The inconvenient truth behind the out-peformed Dongwon Industries by 그린피스 서울사무소

The inconvenient truth behind the â&#x20AC;&#x2DC;out-performedâ&#x20AC;&#x2122; Dongwon Industries

Preface: This report is released for public interests. It studies the problems existing in tuna fisheries, analyses the potential risks arising from fishing in the industrial scale, and figures out the consequent impact on fisheries and our environment. The subject company of this report has been used as an example to illustrate such problems and risks for the Korean tuna industry, and by extension, to the distantwater fishing fleets worldwide.

The inconvenient truth behind the â&#x20AC;&#x2DC;out-performedâ&#x20AC;&#x2122; Dongwon Industries

Disclaimer: - The sources of all the data and information quoted in this report are from, and our understanding of, public materials that we consider reliable; Greenpeace does not guarantee its timeliness, accuracy and integrity. - The findings in this report are the results of the independent research, analysis and study conducted by Greenpeace East Asia on the basis of the information acquired within the time limit of such research, analysis and study. - The report is used only for the purposes of information sharing and reference, environmental protection and public interests. If you want to use or apply the information in the report, you may need do your own study and use your own judgement to make decision, and bear the arising risk from using or applying such information. For any enquiry on the report, please contact: Elsa Lee Senior Business Advisor, Greenpeace International - Political and Business Unit Email: elsa.lee@greenpeace.org

Contents

1. Executive Summary

2. Introduction

3. Future of the tuna fisheries

6 10

5. Environmental impacts

6. E mergence of consumer concerns and market restrictions

7. B ad management and lack of standards in overseas operations

8. Conclusion

References

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

4. C hanging political landscape – increased regulatory risks are imminent

1. Executive Summary The inconvenient truth behind the ‘out-performed’ Dongwon Industries

Dongwon Industries Company Limited’s (006040 KS) recent history shows signs of a bubble. Its share price has almost doubled over one year, driven by aggressive growth plans and supported by risky acquisitions and a five-fold increase in capital expenditure. These aggressive growth plans are built on the assumption of unlimited stocks from a single natural resource, Pacific tuna, on which Dongwon Industries is heavily reliant for its revenue. Fast decreasing tuna stocks due to overfishing, and recent fishery management rules that aim to conserve the stocks, are combining to make tuna prices high and volatile, lead to clear supply and financial risks in both short and long term for the company (Section 3). The company’s profitability has deteriorated during the last few months, e.g. its EBITDA margin fell from 23% to 15% between Q1 2012 and Q1 2013. Its debt structure is not ideal, with around KRW 257B (approx. USD 230M) in short term debt expiring in 2014.1

The financial fundamentals of Dongwon Industries show it is a high growth company. However, investors should be mindful of whether the company has sufficiently disclosed and adequately adapted its business plans for the forthcoming tighter regulatory environment, both within South Korea and internationally (Section 4). With the company aiming to expand into US and European markets, investors should also take note of the increasing consumer demand for sustainable seafood products, in particular canned tuna. This demand poses market risks for Dongwon Industries, and its associate Dongwon F&B, if the companies cannot adapt to the sustainability standards (Section 6). As recently as April 2013, Dongwon Industries has also been under pressure from the media and authorities regarding its appalling business ethics in its African operations (Section 7). As a household name in South Korea, is Dongwon Industries able to prove that it can operate internationally, and adapt its business plan to a foreseeably fast changing natural-regulatoryconsumer environment? For shareholders and investors, would the company be able to manage the major risk of stranded fishing and processing assets if the external business environment turns against it?

Investors buying Dongwon Industries shares may face the following significant risks: The inconvenient truth behind the â&#x20AC;&#x2DC;out-performedâ&#x20AC;&#x2122; Dongwon Industries

tuna stocks: long-term downward trend in tuna populations immediate: fish aggregating device (FAD) ban, constraints from the Parties to the Nauru Agreement (PNA) in H2 2013 Price risks increasing volatility of raw material prices Financial risks assets stranded as cheap tuna supply ends and demand shifts to sustainable products Regulatory risks domestic: Korean government amendment of the Ocean Industry Development Act to make companies operating in distant water fishing more accountable international: WCPFC/PNA conservation measures Governance risks Liberian government investigation, leading to USD2M settlement for illegal fishing activities and perhaps other activities yet to come to light Reputational risks criminal proceedings in Senegal for cannery acquisition, illegal fishing on Liberian coast, Korean Tax Service investigation.

Supply risks

2. Introduction

The world’s ocean is reaching its limit in providing wild-caught seafood for human needs. According to FAO, 87.3% of the world’s assessed fish stocks are over- or fully-exploited, which means these stocks have reached or exceeded their maximum potential to produce a sustainable yield (Figure 1).2 As one of the most globally traded seafoods, tuna is facing serious risks of stock depletion after a significant increase in production since the 1980s. Such a dramatic boom of tuna fishing business is based on the unfounded assumption that there are unlimited fish in the ocean. Section 3 explains the worrying signs for fisheries resources and the future resource risk that investors should be aware of when investing in the fishing business. Percentage The inconvenient truth behind the ‘out-performed’ Dongwon Industries

10 0 1974

1979 Non-fully exploited

1984

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1999

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Figure 1. Global trends in marine fish stock status from 1974 to 2009. Source: FAO (2011) Review of world marine fisheries 4

Asian countries dominate the tuna fisheries catches. South Korea ranked sixth in overall world tuna catch (Figure 2), and third largest in terms of distant-water catch, with a total of 251,093 tonnes of tuna caught in 2011.3 As part of a staple family diet, South Koreans consumed significantly more canned tuna than other Asian countries - around 260 million cans of tuna a year. The market is worth around USD 370M.4 Percentage 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0

1950

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Others France U.S.A. Ecuador Nowhere else indicated Republic of Korea Spain Philippines Indonesia Taiwan Provice of China Japan

100 90 80 70 60 50 40 30 20 10 0

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Figure 2. W orld tuna catch by country in weight (in million tonnes – left panel) and share (right panel), 1950 – 2007. Source: FAO (2010) Recent developments in the tuna industry. industry.

