Indonesia Environment Minister Siti Nurbaya Bakar's comments on 3 November that "Forcing Indonesia to zero deforestation in 2030 is clearly inappropriate and unfair" appear to significantly dilute the COP26 declaration "to halt and reverse forest loss and land degradation by 2030" (which was signed by Indonesia along with 127 other countries).
Half of Indonesia is covered in forest, one of the highest figures in emerging markets – for comparison, the figures for Malaysia and Brazil are 70% and 60%, respectively.
Palm oil is c10% of Indonesia exports and the sector drives the worst deforestation record in the past decade in EM – a loss of 6%. The comparable figures for Malaysia and Brazil are +0.5% and -1.8%, respectively.
Palm oil accounts for 40% of vegetable oils globally, using merely 6% of the land used globally for vegetable oil production. Indonesia and Malaysia dominate global production, with close to 60% and 30% market share, respectively. The palm oil commodity price is up 40% ytd.
Indonesia equities look cheap
Indonesia equities (Jakarta SE Composite) are up 10% ytd, slightly better than FEM (up 8%), and much better than EM (flat) or neighbour Malaysia (down 5%).
Valuation versus history still looks very attractive, with trailing PB of 1.6x a 30% discount to the 5-year median.
The FX rate appears cheap, with an REER of 90, a current account deficit below 1% of GDP over 2021-22 (IMF forecasts), short-term external debt of 5% of GDP and FX reserves import cover of nine months.
ESG considerations have no bearing on our equity strategy views. But we write a lot about ESG and for those investors who claim their process incorporates, or, indeed, is entirely driven by, ESG we highlight a thorny issue below.
ESG investing challenges
Deforestation concerns are already impacting the appetite for investors in companies with otherwise attractive financial outlooks and valuations, but to varying degrees; eg the Palm Oil producers with operations in Indonesia and Malaysia may have been snubbed more than meat producers with exposure to deforestation in Brazil.
So far, investors are generally not snubbing entire countries for their track record or policies on deforestation, although the public letter, which contained criticisms of the environmental impact of reforms under the October 2020 "Omnibus Bill", sent by investors to the Indonesian government may be a sign of things to come.
Indonesia may be one of many, many countries globally (including those in developed markets) where much more scrutiny is warranted across each of the letters in the ESG acronym for those investors who proclaim that ESG drives their process.
At a minimum, ESG investing has little meaning if it is not applied to country allocation decisions in investment portfolios. Concentrating on corporates alone misses the wood for the trees.
Three palm oil producers that adhere to ESG and are good value (Tiruchelvam), October 2021
ESG needs to focus on countries, not just companies, October 2021
The data in the charts of this report is included in the full version of the Tellimer Emerging Markets Investability Matrix.