Indonesia's palm oil clean-up sparks ESG concerns, investment caution

Focus Malaysia

16-07-2025

LAST week, Indonesia's forestry task force transferred approximately 400,000 ha (988,000 acres) of seized palm oil plantations to a state-owned company, Agrinas Palm Nusantara, as they were allegedly operating illegally in designated forest areas.
'Based on our channel checks, several local plantation companies have surrendered a small portion of their plantation land to the Indonesian authorities. We understand that the impact on their earnings is largely muted,' said Public Investment Bank.
However, this development raises regulatory risks for industry players with significant exposure in Indonesia, which could weigh on their valuations over the long term.
Meanwhile, the recent surge in CPO prices to over RM4,200/mt may reignite investor interest in plantation counters. We maintain our Neutral outlook with a full-year CPO price forecast of RM4,200/mt.
Last week, a total of 394,547 ha of plantation land—spread across Central Kalimantan, Riau, and North and South Sumatra and controlled by 232 companies—was confiscated and handed over to Agrinas, a state-owned company established in early 2025 under the administration of President Prabowo Subianto.
The operations were jointly led by the Ministry of Environment and Forestry, Ministry of Defense and Attorney General's Office.
The task force is aiming to take over a total of 3m ha of illegally-run plantations in forest area by Aug.
With this addition, the total plantation area under the Agrinas Group now stands at 833,000 ha, making the company as one of the largest plantation companies in the world.
Based on our checks, several local companies have surrendered plantation land to the Indonesian authorities, ranging from 1,000ha to 6,000ha, some of which are in unproductive condition.
We understand that the earnings impact for these companies is relatively muted. However, in our view, this may pose a long-term ESG risk.
Given the recent land seizures, we do not rule out the possibility that some plantation companies may exit or scale down their operations in Indonesia over the longer term, due to rising regulatory risks.
Investment in replanting activities is also expected to be more cautious, as it may compromise the companies' interests.
We are also concerned that the military-led enforcement in plantation could exacerbate the declining trend in Indonesian palm production as we are doubtful over the state's ability to manage these plantations effectively.
Based on our rough forecast, if 50% of the entire seized 833,000ha plantation remains unproductive, the annual palm oil production could decline by about 4% or 1.7m mt. —July 16, 2025
Main image: What is palm oil?