In our longstanding engagement with producers of palm oil, we have pressed them to adopt sustainable business practices. We have also engaged with some of their customers on the issue.
Setting the scene
Palm oil is a versatile commodity that can be found in everyday products from chocolate to shampoo. It is the world’s most widely used vegetable oil, accounting for 65% of all vegetable oil traded internationally, according to WWF. The efficient crop produces the most edible oil per hectare of land2 and so has proven profitable for its cultivators, which is why the palm oil plantation business has been expanding rapidly.
However, the development of palm oil, the vast majority of which is produced in Malaysia and Indonesia, has been accompanied by controversies. While in Malaysia the business expanded largely by converting former rubber plantations to ones growing palm oil, in Indonesia the development of palm oil plantations has involved the destruction of primary forest of native tree species. Palm-oil producing companies and small-scale farmers have been accused by NGOs and other organisations of starting fires deliberately to clear existing vegetation to make room for new palm oil plantations. The fires have become so widespread they are known as the Southeast Asian haze. In addition, producers have allegedly been involved in land-grabbing and disputes with local communities when developing new plantations. Others have faced accusations of poor working practices in and a lack of oversight of their supply chains. However, the industry also provides significant employment to local people, as well as infrastructure
As local regulators have been slow to date to introduce strict legislation on palm oil, in our engagement, we have urged companies to produce and sell only sustainable palm oil and to follow best practice guidelines. To mitigate reputational risk, we have also encouraged their customers to buy from companies producing sustainable palm oil.
In 2004, the Roundtable for Sustainable Palm Oil (RSPO), a multistakeholder forum, which includes palm oil producers, NGOs and banks, was set up with the aim of promoting the growth and use of sustainable palm oil products. It offers a certification scheme for growers to prove that their palm oil is produced in a sustainable manner. Producers are required to meet a number of criteria on environmental impact, including on biodiversity and carbon emissions, as well as on social matters, for example the rights of workers and local communities. However, to date approximately only 21% of global palm oil is RSPO-certified and questions have been raised about the RSPO’s work and robustness of its certification criteria, for example that it does not take into account greenhouse gas emissions and that certification does not guarantee that the palm oil in a product is deforestation- or exploitation-free. Nevertheless, we believe that the organisation has helped raise awareness about the challenges of palm oil production and made meaningful changes to the way the industry operates.
If any RSPO members are negligent in their plantations, they face expulsion from the certification group. While a recently expelled member continues to sell crude palm oil without RSPO certification, several major global companies have stopped buying from it and it was placed on review for downgrade by credit ratings agency Moody’s.
As companies were not certified when we began our dialogue on sustainable palm oil, we set objectives on RSPO certification. We are pleased that since our engagements started, the Malaysian palm oil plantations of companies we have had dialogue with and some of whose operations we were able to visit, have obtained 100% RSPO certification. However, due to land registry disputes or technical issues, full certification has been more difficult to achieve in Indonesia.
Sustainable Palm Oil Manifesto
Furthermore, pressure from asset owners and investor representatives like ourselves contributed to the Sustainable Palm Oil Manifesto, which launched in 2014 and aims to build on the existing sustainability commitments of RSPO signatories.
The manifesto seeks to achieve common objectives held by key stakeholders in the palm oil industry, such as growers, traders, processors and end-users, to ensure sustainability in the entire chain from cultivation to consumption. It commits palm oil producers and traders to refrain from deforestation of high carbon stock (HCS) forest, as defined by a study, to create traceable and transparent supply chains and to protect highly fertile peat areas. The manifesto also requires companies to ensure continuous positive economic and social benefits for the local communities living near palm oil plantations. Signatories have to prepare their own time-bound plan to implement these principles within 12 months of signing but are free to adopt a reasonable timeframe to achieve their objectives. They also have to publish their time-bound plans and file regular progress reports.
Progress in selected engagements
As a result of the pressure from investors and customers, as well as the above-mentioned initiatives, in our engagement with companies on sustainable palm oil, we have witnessed significant progress.
In 2009, a report by Greenpeace alleged that Southeast Asian palm oil giant Golden Agri-Resources (GAR) was contributing to large-scale deforestation in Indonesia, where it owns nearly 500,000 hectares. This resulted in a number of its customers, including Unilever, Nestlé, Kraft and Burger King cancelling their contracts. Although they made up less than 3% of GAR’s revenue, the incident tarnished the company’s reputation.
We commenced engagement with GAR in 2009. We focused on the objective of ensuring RSPO certification for all of its palm oil and on putting together a credible strategy to address wider sustainability allegations, including the setting of stretching targets. We also pressed GAR to dedicate more resources to the issue of sustainable palm oil.
