You'd think all the coughing in the office would have been a wake-up call.
Every morning for the last several months, Goldman Sachs bankers in Singapore have woken up choking on the toxic haze that has swamped the skies of Indonesia, Malaysia, and Singapore. The bankers are not alone in their suffering of course -- everyone who lives in the region is dealing with a layer of haze that manages to creep even into air conditioned office towers and luxury hotels.
The source of the haze is massive forest fires from across the Malacca Strait in Indonesia -- deliberately set to clear land for palm oil and paper plantations. While the Indonesian government bears a lot of responsibility for the crisis, the fuel for the fires has been billions of dollars in international bank financing to palm oil and paper companies to clear forests and ultra carbon-rich peatland, no questions asked. The region and the world are now inhaling the consequences of that financing binge.
Yesterday, at the height of the fires, Goldman Sachs announced a new palm oil financing policy as part of its updated Environmental Policy Framework. I think Goldman Sachs really wanted to show that it cared about what was happening. Unfortunately, the substance of the policy signals that Goldman Sachs is willing to keep throwing money at the companies holding the match as Indonesia burns.
The most glaring weakness of the policy is that instead of requiring companies to adhere to a strict no burning policy, it gives a green light to forest burning with only a meek commitment not to knowingly finance companies that "utilize illegal or uncontrolled fires." It actually still is legal to burn forest and peat under Indonesian law in certain circumstances, and "controlled" fires still destroy forest and put vast amounts of smoke into the atmosphere.
Partly for that reason, palm oil companies representing more than 90 percent of global palm oil trade have put strict "No burning" policies into place. The haze crisis shows that not all of these companies' suppliers are adhering to the policies, in part because they believe that they will still be able to get financing from companies like Goldman Sachs that will tolerate the burning.
Indeed, the Indonesian government has been considering a blanket prohibition on burning, but Goldman Sachs' announcement doesn't help.
The idea behind these sustainable finance policies is that they're supposed to drive positive change in the industries that are hungry for bank loans or underwriting services. But in Goldman Sachs' case, its policies actually lag those of their customers... consumer companies like Kellogg, Johnson & Johnson, Mars and Hershey's that use palm oil as well as the major agricultural companies have all adopted forest conservation policies that are far stronger than Goldman Sachs.
For instance, whereas the major companies in the industry have strict "No Deforestation" policies, Goldman Sachs just commits to "No Net Deforestation." Translated out of technical terms, that means that Goldman Sachs is willing to do business with a company that clears massive tracts of forests full of wildlife, so long as it plants little immature saplings elsewhere. Needless to say, applying this approach to tropical rainforests would drive many species to extinction, and send even more climate pollution into the atmosphere.
Goldman Sachs also only applies its policy to palm oil, even though soy, cattle, rubber, sugar, and other crops are also all driving deforestation. Again, they're lagging agricultural giants like ADM, Bunge, and Wilmar International that are applying strong protections across all crops where they do business.
Goldman Sachs policy isn't all bad -- it says it won't finance companies engaged in destruction of ultra-carbon rich peatlands, and also requires timber companies not to engage in illegal logging and to move towards sustainable logging practices. And it includes a strong commitment to protect human rights, including Free, Prior, and Informed Consent of indigenous peoples (Update: the initial version of this post did not accurately reflect this provision of the policy, and I have corrected it here - GH).
Goldman Sachs has some of the smartest people in the banking industry, and many individuals in the company sincerely care about fighting climate change. They would do well to look to the example of their rival bank BNP Paribas, which has adopted a policy that, while imperfect, is far stronger. And BNP Paribas and has actually implemented it - denying financing to companies engaged in deforestation. BNP's actions have spurred several major palm oil companies to change their practices. In this case, BNP Paribas is actually showing how a major bank can actually drive positive change through its financing practices.
The fires are so extensive that Indonesia has on a daily basis sent more climate pollution into the air than produced by the entire U.S. economy. Hundreds of flights have been cancelled, and millions of children have been kept home from school. Several infants in the hardest-hits parts of Indonesia have died from the pollution. More than seven thousand square miles of forest have been destroyed in the last five months, probably the greatest environmental disaster of the decade.
It is time for Goldman Sachs to wake up to the new reality in the palm oil industry and in global agriculture more broadly: There are millions of acres of degraded land where development can happen without threatening forests or community rights... or poisoning the atmosphere. Furthermore, companies engaged in deforestation are simply a bad bet. Because of environmental campaigns and consumer demand for responsibly produced products, companies engaged in deforestation increasingly can't find markets.
Goldman Sachs will be facing a lot of scrutiny for its actions in the lead-up to the Paris Climate Summit. They should use that opportunity to get their environmental policy up to the standard of excellence they usually expect. Even their coughing Singapore bankers will thank them.
Thanks to Rainforest Foundation Norway and Deborah Lapidus for their help with this post.