Aggressive business models built on a fast depleting resource and underlying risks Three companies/groups dominated the canned tuna sales in South Korean: Dongwon F&B (a subsidiary of Dongwon Enterprise) accounts for 69.8% of market share, selling mostly the catch of sister company, Dongwon Industries. Sajo Industries has the second largest share with 16.5%. The third largest brand, Ottogi, which sources tuna mainly from Silla Co. Ltd., takes 13.1% of the canned tuna market. However, there are significant risks for companies that are heavily dependent on tuna resources for their business model. Dongwon Industries and Dongwon F&B are particularly vulnerable.

The company ordered two purse seine fishing vessels in 2012, each estimated to cost around USD 22.3M. This was ahead of a restriction by the International Seafood Sustainability Foundation to limit fishing capacity in order to stop unsustainable and uneconomical build of more purse seine fishing capacity.7 Such heavy dependence on and investment into tuna assets could pose significant financial risk to the company in terms of stranded assets, and regulatory risk as the regulatory framework around tuna resources is tightened (see Section 4). As the market for high standard sustainable product becomes the norm in international markets, Dongwon exposes itself to the market risk of not providing sustainable product to fit with this growing demand (Section 6).

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

Dongwon Industries reported total revenue of KRW 1,544B (USD 1.37B) at end 2012, with the tuna fisheries and its distribution sectors contributing almost 90% of the revenue. The company follows a very aggressive expansion strategy, and has been investing heavily in recent years. After acquiring StarKist, a leading brand in the US market, for USD 363M in 20085 with a hefty loan, Dongwon Industries also acquired the largest cannery in Senegal with KRW 5.4B (approximately USD 4.8M) in 2012. It is planning to invest a further USD 21M in upgrading the facility,6 and to expand into the US and European markets as domestic sales slow.

Investors should also be mindful of the governance and management risks of Dongwon Industries. While the company may have performed well financially, its unethical business behaviour, especially in developing countries, poses a significant reputational risk to the company and its investors (Section 7). 5

3. Future of the tuna fisheries After decades of large-scale industrial fishing, the ocean has reached a point where, due to overfishing, it can no longer supply the increasing demand for seafood. The world’s wild marine capture fisheries peaked in the 1990s and have been in decline since the 2000s (Figure 3), with the marine capture production reaching 79 million tons in 2010.8 This is despite an increasing fishing fleet and improved technology to find and catch fish. Figure 4 illustrates the dramatic decrease of catch per vessel and catch per unit capacity against the increase of decked vessels and fishing power since the 1970s.9

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

While scientists and conservation groups have been stressing the importance of healthy oceans and fisheries for many years, the macro and micro-economic impacts of overfishing are only slowly being recognised by economists and the business community. In 2009, the World Bank estimated the lost economic benefits of the world’s marine fisheries due to mismanagement to be in the order of USD 50B annually, with more than 75% of the fish stocks underperforming in 2004.10 The investment community has raised concerns about the risks for businesses that have a direct or indirect dependence on marine fisheries.11 Million tonnes 90

0 50

Figure 3. World marine capture fisheries production since 1950. Source: FAO (2012) State of world fisheries and aquaculture. 6

140

Decked vessels (number) Fleet capacity index (fishing power)

3.0

120

Catch per vessel (tons)

Number of decked vessels/fleet capacity index (fishing power) (million)

100 2.0 80 1.5 60 1.0

0.5

0.0

20 1970

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2000

Catch per vessel/catch per unit capacity (tons)

Catch per unit capacity (tons)

2.5

2005

Source:Author’s calculations; Garcia and Newton (1997); FAO Fishstat Plus;FAO FIEP Figure 4. E volution of Global Fleet Productivity. Source: The World Bank and FAO (2009) The Sunken Billions – the economic justification for fisheries reform.

A collapse of the tuna resource is looming

Catch (mt) 2,800,000

PURSE SEINE 2,400,000

OTHER POLE-AND-LINE

2,000,000

LONGLINE

1,600,000 1,200,000 800,000 400,000

2010

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The inconvenient truth behind the ‘out-performed’ Dongwon Industries

Tuna, being one of the most traded seafood globally, has been the focus of many large multi-national companies, in particularly from Asia. However, the future existence of these fishing companies are in questions as tuna stocks worldwide are declining, with most tuna stocks supplying both canned and sashimi markets being classified by the FAO as fully exploited or overexploited.12 Around 60% of global tuna catch are from the Western and Central Pacific Ocean (WCPO), the key fishing grounds for the Korean tuna industry. Scientists reported the lowest catch since 2005 at 2.24 million tons in 2011, which represents a 12% drop in volume from the record catch in 2009 (Figure 5).13

Figure 5. C atch of albacore, bigeye, skipjack and yellowfin tuna in the Western Central Pacific area by different gear types. Source: WCPFC Scientific Committee (2012). Overview of tuna fisheries in the Western and Central Pacific Ocean, including economic conditions – 2011. 7

The fishery resources in WCPO is estimated to be worth approximately USD 5B annually.14 Bigeye tuna aside, tuna stocks in the WCPO are considered to be in ‘relative health’ compared to other ocean regions. However, there are uncertainties around stock assessments due to the nature of ‘mixed fishing’ (catching more than one species in the net), especially from the fish aggregating devicei-associated purse-seine fisheries. More cautious management measures are needed for commercially important tuna stocks in order to capture their value and to ensure the long-term supply of the resource.

