Palm Oil: Not so slick?

Investors must take the lead in the sustainable palm oil discussion

Schools in Malaysia and Indonesia were closed for most of September 2019, due to regional wildfires that shrouded parts of Southeast Asia in toxic haze. Cities in Indonesia, Malaysia and Singapore reached "hazardous" levels, according to local air quality monitors. At least two people died from breathing difficulties that month.

These wildfires are an annual affair, undertaken by Indonesian and Malaysian farmers who use slash burning to clear land for palm oil plantations.

The palm oil industry has been a blessing and a curse to the region: Indonesia and Malaysia alone control 85% of the USD 30 billion annual trade of the commodity that is used in everything from shampoo and soaps to bread, lipsticks, perfume, toothpaste and biodiesel. The industry employs 6 million Southeast Asians and has been credited by the Indonesian and Malaysian governments as having lifted millions of rural citizens out of poverty.

But palm oil is coming under increasing scrutiny from local and international communities. The industry has been criticised over alleged widespread corruption, human rights abuses and its sometimes devastating environmental effects – September’s haze was just one symptom of a bigger disease.

Environmental and social concerns are scaring consumers away

The environmental impact of palm oil in Southeast Asia has taken centre-stage in international media coverage of the issue. Indonesia – the world’s biggest palm oil exporter – is the third largest greenhouse gas producer behind the United States and China, according to the World Bank. Deforestation for plantations has been linked to the decrease, of up to 30%, of the region’s orangutan and Sumatran tiger populations, according to the World Wildlife Fund. There are human casualties too. The 2015 regional haze from slash burning was estimated, in a study by the universities of Harvard and Columbia, to have caused 100,300 premature deaths in Indonesia, Malaysia and Singapore.

Less reported are the working conditions for palm oil workers. Plantation operators have been accused by human rights watchdog Amnesty International of employing child labour and forced labour in remote plantations and refineries in Indonesia. Amnesty also accused the industry of labour violations, such as underpaying workers.

International consumers and investors will vote with their wallets. A 2018 poll by market research firm Ipsos reveals growing negative public sentiment against palm oil: 70% of Europeans said they were against the product. In 2018, UK supermarket Iceland became the first major retailer to ban palm oil products on its shelves, even releasing a viral anti-palm oil advertisement depicting an orangutan. In March 2019, the European Union passed a bill to phase out palm oil imports from Southeast Asia by 2030, and in September 2019, India – the world's largest palm oil importer – raised its import tax on the oil.

Palm oil isn’t going anywhere, but the industry has to change

Despite the negative press and advocacy against palm oil, it is still the most efficient, cheap and readily available commodity for several key industries such as food, pharmaceuticals and energy. Global businesses that rely on palm oil, and their investors, face difficult choices between their immediate commercial interests and the long-term reputational risk of engaging with the sector.

The soundest course for investors is to advocate for sustainable palm oil plantation and supply practices. Since 2004, investors, banks, farmers and governments have been pushing for more palm oil plantations to be certified under the Roundtable on Sustainable Palm Oil (RSPO). This is a Malaysia-based association which grants voluntary certifications to plantations and suppliers that adhere to what it terms as sustainable palm oil production measures.

Whether these accrediting bodies will have a meaningful impact remains to be seen, and the RSPO’s credibility has been brought into question. For example, the body allows for plantations to be built on peatlands, the large swathes of marshes made of decayed flora and fauna matter. Peatland plantations, according to the RSPO itself, are one of the largest contributors of wildfires and carbon emissions in the industry. Moreover, even if the RSPO were an effective, credible body, only 19% of global palm oil production is RSPO-certified.

In any event, the RSPO is generally seen by media, governments and businesses as the best option we have for now. That said, rather than wholly relying on a certification, asset managers and corporates should be proactive in taking the lead in the palm oil discussion, before activist investors and customers start asking the hard questions for them.