• Investment
  • 30 October 2023

Equity Research - Sustainable palm oil

Sustainable palm oil

Singapore saw the return of transboundary haze in early Oct 2023. The 24-hour Pollutant Standards Index (PSI) recorded a reading between 67 and 123 on the evening of 7 Oct, the first time air quality in the city state hit unhealthy levels since 2019. Transboundary haze is often associated with the burning of peatlands in neighbouring countries like Indonesia for oil palm cultivation. Extreme weather conditions like El Niño may intensify dry conditions and increase the chances of haze, especially during the north-east monsoon (end-Nov to Mar) and the south-west monsoon (Jun to Oct).

Southeast Asia’s worst haze crisis in 2015 was estimated to have resulted in 100,000 premature deaths due to respiratory problems in the region, and cost Indonesia and Singapore up to USD5.2b and USD1.83b respectively due to lower economic productivity during the period. Given the negative social and financial implications, it is no wonder that palm oil has gained a bad reputation.

If a complete boycott on the palm oil industry is not practical, then how can we push for palm oil production to become more sustainable? In this report, we explore the definition of sustainable palm oil, what global organisations like the Roundtable on Sustainable Palm Oil (RSPO) are doing to encourage the adoption and production of sustainable palm oil, and the potential that stakeholders in Singapore have to exert positive influence on regional palm oil activities.

The case for sustainable palm oil

This forest, in South Sumatra, Indonesia, was cleared to plant oil palm trees. AFP.

Complete boycott of palm oil industry not practical

The palm oil industry has long attracted much scrutiny and controversy, due to its links with deforestation, transboundary haze, forced labour, and conflict with local communities. Oil palm grows optimally in humid, tropical regions, often competing with biodiverse and carbon-rich ecosystems like rainforests for land. Illegal and unregulated clearing of forest land for palm oil production has displaced flora and fauna, some of which may be endangered, as well as local and indigenous communities. There have also been social concerns such as intimidation of smallholder farmers, forced evictions, forced and/or child labour, and violations of workers’ rights (e.g. poor working conditions and meagre salaries).

From a food security and conservation perspective, however, a complete boycott of palm oil will not be practical. Palm oil is the most efficient crop for producing vegetable oil, with a yield of 3-4 times that of alternatives such as soybean, rapeseed, and canola oil. In turn, vegetable oil is so versatile that it is almost ubiquitous, found in daily objects from cooking oil to soap to chocolate. Consequently, a ban on palm oil may lead to more land being devoted to vegetable oil production, thereby threatening other natural ecosystems and communities. This would also take away the livelihoods of millions of workers and their families.

Instead, stakeholders like companies, governments, consumers, investors, and financial institutions can push for palm oil to be produced more sustainably. The Roundtable on Sustainable Palm Oil (RSPO) defines sustainable palm oil as that which has been “farmed, processed, distributed, and sold responsibly with strict rules that protect animals, the environment, and people who live and work in oil palm producing companies”. Sustainable palm oil is therefore underpinned by three goals: (i) halting deforestation; (ii) protecting wildlife and the environment; and (iii) treating communities and workers fairly.

What does sustainable palm oil look like?

Environmental impact

Deforestation not only displaces wildlife and indigenous communities who depend on natural resources to sustain their way of life, but also results in soil erosion, coastal flooding, and, consequently, water pollution. Healthy forests serve as valuable carbon sinks; hence, deforestation also causes greenhouse gases in the atmosphere to increase and exacerbate global warming.

RSPO standards ensure that forests with areas of High Conservation Values (HCV) and High Carbon Stock (HCS) are protected and managed during the production of sustainable palm oil.

Since Nov 2018, oil palms grown in peat-rich soil have been excluded from sustainable palm oil production. This is because the draining of tropical peatlands for the cultivation of oil palms causes the peat to decompose and release copious amounts of carbon dioxide into the atmosphere. It is also a high fire risk; peat fires are difficult to extinguish as they can smoulder deep underground, releasing particulates that are harmful to human health and often associated with transboundary haze.

Individual kernels of an oil palm bunch at an oil palm plantation in Sepang, Malaysia. AFP.

Economic & social impact

A 2020 study by the European Parliament Research Service found that palm oil production supports some seven million smallholders globally, providing jobs to four million people in Indonesia and nearly a million more in Malaysia, oftentimes in remote areas where other forms of work are difficult to find. On a macroeconomic level, the provision of livelihoods to rural communities helps to: (i) uplift them from poverty; (ii) support the development of public infrastructure such as schools, roads, and healthcare facilities; and (iii) increase human capital. It is therefore unsurprising that the palm oil industry has become a key driver of economic growth and development in producing countries like Indonesia – which in turn motivated the rampant deforestation experienced in the 2010s.

According to RSPO, the workers and communities behind the production of palm oil that was grown in line with its standards are treated fairly and respectfully, enjoying good working conditions and ethical business practices that are in line with international and local standards such as the International Labor Organisation (ILO) and its Conventions on Forced Labor, and the United Nations (UN) Guiding Principles on Business and Human Rights (2011), amongst others. For new land development projects, RSPO Certified Growers are also required to get Free, Prior and Informed Consent (FPIC) from local and indigenous communities, to ensure that palm oil is produced without land conflicts.

How do we get there?

Oil palm trees at a plantation in Mindanao, Philippines. Palm oil is extensively used globally for biofuel, processed food and toiletries. AFP.