Climate factors affecting tuna catch Besides the impact of industrial scale fishing on the volume of tuna catch, global and regional climate factors are affecting the volume and location of tuna catch in the Pacific Ocean. It is well known that the El Niño-Southern Oscillation affects the migration of skipjack tuna along the water column as well as across the Pacific.15 In addition, global climate change would have a long-lasting effect on the water temperature and hence the occurrence of many species of tuna.16 When fishing pressure and climate impacts drive tuna further out into the ocean, away from easily accessible and productive fishing grounds that foreign fishing fleets are currently depending on, economic constraints will no doubt make the model of high capital tuna fishing unattractive in the future. Unfortunately, fishing companies are ignoring the science and opting for a short-term approach to tuna fishing, investing heavily in building their fleets and capacity aiming to catch tuna in the last remaining stock in the Pacific. The collapse of tuna stocks is unavoidable if the current race for fish continues. The inconvenient truth behind the ‘out-performed’ Dongwon Industries

Box 1. Dependence of Korean fishing industry on tuna Key Korean fishing companies are highly exposed to the risk of collapse of tuna stocks, as their business models are heavily dependent on the future existence of and access to tuna. Data from the Korean Overseas Fisheries Association (KOFA) show that, out of the top 10 tuna fishing companies, tuna comprises more than 80% of the overseas catch of the three largest (Dongwon Industries, Silla, and Sajo) (Figure 6). Dongwon Industries is by far the largest fishing company in Korea, catching 130,000 M/T of mainly skipjack tuna in 2011, which represents about 84% of its total catch in the year.17 It supplies raw material to its food processing affiliate Dongwon F&B. Silla, which supplies Ottogi, is 100% dependent on tuna.

i The use of Fish Aggregating Devices (FADs) is an unsustainable fishing practice that attracts a range of marine life including juvenile tuna, sharks, rays, other fish, sea turtles and marine mammals, which are then all caught in the purse seine nets. See Section 5 for more information on the environmental impacts of fishing practices. 8

160,000

Other catch Tuna catch 120,000

80,000

40,000

Do ng w on

Ind us tri es Co .,L td Sil la Co Sa jo ., L Ind td us tri es Co ., L Ins un td g Co rp or at ion Do ng na m Co Sa .,L jo td Oy an g AG Co NE ., L SF td ish e rie Do sC ng o. w ,Lt on d Fis h Ha er ies ns un Co g .,L En td te r pr Na ise m Co bu .,L kF td ish er ies Co .,L td

Figure 6. C atch of top 10 Korean fishing companies for 2011, and their dependence on tuna catches. Data source: Korean Overseas Fisheries Association (2012)

• Dongwon Industries’ heavy reliance on tuna resource for its recent expansions poses serious long-term financial risks. • Stranded assets and diminishing returns on investments are unavoidable when the tuna catch falls or when the tuna moves away from current fishing grounds.

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

Investor risk:

4. C hanging political landscape – increased regulatory risks are imminent For decades, fishing fleets from developed countries have been attracted to the rich tuna resources in the WCPO, taking an estimated 80% of the Pacific tuna catch, that remove large parts of this key food source and one of the principal economic resources from the region.ii Unlike in other oceans, most tuna fishing takes place in the Exclusive Economic Zones (EEZs) of the Pacific island countries, and fishing partners need to negotiate access agreements to fish in these EEZs. The benefits that Pacific Island countries derive from tuna fisheries mostly comprise fishing access fees, and until recent times these fees have represented only about 6% of the first landed value of the catch.18 Some Pacific Island countries have formed sub-regional bodies to address the inequity of this situation and to further their aspirations for developing their domestic commercial fisheries. The purpose is to better manage their tuna resources and retain a greater share of the benefits from the fishery. As these sub-regional blocks become more influential and effective, foreign fishing companies are forced to comply with increasingly stringent regulatory measures in exchange for fishing in these countries’ EEZs, or risk being excluded.

Parties to the Nauru Agreement (PNA)

Marshall Island PalauFederated States of Micronesia

Kiribati

Nauru Kiribati Paopua New Guinea Solomon Islands

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

Figure 7. Map of the Western and Central Pacific Ocean.

Established by eight Pacific Island countries in 1982,iii the Parties to the Nauru Agreement (PNA) controls over 14 million square kilometres of the WCPO and is a driving force for improving the management of the region’s tuna resource. The area covered by the PNA supplied approximately 1.4 M/T of tuna in 2010 (about 30% of global supply).19 The PNA has introduced measures such as: ii Countries like Japan, China, Taiwan, Korea, the US and the European Union all have distant water fishing fleets operating in the area. These countries are also members of the Western and Central Pacific Fisheries Commission (WCPFC), and due to their vested interests in the tuna industry have been blocking sustainability measures being passed in the WCPFC. iii PNA members are the Federated States of Micronesia, Kiribati, Marshall Islands, Nauru, Palau, Papua New Guinea, Solomon Islands and Tuvalu

Tuvalu

• a Vessel Monitoring System (VMS), which monitors the location of all licensed fishing vessels in the area • the Vessel Day Scheme (VDS), whereby fishing is limited by the purchase of a set number of fishing days •prohibitions on the use of FADs by purse seiners for a set time period •closure of international waters in the WCPO to all purse seine fishing •100% observer coverage of purse seine vessels to monitor fishing practices. PNA has recently tripled access fees to WCPO tuna fishing for the US from USD 21M in 2011 to USD 63M for 2013.20 A new round of negotiations is underway between the US and some Pacific Island countries, and PNA has insisted that the US will lose its preferential access to the tuna resources for their 40 tuna fishing vessels in order to bring higher returns to the Pacific Island countries in terms of economic benefits and jobs for local people.21 For other foreign companies whose fleets fish under the VDS, a new benchmark fee has been increased from USD 5,500 to USD 6,500 per day, an 18% jump, beginning in 2014.22 Many such recent moves by the Pacific Island countries in increasing regulation of their tuna resources, including moves towards requiring landing of catches in the region and expanding measures to longline vessels, mean that foreign fishing companies will have to adopt sustainable fishing practices or risk being excluded from the world’s last productive tuna fishing ground.

