What is wrong and right about our palm oil
Published on: Sunday, June 23, 2019
By: Trinity Chua


In December 2016, Mighty Earth, a US-based environmental activist group, published a report accusing commodities company Olam International of widespread deforestation in Gabon, Africa, where it held concessions to grow oil palm. In response, Olam CEO Sunny Verghese said the company’s plantations were on land that was already highly logged, as well as degraded secondary forest and savannah. 

A couple of months later, however, Olam said it would suspend forest-clearing activity. In July 2017, the company and Mighty Earth, which had visited the Gabon plantations at Olam’s invitation, issued a joint statement, with the environmental group seemingly approving of Olam’s efforts at conservation. Two years on, Olam has now set a target to achieve 100pc traceability of its oil palm plantations by 2020. It has a set of commitments that include zero-de-forestation in high conservation value (HCV) areas, no development of peatlands and no burning, as well as a framework for labour and social rights. 

“Our plantations are climate-positive because [a little] over 50pc of our concession areas have been conserved as HCV.

[Admittedly,] they were originally logged many decades ago and they are damaged forest, but we still think they are valuable from a biodiversity standpoint,” says Christopher Stewart, Olam’s head of corporate responsibility and sustainability who is also former associate director of environmental group Proforest. 

Olam tracks where its oil palms are planted, the water quality in the area and the yield of its plantations,among other factors. It also has a monitoring system involving 60 employees to prevent people from illegally cutting down trees or hunting in their HCV area. 

Part of Olam’s ability to fulfil its obligations lies in the fact that it owns both the plantations and the mills where it operates in Gabon. It has 144,000ha of concession land, of which 94,000ha are certified. It owns two mills that can trace their palm oil supply to plantations. In Africa, smallholder farmers are not common, which allows companies such as Olam to develop modern farms and employ locals within the communities. 

But Olam and other companies like it face a vastly different and monumentally bigger challenge in Indonesia, the source of most of their palm oil. Olam, for one, sourced 287,000 tonnes of palm oil in 2018 through 13 suppliers in Indonesia and Malaysia. In Indonesia, oil palm plantations owned and farmed by smallholders account for 40pc of total oil palm plantation land, and produce 35pc of total crude palm oil, according to Daemeter Consulting. 

Smallholder plantations and independent mills are notoriously difficult to track. “Oil is incredibly complex because you can’t physically segregate it in the same warehouse,” Stewart says. In 2018, Olam could track all its palm oil to the mills through its 13 sup-pliers, but only 42pc of the volume could be traced to plantations. 

According to certification body Round-table on Sustainable Palm Oil (RSPO), 13.5 million tonnes of certified sustainable palm oil was produced globally last year, which is 20pc of total palm oil output. Only half of this “green” palm oil was estimated to have been actually sold at the premium that it commands due to the extra cost of US$8 to US$12 per tonne to certify it as sustainable. What was unsold was combined and offloaded with non-certified palm oil. “The challenge is also there is a lot of competition from players that are offering cheap food, which does not price in the destruction of the [natural environment] into commodities,” Stewart says. 

 

Pressure from regulators, environmentalists 

The world’s most widely used vegetable oil is at the centre of a heated and protracted spat between producers, regulators and environmentalists who are putting pressure on them to be sustainable. Palm oil has been vilified for causing widespread deforestation and endangering animal habitats.

Last month, the European Union decided to limit the types of biofuels from palm oil that could be counted as renewable energy, prompting protests from the two biggest producer countries of palm oil — Malaysia and Indonesia. Both also threatened to boycott EU products and mount a WorldTrade Organisation challenge. 

In fact, the EU’s decision may do more harm than good. Palm oil is the world’s most-traded vegetable oil, and global consumption is expected to reach 240 million tonnes in 2050, up from 73.5 million tonnes last year. It is consumed by more than three billion people a year, more than half of whom are in Asia.

The biggest markets for it as an edible oil are in China and India, owing to its cheapness. And, some five mil-lion people in Southeast Asia depend on it for their livelihood. Large swathes of plantation land are cultivated by generations of smallholders, many of whom lack official titles to the land they plant on. Meanwhile, the industry itself does not have a standard understanding, or criterion, of what sustainable palm oil is. The commitment to sustainability targets differs across palm oil producers.

For instance, Olam Inter-national, Golden Agri-Resources (GAR) and Wilmar International do not plant on peat at any depth, whereas Genting Plantations and Goodhope Asia Holdings do not specify the depth of peat they can plant in, according to a survey by the Zoological Society of London last November.

