TLFF I Sustainability Bond for Natural Rubber Company Repaid in Full

The Tropical Landscapes Finance Facility (TLFF), which provides long-term capital to sustainability-focused projects in Indonesia, has successfully discharged its inaugural transaction, a landmark USD 95 million loan with the bond repaid in full, to support Indonesia’s first sustainable natural rubber plantation.

With the support of TLFF, the government of Indonesia, key noteholders and the impact-driven &Green Fund, the PT Royal Lestari Utama (RLU) project, originally a joint venture between Indonesia’s PT Barito Pacific and France’s Michelin Group, has demonstrated a new benchmark for sustainable land use models in Indonesia.

TLFF I was Southeast Asia’s first corporate sustainability bond, issued to help RLU produce sustainable natural rubber according to clear environmental and social safeguards, with a total project size across 88,000 ha in two provinces in Indonesia. An Environmental Social Action Plan (ESAP) was enshrined in the transaction loan documents. The company also committed under the financing to report on Environmental and Social Key Performance Indicators established by TLFF and those included in the transaction’s Landscape Protection Plan.

The RLU project has, to date, achieved significant positive environmental and social impacts. The Project has planted rubber trees over more than 23,000 hectares, while setting aside over 54,000 ha for community livelihoods and conservation. As a result, 4,000 jobs were created, largely within the local community.  As part of the RLU project, 3,600 farmers were trained under a Community Partnership Program. The RLU project established a 9,700 Wildlife Conservation Area in collaboration with the Provincial Government of Jambi, the Indonesian Ministry of Environments and Forests, NGOs and Indigenous community leaders.

Adjacent to the 142,000 ha Bukit Tigapuluh National Park, the Wildlife Conservation Area helps protect high levels of biodiversity and serves as a transit corridor for unique wildlife such as the Sumatran elephant, Sumatran tiger, orangutans, Clouded leopard, Helmeted Hornbills and various other endangered bird species.

On 21 June 2022, the Michelin Group announced that it had acquired PT Barito Pacific’s shareholdings in RLU, making it the sole owner of the project.

The change in ownership structure triggered the repayment on 18 August of the long-dated sustainability bond, which was arranged by BNP Paribas and issued to RLU as TLFF I in 2018.

Hong Kong headquartered private credit manager ADM Capital was the facility manager for the transaction. The United States’ Development Finance Corporation provided a partial credit guarantee.

“This is an important milestone for the project,” said ADM Capital founder Chris Botsford. “The TLFF bond enabled the successful advancement of RLU as a company, which will now reach maturity as a subsidiary of the Michelin Group.”

Through the RLU project, the TLFF initiative demonstrated a robust financial structure that bridged the gap between the government, private sector and local communities, coordinating cross-functionally to bring about large-scale social and environmental impact, protect the national park from encroachment on its southern border and create positive change to the “business as usual” approach of producing natural rubber.

“The inaugural TLFF transaction successfully established an innovative financial model to unlock private investment and accelerate sustainable land use in Indonesia in a way and at a scale that we have not seen before,” said Ivo Mulder, head of UNEP’s Climate Finance Unit, “TLFF enabled the RLU project to create a new benchmark for commodities production that can now be replicated and scaled up to stimulate green growth in Indonesia and other emerging markets that protects and restores nature, tackles the climate crisis and improves the lives of rural communities”.

As part of the purchase of Barito’s shares in RLU, the Michelin Group made a long-term commitment to continue to realise RLU’s positive environmental and social objectives beyond repayment of the TLFF bond.

Michelin has committed to ongoing operation of the plantation concessions in compliance with the International Finance Corporation’s Performance Standards, continuation of conservation, restoration and smallholder inclusion targets, maintenance of a collaborative approach to achieving impact targets, partnerships with public, private and community stakeholders and transparency via an annual report by an independent expert.

TLFF, ADM Capital and UNEP will continue to provide environmental oversight support to RLU through representation on RLU’s Environmental Sustainability Advisory Board (ESAB). The objective is to ensure that the considerable efforts to support RLU’s positive biodiversity and climate impact will be sustained. ESAP compliance and KPI performance is, and will continue to be, audited annually by third party ESG consultants.