Reform of the South Korean distant water fisheries regulation In January 2013, the Korean Ministry of Oceans and Fisheries (MOF) proposed a review of the Ocean Industry Development Act and its related human rights issues for foreigners crewing on the distant water fleet.23 While traditionally the Act has focused on government support to the Korean distant water fishing industry, public awareness of the behaviour of the country’s distant water fishing fleet has caused the current review to expand its scope into responsible management and sustainable fishing practices.

After weeks of legislative process at the National Assembly, the Legal Committee passed amendments on 17 June 2013 that strengthened the Act. The penalties for illegal fishing now include a potential criminal conviction, and fines up to a maximum of three times the value of the fish caught (increased from the current fine of USD 5,000). Any government subsidy to a company that is proven to engage in IUU fishing activities or mistreatment of fishing crews will be suspended. South Korean distant-water fishing fleets will now be monitored by government patrol ships in the WCPO. The revised Act sends a strong message to the South Korean distant-water fishing fleet that the industry will be properly regulated, with serious consequences for breaching fishery rules.

Investor risks: • Dongwon Industries may not be able to meet its production target due to increased regulatory requirements on the amount of catch and landing conditions. • Increased costs from higher access fees paid to Pacific island countries and fishing requirements may lead to deteriorating returns on capital intensive fishing operations. • Dongwon may lose access to key EEZs over time as domestic fishing capacity increases in the WCPO.

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

Greenpeace East Asia’s input to this process was a report called “South Korean Distant Water Fisheries: illegal, unreported, unregulated (IUU) – and tarnished by human rights abuses”.24 It documented 34 IUU scandals involving South Korean-flagged or South Korean-owned vessels flying another flag. The report was discussed at a meeting of the Standing Committee of Foreign Affairs on 10 April 2013, and was released at a press conference with a member of Parliament from the Korean National Assembly on the following day.25 At the press conference, Greenpeace demanded policy reforms and transparent monitoring systems. Following the political and public pressures, MOF agreed to tighten the management of Korean distant water fishing fleets and to increase the penalties for non-compliance.26

5. E nvironmental impacts As species seldom live in isolation, overfishing of one species could threaten the survival of another if selective fishing methods are not used. This can have a detrimental effect on the ocean ecosystem, which in turn will have serious effects on the health and the future supply of the tuna stocks.

FADs in tuna fisheries cause depletion of stocks The inconvenient truth behind the ‘out-performed’ Dongwon Industries

FADs are widely used by the purse seine tuna industry and are the main method of catching tuna for canning. FADs are man-made structures consisting of objects floating at the ocean surface to attract fish to congregate under and around them. Although the use of FADs can increase the efficiency of fishing operations, it has four major consequences, all of which have considerable implications for the sustainability of tuna fisheries: •They increase the fishing capacity of purse seiners in a way that is difficult to control and measure. •They increase the catch of juvenile skipjack tuna. • They result in bycatch of non-target (and vulnerable) species such as juvenile bigeye and yellowfin tuna, sharks, turtles and other marine species. •Many FADs end up as marine debris in the water column and on the seabed. Together with the lack of operational catch data, the use of FADs undermines the reliability of assessments both of stocks and the ecological impacts, which make sustainable management of tuna resources difficult, if not impossible.27 The catch of juvenile tuna of targeted or non-targeted species could impact the recruitment of these stocks and lead to further depletion of tuna – bycatch of juvenile bigeye tuna by FADs is the primary cause of decline of the bigeye stock.28

Sharks as bycatch in Pacific tuna fisheries As well as the targeted tuna species, FADs attract and capture other species than tuna, including overfished species of billfish, vulnerable species of sharks and sea turtles. The bycatch of sharks is particularly serious in the longline tuna fisheries, where sharks comprise up to a quarter of the total catch in some pelagic longline tuna fisheries.29 Data presented by Korean researchers to the WCPFC Science Committee in 2009 showed that a total of 22 bycatch species were recorded during a longline tuna fishing trip, which included blue sharks, stingrays, bigeye thresher sharks and other vulnerable species of sharks.30 Since the management and control of shark fishing in tuna fisheries is very limited, ‘shark finning’, the practice of cutting fins off sharks, often while they are still alive, and throwing the shark bodies back into the ocean, is common on tuna fishing boats. The fins can be sold at top prices in countries where shark fin soup is a delicacy. Shark finning has become so lucrative to the longline vessels that, as tuna catches decline, many vessels have switched to target sharks for the shark fin trade as part of their operations. Globally, around three quarters of the oceanic pelagic shark and ray species are now classified as threatened or near-threatened by the IUCN.31 With the awareness of shark bycatch in tuna fisheries rising, more shark species are falling under iv CITES restrictions and their international trade controlled,32 and many regional fisheries management organisations have banned the retention of certain species of sharks. This affects the economics of tuna fishing operations, potentially making it unprofitable. Consumer awareness and added regulatory changes could also lead to an outright ban of products which are produced using unsustainable fishing methods. Investors should be aware of these risks (see Box 2 for detail).

Box 2. Legislations in the US on dolphin bycatch and consumer label

Investor risks: • Current fishing methods employed by Dongwon Industries have serious environmental impacts which lead to reputational risks. • Current unsustainable fishing methods employed by Dongwon Industries undermine its own future revenue from tuna.

