Rabobank backs Musim Mas’ first sustainability-linked loan without finalising external verifiers

While Musim Mas, Indonesia’s largest palm oil exporter, said in the press release it issued last month that “reputable assessors” will annually review its performance against its chosen key performance indicators (KPIs) to ensure “transparency and accountability”, it did not specify who these third-party verifiers will be.

In response to Eco-Business queries, Rabobank – the sustainability coordinator for the transaction – said that there will be two post-issuance external reviewers: Netherlands-based certification body Control Union and another yet-to-be-confirmed firm. 

A Rabobank spokesperson said that “there is no requirement pre-signing to identify the verification company as the measurement and verification will take place at a future date,” based on the SLL principles by the London-based Loan Market Association (LMA), alongside the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications & Trading Association (LSTA).

For the outstanding reviewer, the spokesperson assured Eco-Business that “there is sufficient time to assign a verifier,” since performance on the set KPIs is only due to be reported in September 2025. 

Eco-Business understands from Musim Mas that the second reviewer will most likely be one of the Big Four accounting firms Ernst & Young (EY), which has been its sustainability report auditor for the past three years.

The reason why Musim Mas hesitated to publicly reveal this in its release was because of a “technical” issue, as it is pending a contract agreement renewal with EY, said Carolyn Lim, the company’s group corporate communications lead.

Despite not conducting a pre-issuance external review – which global loan market guidelines recommend in order to assess the rationale and level of ambition of proposed targets – Musim Mas has referred to its KPIs in its media release as “ambitious, meaningful and measurable”. 

SLLs offer a lower cost of borrowing for firms that meet certain sustainability goals, like cutting carbon emissions or improving gender diversity.

The three KPIs approved by Rabobank require Musim Mas to ensure that the independent smallholders it contracts are certified by the Roundtable on Sustainable Palm Oil (RSPO), that it trains these smallholders, and that it maintains a deforestation-free palm oil supply chain. 

However, Merel van der Mark, coordinator of Forests & Finance, a coalition of non-governmental groups, said that the KPIs set for the SLL are not ambitious. 

“A deforestation-free palm oil supply chain should be the baseline for any loan, not an ambition for a SLL. In addition, financial institutions should do their own due diligence and be cautious about using certifications schemes as a proxy for sustainability. We are concerned about movements to weaken the RSPO standards,” said van der Mark.

Gemma Tillack, forest policy director of advocacy group Rainforest Action Network (RAN), which is a member of Forests & Finance, told Eco-Business that since the palm oil producer has yet to achieve a deforestation-free supply chain, “the KPI on ‘maintaining a deforestation-free supply chain’ should be strengthened to require Musim Mas to achieve an independently-verified 100 per cent deforestation-free supply chain by the end of 2024.”

“Further KPIs should be set that require Musim Mas to ensure the remediation of deforested lands in its supply chain since the palm oil sector cut-off date of December 31, 2015,” Tillack added, referring to the firm’s commitment to maintain zero-deforestation in its operations since end-2015.

“The inclusion and training of independent smallholders to adhere to responsible palm oil benchmarks is an important indicator especially given Musim Mas’s repeated exposure of sourcing illegal palm oil from small-scale land speculators that have destroyed peat swamps inside the orangutan capital of the world.”

Lim said that Rabobank and HSBC – a co-lender of the loan – have “their own internal sustainable financing panels” to review the materiality and level of ambition of Musim Mas’ KPIs. But Rabobank did not respond to Eco-Business queries on how they assessed the ambition of the KPIs and whether reliable baselines have already been chosen to track its sustainability performance, in line with international best practice guidance.

Musim Mas said that these KPIs – which focus on independent smallholders – were chosen because small-scale farmers account for about 41 per cent of Indonesia’s palm oil plantations and “there is a need to improve the yield of these farmers.”

The loan comes as major exporters of commodities, such as palm oil, coffee and timber, are working to provide proof that their products have not led to forest degradation by late-2024, in order to comply with the European Union’s deforestation law, which kicked in last May.

Indonesia and Malaysia, which collectively account for 85 per cent of global palm oil exports, have contended that the new rules risk marginalising smallholders. But environmental groups have argued that this can be avoided with targeted support to transition smallholder farmers to use more sustainable methods, which Musim Mas has had a track record for doing.

SLLs under fresh scrutiny

Last June, the United Kingdom’s Financial Conduct Authority (FCA) warned of potential conflicts of interest, where banks may be incentivised to accept weak KPIs in loan agreements in order to hit sustainable finance targets that are tied to their remuneration benefits. 

The financial regulator also flagged that relationships, rather than the borrower’s sustainability credentials, “disproportionately drive” the decisions of most banks to participate in SLLs.

The FCA currently has no plans to introduce regulatory standards for the SLL market, but has not ruled out reconsidering this stance “if the market needs it”.

Based on van der Mark’s observations, “SLLs often lack transparency and a strong monitoring framework.”

“Without that, there is a strong greenwashing risk. We call for more regulatory oversight around their issuances,” she said.

Last month, Japanese megabank MUFG came under fire for lending millions in SLLs to another Singapore-based palm oil and paper company, Royal Golden Eagle (RGE), after satellite analysis by RAN alleged that deforestation was being carried out in its concessions. 

In response to these accusations, MUFG has reiterated its “rigorous” assessment of clients, while RGE has refuted RAN’s findings.

Due to the more private nature of loan markets compared to bond markets, SLLs – which first came to market in 2017 – have been hit by credibility concerns in recent years.

“The issue is that there are no regulations demanding lenders follow a set procedure when issuing SLLs,” said a Singapore-based executive familiar with the way such loans are structured in one of the world’s largest banks. He chose to withhold his identity.

Typically, “nationally recognised and reputable third party assurance vendors should be identified upfront before the SLL is signed,” he added. 

Separately, Musim Mas’ loan was also converted from an existing revolving credit facility using what is known as a “sleeping SLL”, or a loan agreement where the borrower is allowed to delay the setting of KPIs until after the deal’s closing date.

LMA has said that such arrangements should only be allowed “in exceptional instances, and where the borrower already has a clear sustainability strategy in place.” The SPTs can then be “switched on” within 12 months and “parties must ensure that the SPTs undergo the same scrutiny and attention as they would have had they been proposed at the outset of the transaction.”

The banking executive told Eco-Business that any clients opting for a sleeping SLL “should have a documented history of ESG strategy,” and that it has “a dedicated team to review all SLL deals’ KPIs and a rating system to determine if a deal is go or no go from a KPI perspective.”

“Any deviation from this standard would require escalation and senior level approvals, should they decide to go ahead without it,” he added.

Notable sleeping SLL arrangements in Asia include Chinese fintech behemoth Ant Group’s US$6.5 billion deal, which was coordinated by Dutch bank ING and remains the largest of its kind regionally.

Globally, SLL volumes have declined from their 2021 peak. But the loan instrument continues to grow in Asia and added to the sustainable finance targets of many regional banks, including DBS, OCBC and UOB. 

For instance, Southeast Asia’s second-largest lender OCBC – which met its S$50 billion (US$38 billion) target over two years ahead of schedule in 2023 – is looking to double the number of SLLs to regional enterprises. Last year, it extended 24 SLLs, including a £200 million (US$262 million) loan to Singapore property giant CDL.