By Nicholas Larsen, International Banker
Whether in cooking oil, chocolate, noodles, margarine, soap or even biofuels, palm oil is unequivocally the world’s most widely consumed vegetable oil today. But controversy and condemnation have followed the crop’s growing popularity every step of the way, as the expansion in global plantation capacity to meet this buoyant demand has led to colossal environmental and social upheavals, including the destruction of massive areas of primary vegetation, degradation of climate-essential peatlands, endangerment of local wildlife, triggering of countless forest and land fires, and sowing of resentments within local communities. It has even been linked to slave labour and human trafficking.
Now that the world is firmly ensconced in a sustainable-investing revolution, the need to solve palm oil’s production challenges has never been more urgent. As such, recent advancements made via the lens of ESG (environmental, social and governance), particularly the “E” and “S” components, could eventually prove crucial in making the ethical investment in this hugely polarising commodity possible.
An essential food first popularised among West African communities, palm oil has a long and illustrious history in global trade dating back to at least the 16th century. Even once briefly regarded as a luxury food item, it is now in hot demand as an essential, low-cost oil used in various foods and supermarket products. And with this oil typically derived from the fleshy, reddish-brown fruit of the oil palm tree, meeting this demand has required expansive plantations that have spread rapidly across the world.
Although plantations have recently sprouted up in Africa and Latin America, the overwhelming concentration of palm-oil production is found in Indonesia and Malaysia, together representing around 85 percent of global output. Indeed, as its most valuable agricultural export and third-most valuable export overall, palm oil accounts for around 11 percent of Indonesia’s export earnings. So, it should come as no surprise that endless, unerringly straight rows of oil palm trees can be observed on the islands of Borneo and Sumatra, sitting on terrain once home to dense, lush rainforests and indigenous communities. And with the production process taking several years to complete, requiring vast swathes of land and involving several key stages, including planting, harvesting, threshing, pressing and distributing, serious environmental and social problems have emerged that remain unresolved today.
A June 2021 report by Human Rights Watch (HRW) provided just one of many examples demonstrating the sheer scope and scale of the problem. Interviewing more than 90 residents of 3 local communities in West Kalimantan (Indonesian Borneo) regarding the conduct of palm-oil producer PT Sintang Raya, a subsidiary of South Korean Daesang Corporation, the research found that the government failed to protect the people of the land adequately from the harms caused by the introduction of oil palm tree plantations and largely disregarded the many climate considerations and land conflicts with local farmers.
Given that peatlands are the planet’s largest terrestrial tools for carbon storage, for instance, their decimation in favour of plantations was found to have had profound implications for climate change. “Peatlands in Indonesia store an estimated 80 billion tons of carbon, equivalent to approximately 5 percent of all carbon stored in soil globally,” the report noted. “At one time, Indonesia housed approximately 50 percent of the world’s total tropical peatlands, but that is rapidly diminishing as large-scale cultivation of these lands for oil palm plantations increases.”
There was also no genuine consultation with local residents, nor was adequate compensation provided for those whose farmlands were uprooted and replaced by plantations, as the report also noted, while local police even “harassed, intimidated, and prosecuted” those who protested. “Indonesian authorities are permitting palm oil companies to destroy peatlands and cause other environmental harm with scant regard for the rights of local communities or the environmental consequences,” stated the report’s author, Juliana Nnoko-Mewanu, HRW’s senior researcher on women and land. “The Indonesian government should ensure that companies comply with laws to protect residents’ land rights, as well as environmental laws, and do their part to address the climate crisis.”
Brazen deforestation remains perhaps Indonesia’s most serious outstanding palm-oil issue, while the unleashing of countless forest fires due to the burning of land to make way for the plantations has also proved hugely problematic in recent years, with deteriorating air-quality levels and spiking carbon emissions exacerbating the global climate crisis. Local wildlife, including endangered orangutans and Sumatran tigers, meanwhile, have experienced untold suffering amidst the wholesale destruction of their habitats. “Every year, it is estimated that between 1,000 to 5,000 orangutans are killed in Palm Oil concessions. That is a significant portion of the wild orangutan population which is lost—without fail—every single year,” according to the nonprofit conservation organisation Orangutan Foundation International (OFI). “After palm oil plantations are established, displaced starving orangutans are frequently killed in the most brutal ways as agricultural pests when they try to obtain food in the plantation areas.”
