Investment Risk

Kuala Lumpur Kepong Berhad

Sustainability Risks

First and foremost, the investment risk that Kuala Lumpur Kepong Berhad encounters is
sustainability risk. Sustainability risk is that the inability to maintain the company growth of any
uncertainty happen. In other words, the company has to ensure that there are sufficient palm
products to encounter the global issue that happened. The Civil Society Organisations (CSO)
takes the responsibility to make sure the organisations follow a certain accepted sustainability
practices standard, for instances, no deforestation, protection of peatlands and traceability. In
order to reach the oil palm plantation level by the end of 2020, the external providers are
involved to fully traceability about the palm oil mills and refineries work with the FFB suppliers.
KLK berhad have been a member of High Carbon Stock Approach (HCSA) in any new
development of oil palm. This is to determine the planting area is qualified with low carbon
and the area is not under the coverage of High Conservation Value Areas (HCVA). KLK
berhad also introduce the peatlands protection so that replanting oil palm can be sustainable.
They established a carbon-rich peatland in Sumatra and Kalimantan. KLK berhad will face a
difficulty when customers bind with the suppliers and make a sever ties with the company.
This will cause a huge decrease in the net income margin and reach the baseline which is
5.9% in FY2016 and 9.4% in FY2017. Hence, the underlying stock price of KLK berhad will
also be affected. Another situation that will cause the net income margins to drop is when the
company fail to have the membership in the Roundtable on Sustainable Palm Oil (Gelder, et
al., 2015).

Regulatory Risks

Another investment risk that KLK Berhad encounters is regulatory risk. The regulatory risk
can be defined as the risk arises with any changes in laws or regulations by the government
or regulatory which may impact the company operations, business or securities. Roundtable
on Sustainable Palm Oil (RSPO) has make a new policy which is the land that allowed to be
worked on must demonstrate the rights in using the land and the land must not contested
rights by locals. Therefore, this new policy forced KLK berhad to stop the work immediately on
the said land. In order to reduce the risk, the company evaluate the effect of the newly
launched laws and regulations to ensure the organization structure and processes meet the
new requirements. KLK berhad also establish several intensive checks for every legal
requirement, licenses, etc (Conflict Palm Oil in practice, 2014).

Operational Risks

Operational Risks is defined as the uncertainties or inadequate procedures, systems and

policies that a company faced when it comes to their everyday business activities. The
operational risks that faced by KLK berhad is the demand on local workers to work for the
harvesting activities. They required a skilled labour which is from locals to work on these
activities, however, it is still highly dependent on foreign workers despite recruitment has been
done to locals. Moreover, the policies of increasing the minimum wages for workers and the
price for chemicals and fertilizer have made an extra increment on operational costs. In order
to deal with the escalating operational costs, KLK berhad has implement the usage of
mechanism to replace the foreign workers at the same time technology can helps to enhance
the efficiency and productivity. For instances, palm oil milling technology is used to further
increase the field yields (Kuala Lumpur Kepong Berhad Annual Report 2019).

Fire and Industrial Risks

Next, the fire and industrial risks are also faced by KLK berhad. The forest fires that
happened in Indonesia yearly which are aim for clearing the palm oil plantations increase the
risk of fire in Malaysia too. Although the usage of fire for preparing the palm oil land is
decreased among the year, however, fire is still using in clearing the biomass and domestic
waste (Nepcon, 2017). The haze produced interrupt the harvesting process and decreases
the operation efficiency. In view of rising fire risk, KLK berhad management has develop a
firefighting team in standby mode which fully equipped. They are comprised of dedicate
emergency response and web-monitoring of fire hotspots (Kuala Lumpur Kepong Berhad
Annual Report 2019).

Market and Commodity Risk

Another investment risk that faced is market risk. This is because the price is uncertain and it
will be frustrated of worrying global economic indicators. Moreover, the tariffs are changing
continually based on few largest exports and imports palm oil country. For instances,
European Union is trying to forbid the usage of palm oil in biofuels. Hence, the demand of
palm oil throughout the entire world will affect the price of it (Kuala Lumpur Kepong Berhad
Annual Report 2019).

Sime Darby Plantation Berhad

Sustainability Risk

Sustainability risk is the ability of a company to sustain when any uncertainties happened. For
instances, Sime Darby faces the issue of safety and health of worker. Accidents may happen
when the workers disobey the rules and regulations which may cause serious injuries or
death. Hence, emergency response policies are made and training is also provided to reduce
the frequency of accidents happen. Moreover, the grievances from local community has
become one of the key plantation risks as it may interrupt the operational process as well as
the goodwill between Sime Darby and the locals. In order to deal with this problem, Sime
Darby has committed into Zero Deforestation and launched the procedure of Free, Prior and
Informed Consent (FPIC). The company will only begin the development after the agreement
is made with the local communities. Sime Darby also improved the FPIC procedure which
include a company-level grievance mechanism to solve the issues. Besides that, climate
change such as water shortage and extreme drought climate are the major uncertainties.
Therefore, water and soil conservation and decreasing the operational carbon emissions may
help to retain the company sustainability. The company may also face materially disrupted
when the outbreak of plant disease. This sudden outbreak happens may be due to disease
threat or pests not being able to identify in the beginning stage or unable to mitigate
effectively. Therefore, Sime Darby management establish regularly on-site inspection at the
estates. Replacing the current planting materials with those that are resistant to disease can
also helps to reduce the risk of happening the outbreak (Sime Darby Plantation, 2020).