Some palm oil producers also say they do not require suppliers to get sustainability certification as long as they comply with the companies’ sustainability requirements. One of them says it is theoretically possible to accept only suppliers that are certified, but it would not be practical from a logistics standpoint. “There are some challenges that are hard to overcome,” says Perpetua George, Wilmar International’s general manager for group sustainability. “For instance, the mom-and-pop mill that only sources from one plantation and has no ex-posure to the Western market — why would it come onboard for an administrative-heavy certification process [that is costly]?” 

Finally, companies — and more importantly, the smallholders who supply them —are not being compensated or incentivised by the market to produce “green” palm oil. While there is strong demand for certified sustainable palm oil, Wilmar says, it is not always that companies will get the premium they want. Indeed, pushing the industry to adhere to strict sustainability standards within a short time could very well backfire. 

“The big risk to the sector is as major palm oil companies are pressured to become more sustainable, they are starting to map their supplier and smallholder farmers base. But it is so expensive to trace [them] that many of these major companies stick to preferred suppliers [and smallholders],” says George Schoneveld, senior palm oil specialist for Centre for International Forestry Research. “[This means] those who cannot meet the standard will lose access, and there is a huge risk they would resort to the leakage market, which is already a very big market.” 

 

What does sustainable palm oil look like? 

One of the biggest challenges towards sustainable palm oil is there is no single standard on how to measure and define sustainable palm oil. There are various certification bodies, including the RSPO, Indonesia Sustainable Palm Standard Commission (ISPO) and Malaysian Sustainable Palm Oil. At the same time, results of these various certifications have been hard to gauge. Industry researchers have not been able to agree on whether the RSPO, for instance, has done more good or harm to Indonesia’s forests, people and orangutans. 

One of the more optimistic studies, published last year by Kimberly Carlson, Robert Heilmayr and others in the Proceedings of the National Academy of Sciences of the United States of America, found that RSPO certification helped to reduce the extent of deforestation in HCV areas and primary forests, compared with non-certified plantations.

The study, Effects of oil palm sustainability certification on deforestation and fire in Indonesia, looked at plantations in Indonesia between 2001 and 2015. Reduction of deforestation was particularly significant in areas within primary forests, that is, areas that were targeted for protection. However, the study also pointed out that the certification was adopted in older plantations with little forest left, which suggests that companies could have cleared the land before certification.

Still, over time, Carlson argues, overall deforestation may be reduced as more companies adopt certification. Conversely, a report published last October by Roberto Gatti, from Purdue University, found that Indonesian plantations with certification had lost 38pc of their forest since 2007, while non-certified areas had lost 34pc. Gatti and his team analysed data from 2001 to 2016. 

“Other studies measure from the point of certification. But our study looked at past deforestation activities before certification. We discovered that almost all plantations certified as sustainable palm oil before the 2000s were tropical forests.

It is an illusion that palm oil can ever be sustainable,” he says. “At this rate, we would clear all the forest in 30 years.

The only way to limit [the damage] is to stop expanding palm oil production, but that is difficult, given the increasing demand for palm oil products.” The perceived positive impact of certification on wildlife and forest fire is also disputable. A 2018 study by the University of Queensland concluded that non-certified and certified plantations had the same track record when it came to protecting orangutans. A study published in 2016 by Megan Cattau from Columbia University found that there was no difference in fire incidents between certified and uncertified plantations. The study looked at data between 2012 and 2015.

However, another study by Praveen Noojipady in 2017 that analysed data from 2009 to 2014 suggested that there were fewer fire-related deforestation activities in certified plantations than non-certified ones. But neither study demonstrated a causation between certification and forest fire. It seems — as researcher Courtney Morgans of University of Queensland’s ARC Centre of Excellence for Environmental Decisions and Borneo Futures notes — the only benefit certification has is marginally higher yields for oil palm farmers. 

 

Differing standards 

Under pressure, the Indonesian government has certified a record number of oil palm cultivation lands under ISPO. The area certified by ISPO in the last three years was three times larger than in the previous four years.

But numerous academic studies in recent years have suggested that the ISPO has loose standards of sustainability and lacks the power to enforce them. The most widely recognised sustainable palm oil certification body, the RSPO, has also been criticised for being lenient to palm oil companies. Set up in 2004, the RSPO aims to set standards that companies must comply with to produce sustainable palm oil. It uses independent, third-party certification bodies to certify smallholder farmers, palm oil companies and mills. This process includes document checks, site visits and stakeholder consultation with the local community, authorities as well as non-governmental org sations. The report produced by the third-party auditor is reviewed by internal and extema reviewers before certification is given. As at June last year,1.6 million hectares of land in Indonesia had been certified. it is the largest RSPO-certified area among palm oil-producing nations, accounting for 7.5 million tonnes of certified sustainable palm oil. But this remains a fraction of the total palm oil produced in Indonesia alone last year, of 41.5 million tonnes. 

