This June, the Norwegian government voted to ban palm oil-based biofuels in public procurement of fuels and public transport. The Norwegian Parliament – the Storting – voted that the regulation shall enter into force as soon as possible. Furthermore, the Norwegian Parliament called for the retail biofuels industry to not use biofuels that exceed the EU’s minimum greenhouse gas emissions reductions targets.
The Norwegian government’s policy changes are important to Neste Corporation as Neste is the sole supplier to the Norwegian market of palm oil-based biofuels.
In response to the Norwegian government decision, Nils Hermann Ranum, Rainforest Foundation Norway, said:
“It is highly positive that Norway has now followed up on last year’s pledge to ensure deforestation-free supply chains through the government’s public procurement policy with this strong commitment. It is now incumbent on other consumer countries to follow suit. In particular, the EU should take urgent steps to reduce the consumption of commodities, such as palm oil biodiesel, that are linked to rainforest destruction and accompanying greenhouse gas emissions, biodiversity loss and human rights violations. A revision of the EU biofuel policy, to avoid biofuels that drive deforestation and are worse for the climate than fossil fuels, is urgently needed.”
Similarly, in 2016, the Norwegian government voted to ban any palm oil products purchased by its central and sub-central governments. This follows Norway’s support for the New York Declaration on Forests, launched during the 2014 Climate Week in New York City. The Declaration is the first global timeline for cutting and totally ending deforestation, and was supported by developing and developed nations, businesses and NGOs.
Importantly, on April 3, 2017, the European Parliament voted for a resolution to phase out the use of non-sustainable vegetable oils for biofuels by 2020. The resolution called for independent audit and monitoring to guarantee that deforestation and peatland conversion does not occur. The resolution also called for a single, mandatory set of certification mechanisms. It states that it:
“Acknowledges the positive contribution made by existing certification schemes, but observes with regret that RSPO, ISPO, MSPO, and all other recognised major certification schemes do not effectively prohibit their members from converting rainforests or peatlands into palm plantations; considers, therefore, that these major certification schemes fail to effectively limit greenhouse gas emissions during the establishment and operation of the plantations, and have consequently been unable to prevent massive forest and peat fires; calls on the Commission to ensure that independent auditing and monitoring of those certification schemes is carried out, so as to guarantee that the palm oil placed on the EU market fulfils all necessary standards and is sustainable; notes that the issue of sustainability in the palm oil sector cannot be addressed by voluntary measures and policies alone, but that palm oil companies should also be subject to binding rules and a mandatory certification scheme.”
Motorists Drive EU Palm Oil Demand
Motorists are the top consumers of palm oil in Europe. In 2015, 46 percent of all the palm oil used in Europe ended up in the tanks of cars and trucks. By 2014, EU palm oil demand had reached 3.22 million metric tons, an increase of 2.76 million metrics tons since 2010. During the same period, EU consumption of soybean oil used for biodiesel contracted by 555,000 metric tons to 440,000 metric tons in 2014. This demonstrates growing demand for palm oil as a soybean oil substitute by refiners.
At the same time, it is clear that EU demand for palm-oil based biofuels has driven deforestation and peatland conversion in SE Asia and elsewhere.
The recent report, For Peat’s Sake, found that biofuels may be worse for the environment than diesel, using direct and indirect emissions as a comparison metric. The report states:
The latest analysis performed for the European Commission ascribes a carbon footprint to palm oil biodiesel that is almost three times higher than that of fossil diesel, due largely to its indirect land use change emissions.
Nasdaq’s New Nordic and Baltic ESG Listing Standards and Neste
Neste trades on the Nasdaq Helsinki exchange in Finland. With a market cap of close to USD 10 billion and over 5,000 employees globally, it is one of the largest buyers of palm oil products for biofuels globally. Its products include gasoline, diesel fuel, aviation fuel, marine fuel, heating oil, heavy fuel oil, base oil, biofuels and lubricants.
In March, 2017, the Nasdaq Nordic and Baltic exchanges announced voluntary environmental, social, and governance (ESG) disclosure reporting. In 2012, Nasdaq joined the United Nations Sustainable Stock Exchanges initiative (UN SEE). In 2015, its seven Nordic and Baltic exchanges individually joined the UN SSE. Accordingly, Nasdaq meet it UN SSE’s Campaign to Close the ESG Guidance Gap commitment by publishing their Nordic and Baltic exchanges ESG guidance.
Nasdaq’s voluntary and non-binding guidance covers Neste’s equity and debt listings that trade on Nasdaq Helsinki exchange.
It is important to note that Nasdaq’s voluntary guideline contains two gaps that allow Neste to not report on the impacts from selling deforestation and peat land conversion-linked palm oil biofuels into the EU market. The gaps in Nasdaq’s guidance are:
- A company’s Board of Directors Risk Committee and/or Governance Committee need to be explicitly responsible for ESG reporting. This would improve peer-to-peer comparison while directly informing financial modeling, valuation, firm-wide enterprise risk management, and a firm’s long-term strategic direction.