National commitments and country-level initiatives set the tone for the local palm oil industry

According to RSPO, national commitments refer to country-level initiatives, spearheaded by industry and/or government, to forge alliances towards certified sustainable palm oil commitments. Such alliances are crucial in: (i) raising awareness about sustainability issues using a ground-up approach; (ii) building public support for ambitious climate action; and (iii) serving as a source of knowledge or resources for companies and other stakeholders who wish to but may not otherwise know how to begin on their sustainability journey.

The North American Sustainable Palm Oil Network (NASPON) was established in Dec 2017, bringing together associations, civil society organisations, consumer goods manufacturers, foodservice retailers, and palm oil traders and producers to work towards 100% certified sustainable palm oil (CSPO) in North America and across the globe. In Europe, initiatives across the individual countries – for instance, the German Forum for Sustainable Palm Oil (FONAP), Italian Union for Sustainable Palm Oil (Unione Italiana Olio di Palma Sostenibile), and Danish Alliance for Responsible Palm Oil – actively engage in activities both domestically and within producer countries to promote sustainable palm oil adoption and production, such as participation in working groups and knowledge exchanges.

In this part of the world, Support Asia for Sustainable Palm Oil (SASPO) was officially incorporated in 2017. Its members include small and medium-sized enterprises (SMEs), local and regional chains, and multinational corporations (MNCs) representing more than 80 brands and 200 food and beverage properties. SASPO aims to increase the availability and usage of RSPO-certified sustainable palm oil in Southeast Asia through education and awareness activities for businesses and consumers.

In 2020, Indonesian President Widodo signed into law an enhanced Indonesian Sustainable Palm Oil (ISPO) certification system. This means that certification is mandatory for all palm oil companies, including palm oil smallholders, and that the industry will have a grace period of five years until 2025 to achieve ISPO certification. There will also be stronger enforcement, as those who fail to achieve ISPO certification will be subject to sanctions, including temporary business suspension.

Singapore: Small but mighty

A 2019 study commissioned by WWF found that Singapore was a relatively small consumer of palm oil. That being said, Singapore’s palm oil imports had been growing over the past decade, due to an increasing demand for palm oil as a feedstock in the country’s growing biofuel sector. In Sep 2023, Singapore’s Acting Transport Minister Chee Hong Tat mentioned that the use of palm oil as a feedstock in the production of sustainable aviation fuel (SAF) would provide producers with greater flexibility – in contrast with the European Union (EU) which has banned the use of palm oil to manufacture SAF on sustainability concerns.

Despite its size, Singapore is home to three of the largest palm oil trading companies which together accounted for more than half of the world’s palm oil trade in 2021. Key stakeholders in Singapore can therefore be powerful catalysts for positive change in the palm oil industry.

Government / Regulators

The launch of the Singapore Green Plan 2030 underscores the city state’s commitment to long-term net zero emissions by 2050, explicitly addressing opportunities in a green economy and green financing. To reduce Singapore’s links with deforestation, the government can potentially enact mandatory requirements for the agriculture/commodities and financial sectors to ensure greater due diligence and supply chain transparency, and to promote sustainable procurement practices through a carrot-and-stick approach. Singapore authorities can also potentially spearhead transnational efforts to encourage sustainable palm oil adoption and to implement regional standards.

Banks & Financial Institutions

A research paper published by the Centre for International Forestry Research (CIFOR) in 2017 found that Singapore banks had provided SGD5.8b worth of loans to 15 major palm oil companies, making the city state the second largest lender to the sector after Japan. The interconnectedness of Singapore-based financial institutions with the palm oil ecosystem lends them significant influence and power to enable a shift to sustainable palm oil by incorporating ESG factors into lending decisions and setting ESG-related targets for borrowers. Therefore, financial institutions should continue to push boundaries, requiring new lending relationships with palm oil corporates to demonstrate alignment with No Deforestation, No Peat and No Exploitation (NDPE) or other similar policies, and ensuring reliable and consistent monitoring of commitments and targets. Financial institutions may also offer sustainability-linked loans pegged to more attractive interest rates that directly fund projects and initiatives by palm oil companies to further their ESG targets.

A worker from a palm oil plantation in Aceh, Indonesia, holding palm oil fruit. AFP.

Consumers & Investors

According to a 2021 study by WWF (Singapore) and Accenture, three in five consumers in Singapore are aware of the negative environmental and/or social impacts associated with palm oil – of which more than two thirds are concerned with palm oil sustainability. Amongst respondents, the level of awareness was the highest amongst youths (aged between 18 and 34), as well as consumers with a higher monthly household income.

Collectively, consumers and investors hold great power to vote with their dollars. By only purchasing products made from sustainably sourced palm oil, consumers can directly affect companies’ financial performance through their discretionary consumption choices. By staying informed and implementing an ESG screen when choosing where to put their money to work, investors can affect companies’ cost of capital and support green initiatives within the palm oil industry while growing their wealth. Altogether, this places real pressure on industry players to incorporate sustainability considerations into their business operations.

Companies

At the end of the day, companies – not just those directly involved in palm oil plantations, but any business that uses palm oil in its products – must appreciate the long-term impact of sustainability investments on their financial performance, as well as the communities and environments they operate in. Only then will they take targeted action in monitoring, managing, and reporting sustainability in their supply chains, and be accountable in adopting sustainable production methods.

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