Still, RSPO certification is one of the most widely used benchmarks for sustainable palm oil, with many sustainable assessment firms such as RobecoSAM using it as part of their assessment of companies’ sustainability standards.

“I think there is a widespread perception that RSPO is not as strong a standard,” says Olam’s Stewart. “RSPO [standards] are actually quite demanding if you follow [them] with rigour. It is like having a very good set of laws, but unless it is properly enforced, the system is not strong enough to ensure sustainability. For instance, in Indonesia and Malaysia, the concept of protecting HCV is not well understood. Many areas that were supposedly HCV are areas that were `unplantable’ anyway.” For Wilmar, George says the certification is the highest bar of the industry. The company reckons it should focus on getting suppliers and associates to comply with its No Deforestation, No Peat, No Exploitation policy, which it started in 2013 and extended to all parties in its supply chain. Indeed, both industry players and observers acknowledge that a certification system alone will not improve the industry’s sustainable performance. Dian Soeminta, spokesperson for TUV Rheinland Indonesia, one of the certification bodies that handled two RSPO certifications in Indonesia, says the demand for RSPO certification has been growing in recent years as a result of greater demand from downstream players for sustainable palm oil. “But some [palm oil growers] are stuck in the remediation and compensation process.

For instance, one company is trying to get the RSPO Principles and Criteria (P&C) certification that requires growers to conduct high conservation value assessment before any new land development. [So, if they have not done so], they have to apply for [remediation]. Until they [resolve] the issue, they cannot get certification. The process can take years,” she says. “The hardest part is to verify social and land conflict issues, because it is really hard to do so without proper records from the past. RSPO requires informed consent from local communities when [a company takes over and converts a piece of land for a plantation]. This may [have taken place] 15 or 20 years ago. The company does not have the [proper] documentation to show that,” she adds. 

Tracking and monitoring 

Fund managers who have palm oil companies in their portfolio say, while investors are increasingly pushing for more sustain-able practices in the industry, the process is capital-intensive. And, it is in practice difficult to verify farming practices on the ground. For instance, smallholders may work on certified concession land but have their own plot of uncertified land as well. They may bring their fruit brunches from both plantations to the same mill. Another issue is local leaders and state governments tend to have different maps, giving rise to disputes over land ownership. “It can be hard to be sure about the fruits coming to the mill,” says Gerald Ambrose, CEO of Aberdeen Standard Investments Malaysia. “If we want to make sure everything is 100pc right, we won’t be doing anything else. We rely on third parties and our engagement with the companies. On several occasions, we had to send people to dig deeper.” A start-up in the industry, Koltiva, offers software and manpower to help palm oil companies track their supply chain and verify sustainable production of the commodity. It just struck a deal to trace produce from 60,000 farmers for GAR, which recently came under fire for alleged bribery and polluting of a local lake. 

Koltiva has already tracked 20,000 small-holders in Indonesia, with detailed information on their land, production and customers. But the process is very costly and manpower-intensive. “I don’t believe in self-reporting assessment,” says its CEO Manfred Borer. “Our agents go on foot to verify the plantation and make an assessment themselves.” 

The company has 250 staff in Indonesia and has registered more than 100 agents on the ground. “Our agents are trained to tell if the farmers are using banned pesticides, if they are lying about it. Our assessment goes beyond the RSPO standards,” Borer says, adding that the details tracked also depend on clients’ requirements. 

Major players such as Wilmar and GAR have been under the spotlight and are actively working to implement sustainability standards. GAR says 39pc of its supply chain is traceable to plantation. Wilmar says 15pc of theirs is traceable to plantation and 95.5pc of its product is traceable to mills. 

But it is the mid-sized palm oil players with 100ha to 500ha plantations that are the most difficult to track, along with the independent mills that receive supplies from both sustainable and unsustainable sources. There are tens of thousands of these players in Indonesia, and NGOs have picked them out for violations of environmental regulations and social rights. Many of these smaller players are now turning to the less-stringent ISPO standards as RSPO tightens its rules. 

Still, ISPO could serve as a stepping stone for plantations to eventually be RSPO-certified, says CIFOR’s Schoneveld.

But he is nevertheless cautious about its effectiveness. For one, only 2.4pc of smallholders in Indonesia comply with ISPO standards, simply because they lack documentation and physical records related to their plot of land. “A lot now rides on the implementation and enforcement of ISPO, whether it can get growers and mills to adopt the standard at scale,” he says. 

At the same time, a study led by Nia Hidayat in the Agriculture and Human Values journal in 2017 found that ISPO rules do not spell out the degree of conservation needed for certification, leaving it open to interpretation by auditors. Further, the enforcement of ISPO rules is spread among multiple government agencies that may not have either the resources or incentives to comply. 

