investigation Report 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
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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 associ…

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