KUALA LUMPUR: Sime Darby Plantation Bhd's (SDP) inability to address forced labour findings by the US Customs and Border Protection (CBP) will hurt its credit quality, said Moody's Investors Service.
The inability would be credit negative as it would keep environmental, social, and governance (ESG) risk high for the palm oil producer, Moody's added.
The firm said such a situation, if not fully addressed, could damage SDP's relationship with customers and other stakeholders.
It added that large losses in earnings, if any, as a result of these allegations would weaken SDP's credit quality.
On January 28, CPB announced it had determined that certain palm oil products produced by SDP in Malaysia were made using convict, forced or indentured labour.
This follows the agency's Withhold Release Order (WRO) issued in December 2020, detaining palm oil products from SDP's Malaysian operations.
Before the WRO, SDP's annual direct exports to the US were only around US$5 million (less than one per cent of revenue), which means the direct financial impact resulting from the order is limited.
"However, the risk to SDP's credit quality could rise substantially because of the recent forced labor findings.
"Such a risk would arise if other countries or companies institute restrictions on purchasing palm oil from SDP, or if SDP's lenders pull funding for the company because their sustainability policies could restrict them from lending to companies alleged to have violated international labor standards.
"While SDP has stated that it has not yet received details around the forced labor findings, it will continue to engage with the US Customs and its various stakeholders to resolve the allegations and take any corrective action required to protect workers' rights," Moody's said in a note today.
Moody's said while immediate risks to SDP's credit quality as a result of the forced labor findings were not yet quantifiable, the allegations could impact on SDP's credit strength in the future.
"Strong labour policies and processes are essential for palm oil companies such as SDP to maintain credit quality, particularly because of increasing scrutiny from stakeholders, including customers and investors, regarding ESG issues associated with palm oil production.
"To strengthen its sustainability policies and mitigate these risks, SDP subscribes to a number of initiatives including a policy of no deforestation, no peatland development and no labour exploitation through its Responsible Agriculture Charter and Human Rights Charter," it said.
SDP is the world's largest producer of certified sustainable palm oil, with around 20 per cent of global sustainable supply.