Schoneveld adds, “I think the government simply needs to invest in putting the framework and resources for the industry to participate. For instance, they could implement territorial jurisdictions, where each area is monitored for complying with environmental standards. So, companies will be more comfortable buying from the particular area because it is monitored and palm oil is traced in the area, even if not all the farmers in the zone are certified.” 

Meanwhile, RSPO has tightened its rules. The new P&C certification, for instance, requires conservation of high-carbon-stock forests and has a clear set of guidelines to identify these forests. But what RSPO and its standards for sustainable palm oil are ultimately dependent on are its stakeholders, which are made up of NGOs, palm oil businesses, consumer goods manufacturers, retailers and banks. 

“RSPO is a journey [where] all stakeholders agree upon what is possible and practical at a given time,” says Dan Strechay, RSPO interim global director for outreach and engagement. “If you have a standard design based on all parties having to give up something [to be part of it] , then it is more equitable to the whole supply chain.” 

 

Paying for it 

The pressure for palm oil companies to produce sustainably is only going to grow. Consumer goods manufacturers have made ambitious commitments to zero deforestation. Nestle, for instance, says all of its palm oil will be RSPO-certified by 2023 and 100pc “responsibly sourced” by 2020, aided by satellite tracking. 

Industry observers say another way to raise adoption of sustainable practices is for lenders and investors to raise pressure on palm oil companies. “These companies are under pressure to get capital from lenders,” Carlson says. “One way is for the financial sector to put pressure on the industry to step up sustainable practices.” 

While banks, investors, fund managers and even credit agencies do not only rely on certification standards to make assessments, these certifications do serve as some form of benchmark for what sustainable palm oil means. And to many risk managers, sustainable certification equates with less risky in-vestments, even though there is no consensus on the environmental and social impact of these standards. 

“suitability is more important for investors now than 10 years ago,” says Maisam Hasnain, Moody analyst for palm oil. “This means adherence to sustainability practices is becoming more important to palm oil industry stakeholders such as lenders that provide capital.” 

On Moody’s part, he adds, “while we do not measure sustainability scores of palm oil companies, we view that companies with stronger sustainability standards are less prone to downside risks. If you have stronger standards than other companies, then you have a better chance to access customers and funding”. 

This has been the case with Olam International, which last year secured Asia, first sustainability-linked loan worth USS500 million from multiple Asian banks. The palm oil trader has to meet pre-set improvement targets annually, and if it does, the interest rate on the loan is reduced. 

But the process to track and certify sustainable palm oil is expensive. Some palm oil companies that spoke to The Edge Singapore say they have included the cost into their operations, declining, however, to reveal exact numbers. Palm oil companies also say that the public and stakeholders expect agri-businesses to not just guard the palm volumes that enter their supply chain but also their associates’ entire operations. Often, these companies say they are held responsible for their associates’ actions. 

Palm oil producers argue that ultimately, consumers need to pay for sustainable palm oil. “The reality is that we probably need to pay more for food than we do now,” says Anita Neville, senior vice-president of corporate communications and sustainability relations at GAR. We pay less for food now than at any other time in human history.” 

As such, the future of sustainable palm oil demand would depend on palm oil, bluest markets — India, China and Indonesia, which together consume 40pc of palm oil globally. And in those markets, environmental campaigns and activist-led boycotts are not likely to change consumer behaviour. But campaigns targeted at the corporations that buy and palm oil in their products might. 

In China, for instance, a study by Philip Schleifer and Sun Yixian last year in the Review of International Political Economy outlined a number of factors that determine demand for sustainable palm oil. Consumers are generally unconcerned about the environmental impact of palm oil, but they do like branded goods, which are in turn owned and produced by multinational corporations that have committed to using RSPO-certified palm oil. This has resulted in demand for sustainable palm oil in China. In addition, the palm oil trading industry in china has consolidated, and most of them are RSPO-certified members. 

In India, however, palm oil is mainly used by the poor for their daily meals. There is no physically certified palm oil sold in India today, according to the study. There are more than 40 palm oil trading companies in India and without substantial support from government agencies, RSPO certification holds very little appeal to them. 

So far, the industry punishes companies for not being sustainable, yet there is little incentive for plantation companies and farmers to adopt greener practices. “This approach is difficult to work. The mills have got no promise from buyers they would pay for sustainable palm oil,” says Koltiva’s Borer. “Sustainable palm oil is not going to materialise just with satellites monitoring forests. We need resources on the ground [to create incentives for farmers and mills] to produce sustainably. The final buyers [that is, consumer goods manufacturers] have to pay.” Which will, in turn, extract their pound of flesh from consumers. 

 

Trinity Chua is assistant editor at The Edge Singapore 





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