Interview with the Sustainable Palm Oil Investor Working Group (IWG)

Investors outline how their work on palm oil is evolving.

RI spoke with the Advisory Committee of the PRI coordinated sustainable palm oil Investor Working Group (IWG) who aim “to provide a coherent and unified investor perspective in support of the development of a sustainable palm oil industry” for a Q&A on the role of shareholder engagement and the Roundtable on Sustainable Palm Oil (RSPO). The IWG has 53 signatories and more than $11trn assets under management. Here are RI’s questions and the IWG’s responses:

RI: In light of Iceland’s announcement, do you think the RSPO remains relevant in the efforts towards a sustainable palm oil sector? If it does, what are its strengths and advantages?
IWG: While some companies may choose to follow Iceland’s lead, a significant number of businesses and investors are instead working to improve sustainability standards within the industry rather than leave the industry all together. Indeed, removing palm oil from products may not necessarily be feasible or ideal for every company. Palm oil has significant advantages in terms of yields and versatility compared to alternatives, as well as contributing significantly to national development in the countries where it is grown. It is therefore a valuable commodity when produced in a sustainable manner. The RSPO is a widely established and recognised organisation, especially among consumers, giving it a unique advantage. In addition, as a multi-stakeholder and multi-national platform it
offers a common reference for companies, buyers, investors. This makes the Roundtable onSustainable Palm Oil one of the most prominent sustainability standards and still very relevant for achieving a sustainable palm oil industry. Many investors have encouraged their investee companies to adopt RSPO certification, however a number now believe that this certification represents a minimum standard in terms of how these companies manage the ESG risks within the industry. To maintain relevance and credibility, the RSPO will urgently need to address the criticisms and challenges it faces. For example in the past, the RSPO has been criticized for the weak assessment, verification and enforcement of its own standards. In particular, the RSPO has faced calls from investors for a more transparent and responsive complaints mechanism in relation to its standards on labour rights. However this announcement by Iceland further highlights the importance and relevance of the RSPO, sending a clear signal to the RSPO and the palm oil industry that buyers and stakeholders expect sustainability standards to be well ahead of where they currently are and that if they do not see more progress in the transition towards a more sustainable industry then they will consider abandoning the use of palm oil all together.
The relevance of the RSPO can be further highlighted by the recent example of IOI Group. Following several complaints from the NGO community regarding land clearing and peatland development, the RSPO found that IOI Group did not meet their Principles and Criteria,

leading them to suspend IOI’s RSPO certification in April 2016. As a result, a number of IOI Group’s largest buyers suspended procurement contracts with the company, these buyers included Unilever, Mars, Kellogg’s and Nestle. The significant fall in share price that followed highlights the commercial relevance of RSPO certification.

RI: What obstacles do the RSPO face in achieving its aims?
IWG: A number of the near-term challenges and obstacles facing the RSPO include the proper enforcement of its own standards to offer credible assurance to buyers and the need for stronger standards as buyers’ policies and expectations begin to surpass the RSPO’s standards, hindering its relevance for industry leaders. The RSPO’s strength as a multi-stakeholder body can also arguably introduce a weakness by constraining the pace and direction of change, which could see it fail to keep up with any changes that occur within the industry. In addition, it has limited ability to influence governments, who may be apprehensive over the influence that the RSPO has over an industry that is of significant importance to national development. Finally, the RSPO faces the challenge of a palm oil market which is running against the adoption of broader sustainability certification. Emerging palm oil markets in parts of Asia and Africa are often unwilling to pay a premium for sustainable palm oil, meaning suppliers are not rewarded for their sustainability efforts. Despite this, RSPO’s review of their Principles and Criteria, expected to come into force by end of 2018, is still very welcome as it will hopefully ensure the standards remain relevant and reflect good sustainability practices.

RI: What are the risks faced by investors with exposure to palm oil? Are investors aware of these risks?
IWG: The IOI example highlights one extent to the financial risks that investors are directly exposed to.However, investors also face the risk of losses if their investments in palm oil companies lose their license to operate. This can occur if an investee consumer company faces boycotts because of their use of unsustainable palm oil or of a producer of palm oil with poor sustainability practises loses sales to a major trader that has commitments to NDPE. The Sustainable Palm Oil Investor Working Group has been operating for 8 years so these risks are well known to the members of PRI.

RI: What is the degree of exposure that western investors have to this sector compared to Asian investors? (is the sector funded by local money or foreign money?)
IWG: Western investors’ exposure to palm oil differs considerably. While some may be exposed via passive or semi-passive investment strategies in emerging markets, others may be directly exposed, i.e. some of the growers have local government/pension funds as large shareholders, but a number of global investors are also listed as major shareholders. Although Asian banks may have a larger share in the loans to palm oil growers, western investors are also indirectly exposed through investments in regional banks that finance palm oil growers. Due to the complexity highlighted above generating positive outcomes on this issue may require application of challenging means of leverage, as permissible by different investors’ approaches and portfolio positions: i.e. a) working with regional banks, b) working with major regional buyers, c) working with growers and traders to advocate / implement standards and monitoring through the chain (the latter, is already ongoing). This could also call for possibly working with domestic institutional investors of these companies with more substantial holdings – but this has not always proven to be easy. Responsible investors who are also members of the PRI should consider joining the IWG since working as members of a larger coalition typically carries more weight than acting alone.