- Companies are not suggested to report metrics for direct and indirect emissions from land-use, forests, and agriculture. On the other hand, the guidance does include metrics for direct and indirect emissions from hydrocarbon sources.
Nasdaq’s voluntary guidelines do not provide options, as described above, for Neste’s Board of Directors to report to investors on its direct and indirect emissions from land-use change.
BNP Paribas Zero-Deforestation Policy as Lead Manager for Neste’s EUR 400 Million Debt Issuance
These listing standards gaps are important because Neste recently issued a EUR 400 million bond maturing June 7, 2024 with a fixed annual interest of 1.5 percent. BNP Paribas, ING Bank N.V., and Nordea Bank AB acted as joint lead managers for the issue of the bond.
As Neste’s prospectus for this bond issuance states on p. 48:
Neste believes that the road transport market is growing in respect of high quality biofuels. According to the estimates of Neste’s management, the EU mandates continue to drive demand towards 20 million tonnes of biofuel in the diesel pool by 2021, and the US mandates translate into an almost-doubling of current demand up to 10 million tonnes by 2021. Further, according to the estimates of Neste’s management, more stringent greenhouse gas reduction targets and blending limitations for conventional biofuels support doubling of drop-in biofuels, such as, renewable diesel demand.
It is clear in Neste’s bond prospectus that management wants to pursue supplying biofuels to the EU market, forecast to double in size by 2021 to 20 million tons. Yet, as described above, Nasdaq Helsinki does not provide ESG listing standards guidance for the embedded emissions in the production of palm oil-based biofuels.
Finally, in June 2017, BNP Paribas launched its new palm oil policy. Its new policy requires downstream refiners and traders to meet several zero-deforestation criteria. It is unknown if Neste’s EUR 400 million debt issuance meets BNP Paribas’ zero-deforestation criteria, specifically in regard to providing a time-bound plan to ensure that their palm oil suppliers are compliant with the criteria required by BNP Paribas. BNP Paribas criteria includes:
- No development in High Carbon Stock forests.
- No development in High Conservation Value areas.
- No burning for the development of new plantations.
- No development on peat, regardless of depth.
- No use of child/forced labor.
- Respect land tenure rights, including the Free, Prior and Informed Consent of indigenous and local communities.
- Have a human resources policy covering all workers (no human trafficking, payment of minimum wage, maximum working hours, and the right to freedom of association and collective bargaining).
As shown in Figure 1 (below), Neste publishes its palm oil dashboard online showing traceability of its palm oil supply chain including companies, mills, and estates. As of June 20, 2017, Neste’s dashboard shows that 100 percent of its palm oil was traceable to a source and certified. The dashboard states “100% of suppliers committed to no-deforestation.” But it is unknown if Neste’s dashboard covers BNP Paribas’ criteria for “no burning”, “no peat land development”, “respecting land tenure rights”, and “child / forced / other labor policies”.
Figure 1: Neste Palm Oil Dashboard, June 20, 2017. Source: Neste.
Norwegian Ban Impacts Neste
The Norwegian government’s policy changes are important to Neste as Neste is the sole supplier to the Norwegian market of palm oil-based biofuels. In 2016, Norwegian national biofuel consumption was 450 million liters. 39 percent of this national consumption– or 175 million liters – was palm oil and palm fatty acid distillate (PFAD), both used as a palm-oil based biofuel in Norway. While no public data is available describing how much of the overall Norwegian biofuel market and its palm oil based feedstocks are purchased by the Norwegian government, Norwegian government procurement is assumed to be a small percentage of the market.
Nonetheless, the Norwegian government’s decision will decrease palm oil biofuels sales in Norway. As Neste is the only supplier to the Norwegian market, Neste can expect to experience biofuel revenue contraction in the Norwegian market.
With a Q1 2017 operating profit of EUR 204 million compared with Q1 2016 EUR 175 million, Neste’s Q1 2017 topline numbers were strong despite the expiration of the U.S. Blender’s Tax Credit (BTC). Their Renewable Products division reported EUR 80 million operating profit in Q1 2017, which is equal to their Q1 2016 numbers.
Given that 82 percent of their Q1 2017 sales volumes were allocated to Europe and that their renewable diesel production facilities operated at a 99 percent utilization rate, Neste may experience revenue contraction only in the Norwegian market given the June 2017 Norwegian government announcement, while the rest of its business lines continue to grow.
If you have any questions, comments, or suggestions for the authors, please contact Gabriel Thoumi, CFA, FRM.
This article was written by Chain Reaction Research, a coalition of Aidenvironment, Climate Advisers, and Profundo.