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

Marine species bycatch in tuna fisheries is not a new issue. In the 1970s, the public outcry against hundreds of thousands of dolphins being killed every year in tuna purse seine fisheries in the Eastern Pacific, led to a series of laws being passed in the US to protect dolphins. Beginning with the Marine Mammal Protection Act of 1972, the Dolphin Protection Consumer Information Act passed in 1990 created the ‘Dolphin Safe’ label, which requires that only canned tuna caught without dolphin contact could be sold in the US market. A recent proposal by the National Oceanic and Atmospheric Administration in the US has tightened the requirements, extending them to all ocean regions, and aiming to comply with the World Trade Organisation appellate panel ruling in 2011.33

iv The Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) is one of the largest and oldest conservation and sustainable use agreements, with 178 member parties. It aims to ensure that international trade in specimens of wild animals and plants does not threaten their survival. 13

6. E mergence of consumer concerns and market restrictions The current dire state of the oceans and growing consumer demand for sustainable seafood has caused a rapid transformation in the global seafood industry. Many progressive companies are fast adapting their fishing practices and supply chain management to ensure they can meet the new standards and consumer expectations of being a responsible supplier. Following Greenpeace’s campaign worldwide around the sustainability of canned tuna, some of the biggest tuna industry businesses, including leading brands and major retailers around the globe, are making commitments to phase out the use of FADs in purse seine fisheries. They are also actively supporting the designation of marine reserves in the Pacific Ocean (Pacific commons) by agreeing not to sell tuna sourced from those areas.

Western markets have already changed The canned tuna market in key western countries including the United Kingdom, Australia and New Zealand have been completely transformed, with sustainably and responsibly caught tuna the only acceptable standard for major retailers. One such example is the United Kingdom, which is the second largest market for canned tuna. All of the major retailers and brands in the UK have committed to sourcing sustainably caught tuna. Sainsburys,34 Marks & Spencer35 and Waitrose36 are sourcing 100% pole-and-line tuna for their products. Tesco, the world’s third largest retailer and the largest in the UK, committed to source pole-and-line tuna for all their own-brand products by the end of 2012.37 Other retailers such as Asda and Morrisons, and leading brands John West (owned by Thai Union) and Princes (owned by Mitsubishi), have all committed to source their tuna from FAD-free or pole-and-line fisheries, at the latest by the end of 2016.

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

There is a high and growing demand in international markets for sustainably caught tuna. Table 1 outlines the sustainable tuna commitments of major retailers or brands in selected countries. Table 1. Sustainable tuna commitments of major retailers or brands in selected countries

Retailer / Brand

Sustainable tuna commitments

Note

UK – the second largest market globally, all major brands have made sustainability commitments Tesco 37– largest retailer in the UK

100% pole-and-line for own-brand products by end 2012

Sainsburys 34

100% pole-and-line tuna for their products

Marks and Spenser35

100% pole-and-line tuna for their products

Waitrose36

100% pole-and-line tuna for their products

Asda

100% FAD-free or pole-and-line tuna by end of 2016

Morrisons

100% FAD-free or pole-and-line tuna by end of 2016

John West

100% FAD-free or pole-and-line tuna by end of 2016

Owned by Thai Union

Princes

100% FAD-free or pole-and-line tuna by end of 2016

Owned by Mitsubishi

Retailer / Brand

Sustainable tuna commitments

Note

Australia – all major canned tuna brands will be sustainably sourced within a few years John West Australia38 – largest brand by value and volume

100% FAD-free by 2015

Sold in New Zealand also

Greenseas39

100% FAD-free by 2015

Sold in New Zealand also

Sirena40

100% FAD-free or pole-and-line by 2016

Safcol41

100% pole-and-line or FAD-free

Coles42

100% FAD-free by 2015

IGA43

100% FAD-free or pole-and-line by 2015

Aldi44

100% FAD-free or pole-and-line by 2016

Woolworths45

100% FAD-free or pole-and-line by 2015

Sold in New Zealand also

New Zealand – all local brands will be FAD-free by early 2014, other major brands are Australian-owned, and listed above. Foodstuffs

100% of canned tuna is 100% FAD-free or pole-and-line

Sealord46

Will source only FAD-free tuna by early 2014

US – the largest canned tuna market globally is seeing more sustainable tuna availability Safeway47 third largest grocer in the US

100% FAD-free skipjack for their own-branded product from April 2012. Committed not to source tuna from the Pacific commons

Whole Food Markets – largest natural and organic grocers in the US

100% pole-and-line or FAD-free

Walmart

Selling FAD-free tuna under a new label

Smaller, boutique labels

100% pole-and-line and troll-caught albacore tuna

Canada 100% FAD-free skipjack by 2015. Committed not to source from the Pacific commons.

Wild Planet49 - smaller but influential eco-brand

100% pole-and-line and troll fisheries

Safeway Canada

100% FAD-free or pole-and-line since the end of 2012. Developing a line of troll-caught albacore. Measures to relieve pressure on Pacific skipjack fisheries.

President’s Choice

Developing lines of troll-caught albacore. Measures to relieve pressure on Pacific skipjack fisheries

Owned by Canada’s largest supermarket chain Loblaw

Western Family

Developing lines of troll-caught albacore. Measures to relieve pressure on Pacific skipjack fisheries

Owned by Overwaitea Food Group

Italy – supplies of sustainable tuna are improving AsdoMar – leading brand

50% of skipjack shifted to pole-and-line. Supports developing marine reserves, implementing better labelling.

Mareblu – third largest brand

Only sell pole and line or FAD-free by 2016. Committed not to source from Pacific commons

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

Gold Seal48 - leading canned tuna brand

Part of MW Brands owned by Thai Union.

