“Sustainable” palm oil: problematic certification systems and responsible investment

A new NGO campaign to bolster certification for the Roundtable on Sustainable Palm Oil could be a marker for finance in the sector.

With over 52 million tons consumed in 2012, palm oil is the world’s most popular vegetable oil, and is only getting more popular. Consumption is growing at 8% a year, compared to 3% growth for the rest of the vegetable oil industry. (i) It is also gaining market share in biofuels, with consumption in Europe up 365% since 2006. The industry has expanded even more rapidly in the wake of the financial crisis. Since 2008, major financial institutions have extended more than $20bn in financing to the palm oil industry. (ii) This expansion, decades in the making, has built an enormous global market. It has also precipitated widespread environmental and social damage. The rapid growth has driven investment in enormous parcels of land in equatorial regions across the globe where oil palms thrive. For the most part, the only undeveloped, viable land in these regions is occupied by carbon-rich rainforests. Deforestation and land-use change is a leading cause of greenhouse gas emissions, accounting for roughly 15% of global totals, more than agriculture, manufacturing, or transportation. (iii) In 2009, Indonesia was ranked by the World Bank as the third-largest greenhouse gas emitter globally due to high levels of deforestation and conversion of carbon-rich peatlands, most of which was undertaken to expand palm oil production. (iv) The palm oil industry is also listed as one of the most notorious for using child and forced labor, according to a recent U.S. Department of Labor report. (v) Additionally, conflicts between palm oil companies and rural communities occur with disturbing frequency. The palm oil monitoring group SawitWatch has identified 663 ongoing land disputes just in Indonesia as of January 2014. (vi) This is also unfortunate as it relates to responsible investing because oil palm agriculture also has a number of advantages that make it one of the most potentiallysustainable options for producing vegetable oil. On average, one hectare of oil palms will yield almost 4 metric tons of oil, which is almost 10 times the amount produced by a hectare of soy, and seven times the production of rapeseed. While accounting for 32% of total global production of oils and fats in 2012 (including animal sources), oil palms occupied only 5.5% of oilseed crop area. (vii) The trees begin producing fruit after approximately 30 months, and have a viable production lifespan of up to 30 years. Destructive practices have been a part of the industry for decades, and in the late 1990’s some major environmental groups rolled out large public awareness campaigns. In 2004, the Roundtable on Sustainable Palm Oil (RSPO) was formed as a response. This group brought together companies involved in all phases of the palm oil industry, as well as conservation and social non-governmental organizations, with the stated mission of transforming markets to make sustainable palm oil the norm. For palm oil producers and manufacturers, the RSPO has been a success. As of 2014, it has almost 900 member organizations, representing 40% of global production. It also includes some of the largest multinational consumer goods conglomerates such as Nestle, Unilever, and SC Johnson, who have all pledged to transition to sustainably sourced palm oil. (viii) However, for many of the conservation NGOs supporting the initiative, it has become apparent that the RSPO fails to sufficiently address a number of sustainability-related issues. The organization has weak standards, a questionable certification system, and inadequate compliance mechanisms. In 2012, 72% of RSPO certified palm oil was traded using the “book and claim” system. Certified producers are given certificates for every ton of palm oil produced, then sell these certificates to end users (such as food manufacturers) via an online marketplace. The holder can then use the
“sustainably certified” claim for any palm oil they wish to sell, regardless of origin. Certificates are traded anonymously, offering no traceability for end users. The majority of the remaining certified palm oil is traded using the “mass balance” system, which is designed to track palm oil passing through a particular supply chain. A trader who buys 10 tons of palm oil from any certified source is then allowed to sell the same amount of “certified’ oil, regardless of origin. The “segregated” supply chain does manage to deliver 100% certified oil, mandating complete separation and tracking from beginning to end. However, these sales end up as a very small part of the “certified sustainable” palm oil market. (ix) The RSPO provides paths to “sustainable certification,” which may remedy reputation problems, but inadequately curbs practices that constitute some of the most blatantly destructive exploitation of human and natural resources. Furthermore, the perception that RSPO certification effectively mitigates the issues can permit irresponsible companies to abuse the organization’s weak compliance scheme.
At the time of inception, the RSPO was a pioneering organization. It formed because local legal systems afford extremely inadequate protections against practices that have been exposed as deeply harmful to the environment and local communities. While enforceable legal regulations are an important long-term goal, climate change, human rights abuses, and biodiversity loss demand more immediate solutions. Just as sustainability concerns prompted the formation of the RSPO, the lagging effectiveness of the RSPO’s sustainability measures prompted the 2013 formation of the Palm Oil Innovations Group (POIG). This new collaboration between industry groups and conservation NGOs such as Greenpeace and the World Wildlife Fund lays out higher environmental and social standards for palm oil production, andestablishes much more rigorous compliance protocols. The POIG promotes sustainability with a strong, comprehensive framework addressing deforestation, greenhouse gas accountability, agro-chemical use, and water accountability. Additionally, the organization insists on forming fair partnerships with local communities and high standards of corporate integrity. Unlike the RSPO, member companies will be strictly monitored for compliance, and must make measurable progress towards sustainability goals. As problematic as the RSPO is, the organization nonetheless represents important progress that should not be abandoned. Although the criteria may be inadequately enforced, the framework the RSPO established is a sustainability entry point for companies in all parts of the industry. The POIG recognizes this in the opening sentence of its charter, stating: “The Palm Oil Innovations Group aims to support the RSPO through building on RSPO standards and commitments.” Building from the RSPO’s foundation, the POIG is an outstanding example of how consumer activism, shareholder engagement, and industry collaboration can make a real difference toward building comprehensive industry guidelines and strict compliance structures. Beyond this, the POIG has created a set of standards that enable responsible investors to consider involvement in this increasingly critical segment of the global food system.

Christian Wood is a Research Assistant at Portfolio 21 Investments

(i) Rainforest Action Network, (2013) “Conflict Palm Oil” Rainforest Action Network, San Francisco
(ii) Conant, J. (2014) “What’s driving the palm oil industry’s human rights abuses and environmental destruction.” Friends of the Earth International, Amsterdam. Link
(iii) World Wildlife Fund, “Deforestation, WWF, Washington DC. Link
(iv) Buttler, R. (2010) “Indonesia is the 3rd largest GHG emitter but reducing deforestation offers big opportunity” Mongabay.com, San Francisco. Link
(v) Green Century Funds, “Institutional Investors Press Palm Oil Industry to Stop Burning Rainforests and Driving Climate Change.” (2013) Green Century Capital Management, Boston. Link
(vi) Conant, J. Ibid.
(vii) Sime-Darby, (2013) “Palm Oil Facts and Figures,” Sime-Darby, Kuala Lampur.
(viii) Reyes, E. (2013) “Palm oil industry key culprit behind deforestation, haze in Indonesia.” Eco-Business. Link
(ix) “Certifying Destruction” ibid.