The International Finance Corporation (IFC), the private arm of the World Bank, has decided to suspend funding in the palm oil sector, affecting the world's top producer, Wilmar International, pending a review of internal procedures on environmental and social standards.
In a press release, it was confirmed Wednesday that World Bank President Robert Zoellick had taken the decision in response to an appeal by a global coalition of NGOs.
A group of 19 environmental groups, plantation smallholders and local organizations representing indigenous people filed in 2007 a complaint to the IFC ombudsman over Wilmar's business practices in Sumatra and Kalimantan.
They claimed that Wilmar International did not comply with prevailing laws in Indonesia, particularly concerning social and environmental impact assessments, and was not working in accordance with IFC operating procedures and due diligence requirements.
Zoellick said IFC's ombudsman had conducted an audit following the NGO complaints and found that IFC funding of Wilmar International, listed on the Singapore Stock Exchange, had violated IFC's procedures and commercial concerns had been allowed to override IFC environmental and social standards.
The ombudsman's report was released earlier this month and focused on four financing arrangements made by the IFC between 2003 and 2008 in favor of Wilmar International, which runs more than 200,000 hectares of palm oil plantations in Indonesia and Malaysia.
IFC had earlier agreed to provide the company with US$33.3 million in investment guarantees and $17.5 million in loans over five year.
M.P. Tumanggor, a commissioner at Wilmar, when contacted by The Jakarta Post, said the company would study the IFC statement.
He said it was his understanding that the company, at present, had no loans outstanding to IFC.
The IFC statement also reported that the ombudsman had succeeded in encouraging Wilmar and local community members to pursue a dialogue to help resolve local conflicts.
As a result, Wilmar has instigated a moratorium on further land clearance and has agreed to compensate households for the appropriation of land.
In response to the audit findings, the IFC said it "recognizes the deficiencies identified in the ombudsman's report and that there are lessons to be learned for future investments in the palm oil sector".
He also noted that IFC would conduct an intensive six month review on how it should engage in the palm oil sector in the future.