Asian market next? Unfortunately, tuna companies from Asia, including Dongwon Industries and its associated brand Dongwon F&B, have been slow to respond to this growing trend by failing to demonstrate their clear support of and commitment to responsible and sustainable tuna fisheries. If the companies continue to disregard the sustainability aspect of their tuna source, they risk losing access to sustainable supplies and thus the competitive advantage of operating their business innovatively, ambitiously and decisively. While it is easy to hide behind the success of their current business model, it is clear that the biological and regulatory externalities of tuna supplies are fundamentally changing. Consumers worldwide recognise the need for sustainable seafood, and it is only a matter of time until Asian consumers catch up with the seafood sustainability issues and demand more sustainable and ethical choices. Any business that is slow to adapt to this consumer demand will surely lose out in the market. The only way to secure tuna supplies for tomorrow, and ensure the industry is viable for the long-term, is by running a tuna fishing business sustainably.

Implications for export markets The transformation of canned tuna market in many Western countries poses significant challenges for Korean tuna companies, since only products of the highest standard would be allowed into these markets. Currently, Dongwon Industries and other Korean tuna companies are lagging behind: the recent high profile example of bad management in Dongwon Industries’ operations raise doubts about the legality of the sources of their supply, for which one of their vessels was refused to land the tuna catch in Mauritius 50 (see Section 7). Their lack of rigorous sustainability standards runs the significant risk that increasingly retailers will not accept the entry of Korean products into Western markets, as demonstrated by the issuance of warnings from European authorities about illegal tuna product from West Africa entering the market.51

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

Investor risks : • Dongwon Industries loses access into international markets with high consumer demand for sustainable seafood due to reputational issues. • Dongwon Industries is unable to adapt its operation to more sustainable methods when regulation tightens for these markets.

7. B ad management and lack of standards in overseas operations Distant-water fishing is an industry renowned for bad practices and sometimes involves criminal activities, especially when fishing on the high seas and in the waters of developing countries (e.g. West Africa) where governance is weak. Despite having one of the biggest distant-water fleets globally and being signatories to a number of international fisheries instruments,v South Korea has not lived up to its international obligations; instead allowing its distant-water fishing companies to continue to exploit poor countries and escape sanctions. To highlight this unethical business behaviour, Greenpeace East Asia release a report titled “South Korea Distant Water Fisheries – illegal, unreported and unregulated (IUU) and tarnished by human rights abuses” in April 2013 together with the Parliamentarian Mr. Shim Jae-Kwon at the National Assembly’s Foreign Affairs, Trade and Unification Committee.52 The report received huge media attention and various government Ministries have promised to tackle this embarrassing issue. The regulatory framework for the South Korean distant water industry and the penalties have since been tightened in recent months (see Section 4).

Box 3. What is illegal, unreported and unregulated (IUU) fishing? IUU fishing undermines efforts to conserve and manage fish stocks, leads to the loss of both short and long-term social and economic opportunities, and in particular negatively affects the food security of many fishery-dependent coastal communities. The inconvenient truth behind the ‘out-performed’ Dongwon Industries

According to the FAO’s International Plan of Action to prevent, deter and eliminate illegal, unreported and unregulated fishing:53 • ‘Illegal’ fishing refers to activities conducted in contravention of relevant national or international laws and regulations; • ‘Unreported’ fishing refers to fishing activities that have not been reported, or have been misreported, to the relevant national or regional authority; • ‘Unregulated’ fishing refers to fishing activities conducted by vessels without nationality, or by those flying the flag of a State not party to a regional management organisation, in a manner that is not consistent with or contravenes the conservation and management measures of that organisation, or in areas or for fish stocks for which there are no applicable conservation or management measures, and where such fishing activities are conducted in a manner inconsistent with State responsibilities for the conservation of living marine resource under international law.

v Such as the United Nations Agreement on straddling and highly migratory fish stocks, and the UN Food and Agriculture Organisation’s Compliance Agreement. 17

Dongwon Industries illegal fishing case in West Africa In the Greenpeace report, Dongwon Industries was highlighted as one of the worst offenders with a recent IUU fishing case in Africa, including forgery of official documents. Two tuna purse seine vessels, one owned and one operated by Dongwon Industries, the F/V PREMIER and the F/V SOLEVANT, were caught fishing illegally in Liberia in 2011and 2012 and were under investigation by the Liberian authority.54 This and other illegal fishing cases have prompted the European Union55 and the United Kingdom56 to issue warnings to importers that IUU products may have entered their canned tuna market, while several countries in the Western Indian Ocean have denied a fishing licence to the F/V PREMIER due to the then ongoing IUU case in Liberia. Rather than cooperating with the investigation, an employee of Dongwon Industries forwarded two letters to the Government of Kenya, implying that the F/V PREMIER was innocent of the illegal fishing charges in Liberia.57 The Bureau of National Fisheries in Liberia later confirmed the letters were forged.58 This has created an international scandal and has resulted in unified action by coastal States in the Indian Ocean to refuse to license the vessel or allow it services in port.59 Dongwon Industries negotiated a settlement with the Government of Liberia and have paid a fine of USD 2M.60 Although Dongwon Industries has maintained its claim as a victim of fraud,61 the fact that the agency they have used is also involved with five other vessels from Inter-Burgo,62 another Korean operator that is notorious for IUU activities, suggested the company has lax standards in its overseas operations and weak due diligence in high risk countries. Dongwon Industries is currently under investigations on multiple fronts in South Korea, which has raised questions regarding the competence of the general operations and governance of the company. Since the illegal fishing case in Liberia has surfaced, the South Korean Coast Guard has initiated an independent investigation into this case. In addition, several Members of the Parliament from the National Assembly hosted a workshop on 11 May 2013 to look into the general ethnics of Korean fishing companies and find ways to prevent similar cases from happening in the future. The National Tax Service raided Dongwon group’s office on 25 April 2013, along with Sajo, on suspicion of offshore tax evasion related to ‘their illegal practices such as flag-of-convenience fishing vessels’, and ‘irregular money transfers during the import and export production’ as reported by Money Today and Hankuk Economy TV.63

