« View All Blog Posts

Finding Palm Oil: The Journey Continues
By JJ Jahania

Palm_oil_production_in_Jukwa_Village,_Ghana-09Instant noodles. Laundry detergent. Ice cream. Shampoo.

At first glance, it may appear that these items are unrelated; however, they actually have more in common than you might think. All of these products can be found in your local grocery store, and they all contain palm oil.

Palm oil is the most widely-used type of vegetable oil in the world. In fact, it is so common that if you go to your local supermarket and pick up any packaged product, there is roughly a 1 in 2 chance that it contains some amount of palm oil.

With such a high usage of palm oil, there needs to be a large supply chain for production from the fruit of a palm oil tree. Today, 85% of global palm oil output comes from Malaysia and Indonesia and these countries have come to account for this industry as a major source of GDP. In Malaysia, the palm oil industry makes up roughly 6% of the country's GDP, which is equivalent to about $16.1 billion U.S. dollars. Current projections estimate that this number will more than triple in the next few years. The island nation of Indonesia supplied over 50% of all palm oil in the world during the decade from 2000 to 2009.

Revenue aside, there is a major downside to palm oil production. Since palm oil is produced through farming, palm oil plantation owners must clear forest areas to grow palm oil plants. The result is high levels of deforestation. From 2000 to 2012, Malaysia had the highest rate of deforestation in the world, losing almost 15% of its rainforest. Indonesia lost more than 8% of its total rainforest.

So, how do we prevent deforestation due to palm oil production if palm oil is so essential to many of the items we use on a daily basis? The responsible investing community has made it a goal to find a solution to this dilemma.

In fall of 2014, First Affirmative and Trillium Asset Management to filed a shareholder resolution on behalf of Yum! Brands shareholders, asking for data that shows how the company is actively working to reduce the negative environmental impact of its palm oil supply chain. As a direct result, Yum! Brands made immediate improvements to its corporate palm oil policies and the resolution was withdrawn. The company's updated Yum! Palm Oil Policy, representing the business's commitment to sourcing only sustainable palm oil going forward, has been published on its corporate website. The policy includes promises to avoid producing palm oil on High Conservation Value landscapes or High Carbon Stock forests, as well as to avoid development on peatlands and use best practices for managing plantations that currently exist on peat.

This is just one example of the type of impact the SRI community has been able to make in terms of working toward sustainable palm oil. We have written in the past about other ways our community is working toward a sustainable supply chain here and here.

As our journey continues, it turns out that it is relatively easy to secure commitments that companies will change their policies. The big issue instead has turned out to be getting companies to walk their talk. Ultimately, it will be up to government officials to hold companies accountable. Strong legislation regarding the production of palm oil will be necessary in order to enforce the commitments that businesses are making. Recent action by Indonesia's Environmental Ministry suggests that public policy can be effective in controlling palm oil production, as the organization rejected a proposal by dozens of palm oil companies to convert a large portion of the nation's forests into palm oil plantations.

Despite this positive sign, there is a still long way yet to go, as global reports indicate that there is a large amount of illegal palm oil getting into the system. In fact, in Indonesia's Riau Province, the nation's main palm oil producing region, it is estimated that half of all palm oil plantations are in violation of one or more laws. To further this point, right now, only about one-fifth of palm oil is certified sustainable by the Roundtable on Sustainable Palm Oil (RSPO), an initiative supported by palm oil industry shareholders that aims to develop global standards for sustainable palm oil.

Just last month, members of the RSPO voted to kick IOI Group, a large Malaysian agriculture business, out of the organization. This move comes after IOI failed to answer to accusations that it has been driving earnings through deforestation and human-rights exploitation. As a result, IOI can no longer sell RSPO-certified sustainable palm oil. Wall Street analysts, such as Moody's, are now reviewing the option of downgrading their ratings on IOI Group, citing concerns that profit margins will shrink due to the expulsion from RSPO.

But it's important to note is that RSPO standards represent a bare minimum requirement. The commitments to ending deforestation and other harmful activities that many firms are making on their own go far beyond what RSPO requires, yet it still took RSPO six years of investigation before it decided to expel IOI. This begs the question on whether businesses actually intend to follow through on their promises, if they can't even meet the very low bar set by RSPO.

Due to increasing concerns that many RSPO-certified companies are still engaging in irresponsible palm oil practices, RSPO has launched RSPO Next, which is its updated set of voluntary standards. These modified standards are stricter than the old guidelines, putting into effect a no-tolerance policy on deforestation and minimum wage requirements for all employees. It is important to remember that these are only voluntary standards, so companies won't be forced to abide by them, as of now.

It makes sense that there is a positive correlation between beneficial sustainability practices and overall business performance. When companies actively work to preserve our planet, they attract socially-conscious investors, and this helps fuel growth. However, despite the solid logic, making the transition to a sustainable palm oil supply chain is no easy task. Corporate supply chains can be extremely complicated, and making a smooth change within an intricate process can take a lot of time. While several corporations like Unilever, Kellogg, and Nestle have publicly stated they will no longer purchase palm oil from IOI, others like Bunge and General Mills have admitted that they will keep purchasing from IOI until they can implement changes in their supply chain.

While many corporations have spoken out about no longer using IOI, several others are not talking, and this is leading many people to question what these companies are thinking. Now that more and more people are paying attention to corporate sustainability policies, the pressure on those companies currently remaining silent to disclose their information will only continue to grow.

RSPO's expulsion of IOI Group sets a standard, and makes it clear that there will be consequences for corporations that exploit the environment. Overall, there is much work to be done in order to achieve a global palm oil supply chain that is fully sustainable, but the early efforts by the SRI community and organizations such as RSPO are a promising sign of future developments.

First Affirmative understands that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?

NOTE: Mention of specific companies or securities should not be considered an endorsement or a recommendation to buy or sell that security. Past performance is no guarantee of future results.

Posted: July 12, 2016