In 2010, the company committed to certifying all of its plantations to RSPO standard by 2015. A year later, it developed a forest conservation policy to ensure sustainable growth and gained RSPO membership. It also worked with Greenpeace and The Forest Trust on a different version of HCS, which classifies land and sets out which vegetation types have more or less carbon content than a plantation. This helps identify where palm oil development would contribute to carbon storage. In addition to these commitments, GAR pledged to oversee a wider cultural change in its attitude to environmental sustainability. This included ensuring that its lead independent director would oversee environmental and social risks and that the company’s environmental commitment would be driven by a culture of awareness of the importance of sustainability at the board level. The company also nominated an executive director responsible for sustainability issues to enhance the board’s reporting. Unilever and Nestlé resumed buying from GAR in 2011.
In 2012, we conducted a site visit to GAR plantations in the Riau region of Indonesia to inspect its methods of consultation with the local community and management of impacts on carbon emissions, as well as to assess whether its commitment to full RSPO certification by 2015 was sufficiently stretching. Following the visit, we engaged the company’s senior independent director to urge the board to publish a time-bound action plan for implementation of its sustainability strategy. GAR understood the importance of demonstrating its commitment to sustainability and agreed to strengthen its standard operating procedures on sustainability matters.
We continue to monitor the company as it has begun palm oil operations in Africa, which raises new challenges and requires different approaches to be developed beyond those in Asia.
Kuala Lumpur Kepong
Our engagement with Malaysian multi-national Kuala Lumpur Kepong (KLK) was sparked in 2012 by allegations of illegal logging of an Indonesian peat forest in violation of a two-year moratorium by one of its subsidiaries. In addition, a contractor of KLK was accused of operating slave labour-like conditions at its palm plantations, allegations which KLK has denied. The company has also been accused of failing to respect the rights of community groups in Papua New Guinea and Liberia.
Throughout our engagement, we have pressed the company to implement better labour standards in its supply chain. While denying the allegations of labour abuses by one of its contractors, KLK confirmed that it had terminated its contract with the contractor concerned and provided us with a document intended for its customers explaining its labour practices. We welcomed its efforts to reduce the use of contract workers, improve communications with customers and engage with NGOs. We were also encouraged by the significant amount of time the board spent discussing these issues and the visits to the estates by directors to gain first-hand experience. However, we noted the company’s lack of public disclosure of this and other sustainability issues and urged it to publish a policy commitment, highlighting the significance of reputational risks facing palm oil producers. We continued our discussion on its progress in obtaining RSPO certification for all of its plantations, to ensure that the company was on track to meet its targets.
In 2014, the company became a signatory to the Sustainable Palm Oil Manifesto. This was followed by an announcement that the signatory companies would halt development of potential HCS areas while the HCS study was underway. In addition, KLK obtained RSPO certification for all of its plantations and mills in Malaysia and is working on meeting this target for Indonesia. We welcomed the publication of the company’s first sustainability policy and its intention to engage with its contractors and suppliers to ensure their adherence to the policy. Furthermore, KLK has vastly improved its reporting, including the disclosure of fires within its plantations.
Public policy engagement
While we have seen improvements at the company level, it is important not to forget the role governments can play. By creating legislation and supporting a change in farming of smallholders, they can pave the way to sustainable palm oil production. As part of our engagement, we jointly signed a letter to the Indonesian government calling on it to make sustainable palm oil practices compulsory. As part of the collaborative engagement on palm oil led by the Principles for Responsible Investment, we have met indigenous community representatives from tropical forests in Indonesia, Colombia, Peru and Liberia, to listen to their concerns – related to land-grabbing, human rights violations, deforestation and contamination of land and water – and investigate their claims further.
However, challenges remain. One of the biggest is the oversight and control of small-scale farmers who often work on concessionary lands of global companies. These smallholders typically supply local customers who may not be interested in sourcing palm oil in a sustainable manner and lack investors who could pressure them on sustainability. This makes it difficult for them to see the potential economic benefits of producing sustainable palm oil. Large companies may have zero burning policies in place but smallholders on concessionary lands can still choose to ignore these.
We continue to engage with large palm oil producers to seek their help in extending best practice to smallholders, while putting pressure on the regulators to raise industry standards. We urge the laggards in the industry to catch up with its leaders and push to ensure that the companies in our engagement programme achieve full RSPO certification in Indonesia. Furthermore, we engage with the companies to ensure that they apply best practice standards in new sourcing markets where they expand their palm oil activities, such as Africa and Latin America.
2 Sustainable path: Who is leading palm-oil reform?, CLSA Blue Books 2016