The Chain: Pepsi Suspends Palm Oil Purchases from Indofood Agri Resources

The Chain: Pepsi Suspends Palm Oil Purchases from Indofood Agri Resources
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On January 24, PepsiCo announced that the company and its joint venture with Indofood Sukses Makmur, IndoFood Fritolay Makamur (IFL), had suspended purchasing palm oil from Indofood Agri Resources (IndoAgri). Pepsi stated it made this procurement decision because “PepsiCo is very concerned about the allegations that our policies and commitments on palm oil, forestry stewardship and human rights are not being met”.

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PepsiCo has been subject to NGO pressure for its ties to IndoAgri in the past. In 2016, the Rainforest Action Network (RAN), OPPUK – a local labor rights organization, and the International Labor Rights Forum documented alleged labor grievances against IndoAgri including laborers under 18 years of age, low pay, health and safety conditions, production quotas, and use of informal labor. In its updated 2017 analysis, the coalition called out PepsiCo’s supply chain for its “conflict palm oil,” writing in that “workers’ testimonies contradict Indofood’s statements related to Freedom of Association.” RAN filed a formal complaint for breaches of the labor rights laid out by the Roundtable on Sustainable Palm Oil (RSPO) was filed against Indofood subsidiary PT PP London Sumatra Indonesia Tbk in October 2016 and is still ongoing. A 2017 report by Chain Reaction Research showed that 36 percent of the Crude Palm Oil (CPO) processed by Indofood came from undisclosed sources, creating reputational risks for purchasers.

PepsiCo’s action is significant as the company is now including entities that are not under PepsiCo’s direct managerial control in its supply chain risk management polices known as No Deforestation, No Peat, No Exploitation (NDPE). That PepsiCo would apply this action to a joint venture where the partner is an affiliate of the supplier in question is even more telling, bowing to external pressure and expanding the scope of risk management policies that address potential material labor and deforestation risks throughout its global palm oil supply chains.

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As mentioned above, IndoAgri is a publicly-traded subsidiary of Indofood Sukses Makmur, which operates IndoFood Fritolay Makamur as a joint venture with Pepsi to produce Lays-branded snacks in Indonesia. In 2016, 11.46 percent and 7.05 percent respectively of IndoAgri revenue and cost of goods sold occurred in transactions with publicly traded Indofood CBP Sukses Makmur, which is 80.53 percent owned by Pepsi’s joint venture partner, Indofood Sukses Makmur.

PepsiCo is a major player in the global food supply, purchasing 480,000 metric tons of palm oil in 2016 – about 0.8 percent of global supply – from 60 direct palm oil suppliers and their 1,500 mills upstream. They estimate that 92 percent of palm oil purchased in 2017 was traceable to its origin, an improvement from 65 percent in 2015.

In response to media coverage of PepsiCo’s suspension, CEO and Executive Director of IndoAgri Mark Wakeford stated that:

“The Company wishes to state that as a public listed company (on the Singapore Exchange) we comply with the labour laws and regulations of the Indonesian Government. We do not have any dispute or outstanding issue with any of our Labor Unions (we have a total of 10 Labor Unions) or the Indonesian Ministry of Labor. We have also recently received a good compliment and zero accident award from the Indonesian Ministry of Labor.”

A suspension by Pepsico will have a negative impact on revenues and profit of IndoAgri, although the exact impact is unclear. Investors in Indofood Agri should also be aware that Wilmar remains a customer, and that IOI is also an indirect customer, although either or both could follow PepsciCo’s lead and halt purchases. Critically, several financers of IndoAgri including Rabobank and Citi have adopted forest policies. If they take action similar to PepsiCo, IndoAgri could face a dramatically higher cost of capital.

Chain Reaction Research conducts sustainability risk analysis for financial analysts and investors. Our special focus is on sectors that deal with environmentally intensive commodities, especially those sourced from tropical regions like palm oil, and pulp and paper. We explore whether unsustainable corporate practices and actions have introduced unreported risks – and how or whether sustainability leadership can mitigate those risks and possibly provide competitive advantage. Where possible, we provide pre-IPO checking of claims about risk and assets reported in prospectuses. We also review claims made by publicly traded companies. Chain Reaction Research has received support, in part, from the David and Lucille Packard Foundation, and from the International Climate and Forest Initiative (NICFI) scheme managed by the Norwegian Agency for Development Cooperation (Norad). Chain Reaction Research statements and materials do not necessarily reflect the standpoints of the Packard Foundation or Norad.
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