Questionable acquisition of Senegalese cannery

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

In 2012, Dongwon Industries acquired the largest cannery in Africa, Societe de conserverie en Afrique SA, which later changed its name to Societe d’exploitation-Societe nationale de conserverie du Sengeal (Se-SNCDS). It appears that the acquisition went under the decree of former president Abdoulaye Wade, without the proper tender process required by Senegalese law.64 Local media questioned the motive of the previous government in signing the deal.65 In April 2013, top management of Dongwon Industries had to appear in the Dakar criminal court, under legal procedure brought about by local businessman Fouad Nouasser. Mr Nouasser invested CFA 3B (approx. USD 6M) in the cannery before the Dongwon Industries’ acquisition and was the company’s Deputy Director. Mr Nouasser claimed that he was removed from the cannery’s board by Dongwon Industries based on forged documents.66 By acquiring the Senegalese cannery, it appears that Dongwon Industries is aiming to expand into the European market and take advantage of an EU tax exemption for fisheries products originating from Senegal. However, the poor business ethics of the company, in particular in their overseas operations, raises questions about whether they could meet the higher regulatory and consumer standards demanded of a multi-national company.

Investor risks : • Current and possible future financial liabilities from fines due to unlawful activities in countries where it fishes and operates. • Mishandling of environmental, social and governance issues poses a reputational risk to Dongwon Industries.

8. Conclusion Dongwon Industries’ recent expansion beyond the South Korean market and its aggressive capital growth are based on the assumption that there is an unlimited supply of tuna resources. In fact, tuna catches have probably peaked and there are recent and increasing restrictions on catch quota by regional fisheries management organisations, and by the Pacific island countries that own the resources. Dongwon Industries’ business model poses significantly risks to the environment, the resource it depends on and threatens the long-term financial viability of the company. Investors should consider whether Dongwon Industries has sufficiently disclosed its business risks, such as the financial and regulatory risks posed by the diminishing tuna catch or the increased market risk created by the demand for sustainably caught tuna. The governance and management risks for Dongwon Industries are in particular concerns, and have recently alerted South Korean and international authorities, including the National Tax Services, to investigate its operations. Investors should be aware of the impacts of increasing restrictions from the South Korean government on the currently under-regulated distant-water fishing operations of large companies .

Box 4. Sustainability ranking on Korean canned tuna products

Green

In June 2013, Greenpeace released a report named “No sustainable tuna in Korea” in order to provide sustainability guidance on canned tuna products to Korean consumers. No Korean brand currently meets Greenpeace’s sustainability standards. The ranking result shows that Dongwon comes at the bottom amongst the three key brands in the market.

Orange 2nd Sajo Industries Sajo Industries

Red

3rd Dongwon F&B Dongwon Industries

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

1st Ottogi Silla Co., Ltd

Source: “ No sustainable tuna in Korea” Greenpeace’s canned tuna sustainability report, June 2013. (http://www.greenpeace. org/korea/multimedia/publications/2013/oceans/360384/)

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biz/2011/11/258_99072.html 7 ‘Dongwon to build two new tuna seiners’. Atuna. 2 October 2012. http://pna.atuna.com/ViewArticle.asp?ID=11852 8 Food and Agriculture Organization (2012) The state of world fisheries and aquaculture 2012. FAO Fisheries and Aquaculture Department 9 The World Bank and FAO (2009) The Sunken Billions – the economic justification for fisheries reform. Washington DC. 100pp. 10 The World Bank and FAO (2009) The Sunken Billions – the economic justification for fisheries reform. Washington DC. 100pp. 11 Blinch, J. et al (2011) The Future of Fish in Asia – issues for responsible investors. Responsible Research.

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

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34 ‘All Sainsbury’s tuna to move to 100% pole and line caught’. Sainsbury press release. 7 January 2011. http://www.j-sainsbury.co.uk/