Meanwhile, other parts of the world have their own sets of sustainability challenges to address from palm-oil production. Indeed, when forest fires raged across Indonesia in 2019, palm-oil companies in the Democratic Republic of the Congo (DRC) were reported around the same time to be violating workers’ rights and dumping untreated waste. Another HRW report at the time found that Feronia Inc., a company that was being financed by development banks owned by Belgium, Germany, the Netherlands and the United Kingdom, “exposes workers to dangerous pesticides, dumps untreated industrial waste into local waterways, and engages in abusive employment practices that result in extreme poverty wages”.
So, what is the solution to this myriad of disasters? Confronted by the weight of problems not entirely dissimilar to fossil fuels, nothing less than outright bans and boycotts are, understandably, the only acceptable responses, according to many. The scrupulous ESG investor, meanwhile, might still want to learn more about the global initiatives seeking to establish clear environmental and social standards for palm-oil companies to follow to be deemed sufficiently sustainable.
Few organisations have gained more traction in this regard than the Roundtable on Sustainable Palm Oil (RSPO). Formed in 2004 by the World Wildlife Fund (WWF) [today, World Wide Fund for Nature], the Malaysian Palm Oil Association (MPOA), Unilever, AAK (AarhusKarlshamn) and Migros, the RSPO covers all stages of the palm-oil supply chain. The initiative brings together a diverse group of relevant stakeholders to develop key environmental and social criteria with which companies must comply to obtain RSPO certification, which internationally recognises their commitments toward minimising the impacts of palm-oil production on the local environment, wildlife and communities.
The Indonesian and Malaysian governments have also introduced important certification standards, such as Indonesia Sustainable Palm Oil (ISPO) and Malaysian Sustainable Palm Oil (MSPO), to which palm-oil firms operating in those respective countries must adhere. Over one-third of Indonesia’s total 16.38 million hectares of oil palm tree plantations are now ISPO-certified, while Malaysia’s deputy plantation and commodities minister, Datuk Siti Aminah binti Aching, stated in February that a whopping 97.88 percent of Malaysia’s 5.6 million hectares of oil palm tree plantations have obtained MSPO certification.
The global investment community, meanwhile, seems to be catching on to the E and S investing risks associated with palm-oil cultivation. BlackRock, for example, has stated that it assesses public disclosures from companies to determine the actions they are taking to address those risks against seven broad criteria: Sustainable Palm Oil Program, Management of Environmental Risks and Opportunities, Management of Social Risks and Opportunities, Remediation and Grievance Mechanisms, Supplier Relations and Supply Chain, Governance and Oversight, and Disclosures and Stakeholder Engagement.
But evidence shows that even BlackRock’s palm-oil-related activities have been found wanting. Revelations surfaced in 2021 that Golden Veroleum Liberia (GVL), a subsidiary of the world’s second-largest palm-oil company, Golden-Agri Resources (GAR)—which itself was an industry leader in investor ratings for environmental and social policies and of which BlackRock was a shareholder at the time, had admitted to destroying forests and violating the rights of indigenous people. A Bloomberg report stated that through its palm-oil operations in the Upper Guinean forests of West Africa, GVL had pledged to provide jobs and amenities, such as piped water, but instead “cut down the forest, deprived farmers of their land and polluted the water supply”.
A group of more than 60 indigenous leaders and activists worldwide wrote to BlackRock, stating that it should not continue to ignore the destruction of forests and similar ecosystems in South America and Southeast Asia. “Climate change isn’t simply a risk to be calculated in terms of profit margins,” they wrote. “It is a constant stream of risks to our peoples and our planet, which we face every day.”
As such, the glaring shortcomings of the ESG approach to palm-oil investing persist. “This is an example of a common problem with ESG ratings,” Andrew King, a Boston University Questrom School of Business professor of management and ESG measurement and corporate sustainability specialist, said of the GVL episode. “Their inaccuracy can protect bad actors by impeding pressure for real improvement.”