Palm oil: a burning issue

Palm oil development is one of the leading drivers of global deforestation, which took a heavy toll on South East Asia in 2015. Consumer brands and investors are exerting influence on companies to decouple production from further social and environmental degradation.

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picture - Dystopian palm oil forest after burning

The palm oil plantations stretched as far as the eye could see, interrupted only by production mills that turn the fruit into lucrative oil found in everything from biscuits to bio-fuel.

Flying across the Indonesian island of Sumatra, it struck me that the vista from my window would have been very different twenty years ago. Large areas of tropical forest, and other ecosystems with high conservation values, have been cleared to make way for a vast monoculture. The palm oil industry is a major employer and export earner for Indonesia, but the social and environmental costs have been immeasurably high.

I visited Jakarta, Sumatra and Singapore in September as part of a 25-strong investor group that met with palm oil companies, small-holders, government officials and non-governmental organizations. The trip was organised by the Principles for Responsible Investment, an international non-governmental organisation backed by the United Nations.

As an investor, I was hoping to see evidence that palm oil companies are committed to reducing deforestation, a major contributor to climate change. Indonesia and Malaysia account for around 75 per cent of the global palm oil market, which was worth $61 billion in 20141 and is forecast to hit $88 billion by 20222. The country lost more than six million hectares of natural forest between 2000 and 20123, which could rise unless the industry transitions more fully to a sustainable model.

It soon became clear that international brands, investors and others had successfully exerted pressure for change since my visit to Singapore in November 2015. At that point, the skies of South East Asia were slowly clearing after months of smog, which is primarily attributed to the burning of carbon-rich peatland to make way for palm oil and pulp wood plantations. The so-called haze occurs every year, but the El Nino weather phenomenon warmed up the sea and delayed rainfall; allowing the fires to burn for longer over an extended area. 

The fires released more greenhouse gases into the atmosphere than Germany does in a typical year. This pollution led to an estimated 100,000 premature deaths - including 90,000 in Indonesia - according to a study by Harvard and Columbia universities4. The World Bank estimated the cost to the Indonesian economy at $16.1 billion5, compared to the $7 billion6 rebuild after the 2004 tsunami. Diplomatic relations between Indonesia and its neighbour Singapore, ever fractious, reached boiling point.

Consumer boycotts, legal action, fines and tighter regulation followed as the reputation of the palm oil industry fell to a new low. For me, a front page photo in the Singaporean newspaper, The Straits Times, captured the moment. The image showed supermarket FairPrice removing products by the Jakarta-based Asian Pulp and Paper from its shelves to put pressure on companies deemed to have played a role in the haze. Boycotts attract attention in the Lion City.

The Association of Banks of Singapore (ABS) exerted pressure on lenders to the palm oil industry, with inaugural guidance on responsible finance7. Singaporean banks will be expected to disclose senior management’s commitment to responsible financing in their annual reports. The Monetary Authority of Singapore plans to work with the ABS to monitor adoption and implementation of the guidelines, with the ABS hoping banks will be fully compliant by 2017.

Pressure intensified this year. In March, the Round Table on Sustainable Palm Oil suspended IOI Group8, one of the world’s biggest palm oil players, after years of complaints by NGOs. The rationale was that IOI permitted its subsidiaries to clear peatland and forest, and plant illegally outside the authorised boundaries of their concessions. The suspension sent IOI’s share price tumbling by 17 per cent.

The RSPO move kicked off a powerful domino effect. Some 27 corporate buyers, including Colgate-Palmolive, Hershey’s, Johnson & Johnson, Kellogg’s, Mars, Nestle, P&G and Unilever, suspended or terminated their business relationships with IOI. The company’s response was defensive at first and legal in nature. IOI filed a case in Switzerland on the grounds the suspension was disproportionate to the complaints. Common sense prevailed shortly after, and the company dropped its legal action in favour of reaching an amicable resolution. IOI regained its sustainable palm oil certification from the RSPO in August, but not all of its previous trading relationships have returned.

More encouragingly, a number of large palm oil players have pledged to end their involvement in deforestation and the burning of peat altogether. These include US-based agricultural trading house Cargill, Golden Agri-Resources, the world’s second largest palm oil plantation company with 483,000 hectares under production in Indonesia, and Wilmar International, one of the largest agri-business groups in Asia.

There is still much work to do, however. These companies face substantial challenges in pursuit of their goals, and others have yet to sign up to such a commitment. It is to be hoped the transition to a sustainable palm oil industry expands and accelerates, not least because time is running out for some well-loved and iconic species. It would be a great shame if the orangutan and Sumatran tiger followed the dodo into extinction.

References

1 Grand View Research 

2 Grand View Research

3 University of Maryland

4 Harvard University

5 World Bank

6 World Bank

7 ABS

8 RSPO

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