loan amount. It was this guarantee that enabled the A-class bonds (which represent 30% of the total value of the bonds) to obtain the maximum AAA rating.

Diagramme of TLFF stakeholders. | Source: Convergence

When asked by Voxeurop about USAID's assessment report on the project, Jeff Cohen, the agency's head in Indonesia, also chose not to comment on RLU's responsibility for deforestation: "Our partial loan guarantee by TLFF has allowed RLU to rehabilitate land that had been degraded in the past with sustainably managed rubber plantations.” (1)

One third of the Class B bonds sold by BNP Paribas were acquired by the Netherlands-based &Green fund (for $23.75 million). This fund had received a capital contribution of $2 million from UNEP. PG Impact Investments (now Blue Earth Capital) bought them for $9.3 million. The French bank sold the remaining bonds to its network of clients.

In the opinion of Satya Tripathi, the ex-secretary-general of the TLFF, it was a well-organized operation: "Even Michelin invested $20 million in these bonds, which provided confidence to other investors."

End of chapter 2

In the next part of our investigation we reveal, with the help of our partners from Tempo magazine in Jakarta, how a lack of clarity in the law – as well as a series of legal hijinks – allowed Barito Pacific, Michelin's partner in Indonesia, to get its way at the expense of wildlife and local communities.


1) Like USAID, other public and private development cooperation agencies have refused to share with Voxeurop and Mighty Earth the due-diligence documents on which they based their decision to fund the project after the green bonds were issued. These include the French Development Agency (AFD), the UK-based Partnerships for Forests (P4F) and the Netherlands-based Sustainable Trade Initiative (IDH).

👉 Glossary and methodology
👉 Read Chapter 1: European green finance is paying for deforestation in Indonesia: the case of Michelin

The fieldwork in Indonesia by our partner Tempo was supported by a grant from the Global Initiative Against Transnational Organized CrimeThe investigation was also supported by the Environmental Reporting Collective, and Mediabridge.

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