Environmental Risk

The land or forest of undeveloped concession is in imminent danger of extinction. The area
that is surrounded by Sime Darby developed concession is mostly covered with area which
more than 80% forest, in the high-density level. Additionally, the remaining areas are in the
medium density forest which is around 30% to 80% filled with forest. Therefore, these two
areas are not suitable for being develop by Sime Darby on its concession. This will cause a
high risk of deforestation whenever Sime Darby planning to expand its plantation area.
Besides that, most of the plantation areas are located at coastal areas and it increases the
rising of sea levels may happen. This accelerated the risk of erosion and flooding (Kuepper et
al., 2016).

Foreign Exchange Risk

Sime Darby has the more than 250 companies located in more than 20 countries worldwide.
This caused the company fall under high foreign exchange risk. The foreign exchange risk
can be divided into a few categories. First and foremost is the transaction risk. Transaction
risk can be defined by the effect of earnings and cash flows denominated in foreign currency
meaning that foreign currency transactions and monetary items are translated according to
the exchange rate. Therefore, the exchange rate fluctuation may show a huge affection to the
company financial results, especially the currency between US dollar and ringgit Malaysia.
Besides that, the company may also face translation risk as the company are holding a lot of
financial assets and liabilities. All these are influenced by the foreign currencies (Jane, 2016).

Political Risk

Political risk can be defined as the undesirable political changes or instability in Malaysia that
influence the investment’s return. For instances, changing of the government, legislative
bodies or military control may be one of the reasons that instability of a country happens
(Chen, 2020). Sime Darby has fall into this political risk as they involved in both local and
foreign country investment. Sime Darby corporate with a plantation company in Liberia to
transform a concession estate into a rubber plantation. However, Liberia undergo a civil war
that begin because the political issue, this uncertainty forced the company in Liberia to
abandon the project. This case happened twice to Sime Darby, where the civil war blows up
the work on the rubber estate in the year of 2003 (Chin, n.d.).

Interest Rate Risk

Interest rate risk can be defined as the investment losses that due to the changes in interest
rate (Chen, 2020). The Bank Negara Malaysia decided to decline the Overnight Policy Rate
(OPR) to 2.5% in the year of March 2020. The previous reduction was happened in the year
of July 2016. This reduction considers as a bad new to outsider with high savings or fixed
deposits. Outsider will then receive a lower interest rate compared to before (The Star
Online, 2020).
Gelder, J. W., Kate, A. t., Cushing, B., Finkelstein, J., Hurowitz, G. & Wilde, J. (2015). KLK CRR
Report 02_26_2015. China Reaction Research. Retrieved from
https://chainreactionresearch.files.wordpress.com/2015/02/klk-crr-report-02_26_20152.pdf
Conflict Palm Oil in practice (2014). Rainforest Action Network. Retrieved from
https://www.ran.org/wp-content/uploads/2018/06/klk_case_study_2014_low.pdf

Nepcon (2017). Palm Oil Risk Assessment Malaysia-Peninsular. Retrieved from :

https://www.nepcon.org/sites/default/files/library/2017-11/NEPCon-PALMOIL-Malaysia-
Peninsular-Risk-Assessment-EN-V2_0.pdf

Sime Darby Plantation (2020). Sustainability Governance. Retrieved from :

http://www.simedarbyplantation.com/sustainability/beliefs-
progress/governance/sustainability-governance

Jane (2016). Risk+Impacts+Hedging-Foreign Exchange Risk Faced by Sime Darby. Retrieved

from https://www.coursehero.com/file/17414113/Riskimpactshedging/

Chen, J. (2020). Political Risk. Retrieved from

https://www.investopedia.com/terms/p/politicalrisk.asp

The Star Online (2020). Bank Negara Lowers OPR by 25bps to 2.5%. Retrieved from:
https://www.thestar.com.my/business/business-news/2020/03/03/bank-negara-lowers-
opr-by-25bps-to-25#:~:text=KUALA%20LUMPUR%3A%20The%20Monetary%20Policy,
%25%20and%202.25%25%2C%20respectively.
Chin, A. (n.d.) International Finance Group Assignment 1. Retrieved from
https://www.academia.edu/7951341/International_Finance_Group_Assignment_1

Kuepper, B., Lima, B., Steinweg, T. & Thoumi, G. (2016). Sime Darby: Liberian Crossroads.
China Reaction Research.