The inconvenient truth behind the ‘out-performed’ Dongwon Industries

media/latest-stories/2011/20110107-all-sainsburys-tuna-to-move-to-100perc-pole-and-line-caught/ 35 ‘Marks & Spencer updates on progress of its “Eco-plan”, Plan A’. Marks & Spencer press release. 5 November 2009. http://corporate. marksandspencer.com/media/press_releases/planaupdate 36 ‘All Waitrose canned tuna to carry MSC logo’. Waitrose press release. 20 February 2013. http://www.waitrose.presscentre.com/PressReleases/All-Waitrose-canned-tuna-to-carry-MSC-logo-b36.aspx 37 ‘Tesco makes sustainable tuna pledge – all Tesco canned tuna will be pole and line caught by the end of 2012’. Tesco press release. 11 January 2011. http://www.tescoplc.com/index.asp?pageid=17&newsid=397 38 ‘John West confirms its commitment to sustainable tuna’. John West website. Accessed on 26 April 2013. http://johnwest.com.au/johnwest-confirms-its-commitment-to-sustainable-tuna 39 Sustainability – Greenseas website. Accessed on 27 April 2013. http://www.greenseas.com.au/Sustainability 40 Sustainability – Sirena website. Accessed on 27 April 2013. http://www.sirena.com.au/sustainability 41 Environment – Safcol website. Accessed on 27 April 2013. http://www.safcol.com.au/content/environment/gjgk1s 42 ‘Coles launches first responsibly fished supermarket brand tuna’ Coles press release. 30 August 2011. http://www.coles.com.au/ Portals/0/content/pdf/news/Tuna%20pole%20and%20line%20media%20release%20doc.pdf 43 IGA sustainability consumer information page – IGA website. Accessed on 27 April 2013. http://www.iga.com.au/igafresh/index. cfm?page_id=2708 44 ‘Aldi Australia puts sustainable seafood on the table’. Aldi press release. 18 March 2013. http://aldi.com.au/au/html/downloads/ALDI_ Media_Release_-_Sustainable_Fisheries_Partnership_Announcement_-_March_2013_-_FINAL.pdf 45 Sustainable seafood – Woolworths website. Accessed 27 April 2013. http://woolworths.com.au/wps/wcm/connect/Website/Woolworths/ About+Us/Our+Planet/Sustainable+Seafood/ 46 ‘Sealord tuna goes FAD-free’. Sealord media release 29 May 2013. http://www.sealord.com/docs/default-document-library/sealordannounces-fad-free-tuna-29-may-2013.pdf 47 ‘Safeway announces new sustainable sourcing practice for tuna’ Safeway press release. 10 February 2012. http://www.safeway.com/ IFL/Grocery/Lifestyle?contentURL=http%3A%2F%2Fphx%2Ecorporate-ir%2Enet%2Fphoenix%2Ezhtml%3Fc%3D64607%26p%3Dirol-newsArti cle%26ID%3D1659609%26highlight%3D#iframetop 48 ‘Sustainable Seafood procurement policy – tuna’. Gold Seal website. Accessed 28 April 2013. http://www.goldseal.ca/aboutus/tuna_ procurement_policy.asp; 49 ‘Raincoat Trading Ltd Product procurement policy statement’. Updated February 2011. http://www.raincoasttrading.com/_downloads/pdf/ policy/ProcurementPolicy-RT.pdf 50 ‘Dongwon vessel refused entry to Mauritius port’. Undercurrent news article. 19 April 2013. http://www.undercurrentnews. com/2013/04/19/dongwon-vessel-refused-entry-to-mauritius-port/#.UYywT7VTAb0 51 “West African canned tuna now a major risk for imports”. Atuna article, 4 March 2013. http://pna.atuna.com/ViewArticle.asp?ID=12561 52 한국 원양어선들의 고착화된 불법어업(IUU)으로 대한민국 위신 추락11 April 2013. http://www.greenpeace.org/korea/news/pressrelease/oceans/2013/353503/ 53 FAO (2001) International Plan of Action to Prevent, Deter and Eliminate Illegal, Unreported and Unregulated Fishing. Rome, 24pp. http:// www.fao.org/docrep/003/y1224e/y1224e00.htm 54 Letter by the Bureau of National Fisheries, Ministry of Agriculture, Republic of Liberia. 20 February 2013. http://www.liberiafisheries.net/ sites/default/files/pdf/Warning_Lib._Gov_Doc.pdf 55 “West African canned tuna now a major risk for imports”. Atuna article, 4 March 2013. http://pna.atuna.com/ViewArticle.asp?ID=12561 56 Letter from the Department for Environment Food & Rural Affairs (DEFRA). ‘Important information regarding the import of West African fish products into EU and UK markets’. 27 February 2013. http://www.seafish.org/media/771007/letter%20to%20tuna%20importers%20130227. pdf 57 “F/V Premier - another IUU vessel involved in illegal fishing and fraud in Liberia.” Stop Illegal Fishing article, 21 February 2013. http:// www.stopillegalfishing.com/sifnews_article.php?ID=102 58 Letter by the Bureau of National Fisheries, Ministry of Agriculture, Republic of Liberia. 20 February 2013. http://www.liberiafisheries.net/ sites/default/files/pdf/Warning_Lib._Gov_Doc.pdf 50 ‘Dongwon vessel refused entry to Mauritius port’. Undercurrent news article. 19 April 2013. http://www.undercurrentnews. com/2013/04/19/dongwon-vessel-refused-entry-to-mauritius-port/#.UYywT7VTAb0 60 ‘Liberia receives 2,000,000 USD for IUU activities’. Liberian Ministry of Agriculture website. http://liberiafisheries.net/node/15 61 ‘Dongwon claims to be victim of fraud’. Undercurrent news. 15 March 2013. http://www.undercurrentnews.com/2013/03/15/dongwonclaims-to-be-victim-of-fraud/#.UYypQ7VTAb1 62 Greenpeace report ‘한국 원양어업 불법어업(IUU) 실태 보고서’ Available at: http://www.greenpeace.org/korea/multimedia/ publications/2013/oceans/353504/; ‘Forged license, illegal transporting, waste dumping: The deep-sea fishery nation Korea disgraced’ The Kyunghyang Shinmun. 11 April 2013. http://english.khan.co.kr/khan_art_view.html?artid=201304112038357&code=710100 63 ‘동원산업•사조산업 세무조사… 역외탈세혐의 무게’ Money Today. 25 April 2013. http://news.mt.co.kr/mtview.php?no=20130425192 90543013&type=1&MS2. ‘국세청, `동원•사조` 특별 세무조사’ Hankuk Economy TV. 26 April 2013. http://www.wowtv.co.kr/newscenter/ news/view.asp?bcode=T30001000&artid=A201304260274 64 La SNCDS vendue en catimini à des Coréens : le flou total sur une transaction. Dakaractu. 6 November 2012. http://www.dakaractu. com/La-SNCDS-vendue-en-catimini-a-des-Coreens-le-flou-total-sur-une-transaction_a34655.html; 65 “Liaisons dangereuses en eaux troubles". Liberation, 12 April 2013. 66 “Dongwon mêlé dans une autre scandale pour (encore) faux et usage de faux”. Liberation. 13-14 April 2013.

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