Southeast Asia’s Fires and Haze: From Risks to Opportunities
It’s known simply as “The Haze”: a thick, eye-watering, nose-running, cough-inducing, health and climate hazard emanating from the burning of land and forest fires in Indonesia.
Nearly two decades have passed since the terrible haze of 1997-98 swept across the skies. Today the Haze is one of the largest sources of pollution and global carbon emissions in the Asia-Pacific region, and despite increased pressure on polluters by regional governments of the Association of Southeast Asian Nations (ASEAN) and the private sector, a solution to the problem remains elusive.
Pulpwood and palm oil plantation companies that continue to use fire to clear forest land for new planting—a practice outlawed in Indonesia—face growing risks. Those risks now extend to their buyers, or financiers, as well. Further steps in law and soft regulation are expected to increase the legal, reputational and credit risks.
In 2014 Singapore and parts of Malaysia witnessed record levels of haze in the burning season. In 2015, the region saw one of the worst episodes in history as forest and peatland fires devoured some 2.6 million hectares of land in Indonesia. Public emergencies were declared and a number of fatalities were recorded in Indonesia.
The 2015 haze crisis also severely disrupted economic activity: factory output declined, tourist arrivals dipped and public health was compromised, among others. Indonesia, Malaysia and Singapore all suffered significant economic losses—with Indonesia’s losses alone estimated at $16 billion.
So far in 2016, five provinces in Indonesia’s Sumatra and Kalimantan regions have raised the forest fire emergency alert and deployed assistance.
Increasing Regulatory Pressure
Indonesia is intensifying its law enforcement against the use of fire for land clearing. Last month, Indonesian President Joko Widodo (Jokowi) ordered authorities to re-investigate 15 companies that escaped prosecution due to lack of evidence after being suspected of causing 2015’s forest fires in Riau.
Moreover, on August 11, a Jakarta district court imposed fines totalling 1.07 trillion rupiah ($81.7 million) for violating the burning ban—the largest reported fine to-date linked to the fires. The Indonesian government is similarly suing five other companies for fire-related violations.
Further enforcement action came with the passage of Singapore’s Transboundary Haze Pollution Act (THPA) in 2014. The THPA holds liable entities that conduct or condone an act—even occurring outside Singapore—that causes or contributes to haze pollution. The Act was triggered during the 2015 haze crisis. By the end of October 2015, Singapore had served Preventive Measures Notices to seven companies with which investigations are still ongoing.
Playing the Blame Game
Many blame small-scale farmers who are allowed to burn up to two hectares of land. But there is considerable uncertainty regarding the culprits given Indonesia’s lack of a comprehensive and up-to-date land use map.
In this regard, large-scale producers of palm oil, pulp and paper face greater exposure to legal and reputational risks from fires within their concessions, or if their supply chains are associated with farmers who use fires. In addition to fines, the damage to branding and image may also lead some buyers to terminate business transactions.
Singapore has stepped up its own enforcement efforts to augment those of the Indonesian authorities. Amidst investigations by the Singapore authorities, an exclusive distributor for a major pulp and paper company had its license suspended. Several major supermarkets swiftly removed the company’s products from their shelves. Government officials continue to question the company and other companies’ representatives in the course of THPA investigations.
These investigations have not resulted in major fines or losses to the companies yet. However, companies face rising reputational risk. Some producers have been cut off by major buyers such as Unilever. Indonesia’s Bank Mandiri announced that it will stop approving any credit proposals to finance the development of new palm oil plantations on peatlands.
Moving Ahead: Opportunities
These steps, while small, are new in Southeast Asia where banks have typically evaluated creditworthiness solely on financial grounds. It is only recently that the financial sector in Indonesia, Malaysia and Singapore has developed a better awareness of Environmental, Social and Governance (ESG) standards. Assessing clients’ social and environmental impacts is critical for the agriculture and forestry sectors, which are often plagued with controversies and are thus a high risk.
There is also an increasing risk that land concessions may be forfeited or sharply curtailed in expansion. To prevent fires in the future, the Indonesian government has identified peatland conservation as its key strategy. It has committed to halting distribution of new permits to convert peatland into commercial plantations; and existing peatland areas must comply with strict procedures to ensure there are no peat fires in the future.
In January 2016, President Jokowi established the Peatland Restoration Agency (BRG), led by environmental activist Nazir Foead. Reporting directly to the president, the BRG is assigned to coordinate and facilitate peatland restoration in various provinces. It is also tasked to design and implement an action plan to demonstrate Indonesia’s commitment to tackling peatland destruction.
While pressure is growing for errant companies, sustainability can bring opportunities to others. The BRG, for example, is inviting selected companies to manage and restore peatlands in their concessions. Another opportunity is for larger companies to actively engage and impart good agricultural practices to the small-scale farmers in their supply chain and those surrounding their land concessions. This could increase productivity, raise yields and reduce deforestation and the risk of fires.
Financial institutions in the region can venture into green financing and investment funds. For instance, program financing for Reducing Emissions from Deforestation and Forest Degradation (REDD+) can help stop fires and potentially cut emissions, according to the Paris Climate Change Agreement. Forest and peatland fires combined with changes in land use contribute to almost two-thirds of Indonesia’s emissions.
The haze that comes at the peak of the dry season ebbs when rain sweeps across the region. But as regulations tighten, and pressures from financial institutions and the supply chain increase, it will be more than the weather that dictates what companies can and cannot do, and where their risks or opportunities lie.