Incentivizing responsible palm oil cultivation
Engagement with companies on ESG issues is vital for ensuring environmentally and socially responsible palm oil plantations
Palm oil is a vital commodity that is an essential ingredient in many consumer goods. As the most land-efficient and versatile vegetable oil, it exhibits important benefits that make its cultivation a profitable activity.
The plant yields more oil per hectare of land than any other crop and accounts for almost 35% of the total edible oil market while only occupying 10% of the land allocated to edible oil production. The palm oil industry, therefore, presents an attractive value proposition for investors.
However, companies involved in the production, trade, processing and raw materials usage of palm oil are exposed to severe environmental and social risks, including deforestation, pollution, destruction of critical habitat, biodiversity loss, and serious human/labor rights violations.
Deforestation and biodiversity loss: According to Indonesian government statistics, deforestation due to clearance for palm oil plantations amounts to 2.9 million hectares or 40% of all agricultural land. Deforestation has a significant impact on the global carbon balance as the removal of trees releases carbon into the atmosphere, speeding up global warming. Additionally, the removal of acres of rainforest threatens the rich biodiversity in these finely balanced ecosystems, along with the habitat of species such as the orangutan and Sumatran tiger.
Peatland degradation increases risks of peat fires: Much of the peatland in Southeast Asia have been drained for activities such as agriculture and forestry. Peatland degradation starts with clearing and draining. A network of canals diverts water away from the land. Valuable timber is sold and the remaining vegetation is often cleared through burning. With the trees removed, the peat receives direct sunlight which dries it out further, causing it to be highly vulnerable to fire. Once a fire is started, it can burn three to four meters underground, continuing for months or even years. That is why fires, and the resultant haze, are common in Indonesia.
Human/labor rights: There are many palm oil companies whose human rights violations often hamper development of their palm oil concessions. Major controversies relate to land grabbing and displacements of indigenous people. The development and clearance of land for palm oil cultivation has deprived many local communities of their vital land and water resources. Several palm oil companies have also been linked to major labor rights violations, including the use of child labor in remotes areas of Indonesia and Malaysia.
Ensuring sustainable palm oil production requires investor engagement throughout the value chain
The relevance of palm oil as a commodity in today’s economy has to be acknowledged. However, as production volumes have surged, so have the environmental and social challenges. These problems are often complex and require various stakeholders to work together.
As more than half of all packaged goods sold in supermarkets contain palm oil, it is the extensive palm oil value chain that ultimately drives demand for the commodity. We are of the opinion that the broad presence of palm oil in global food supply chains does not allow for an undifferentiated divestment or exclusion approach. This neither contributes to sustainability improvements in the industry, nor does it recognize the nuances of varying practices and standards among industry players.
Therefore, focusing primarily on engagement along the value chain to drive long-term change, complemented by targeted exclusions, is the way forward in driving sustainability improvements.
A structured engagement on financially material ESG issues with investee companies not only preserves long-term shareholder value, but also incentivizes the investee company to make progress on financially material sustainability issues. At the same time, it is important to draw a line for companies that are not making any progress, nor have any intention of improving their corporate practices.
At Robeco, our engagement programme considers the sustainability performance of individual companies at various stages of the palm oil supply chain, measured against a set of objectives. These objectives are based on international best practice and sustainability standards that are aligned with the work of the Roundtable on Sustainable Palm Oil (RSPO).
Established in 2004, the RSPO is a non-profit organization that aims to unite stakeholders from all sectors of the palm oil industry. As the most relevant standard for sustainable palm oil, the RSPO has established processes to develop, implement, verify, assure and periodically review standards for the supply of it. The RSPO has developed a set of environmental and social criteria that companies must comply with in order to produce Certified Sustainable Palm Oil (CSPO).
Its platform was further strengthened by the adoption of a revised set of principles and criteria in November 2008. This has integrated a key expectation towards palm oil plantation owners – commitments to no deforestation, no development on peatland, and no exploitation of works, also known as "NDPE" policies.
We believe that RSPO certification can play an important role in ensuring environmentally and socially responsible palm oil plantations. There is a significant difference between sustainably and non-sustainably produced palm oil, which strengthens the case for engaging with companies to achieve sustainable practices.
As a result, Robeco’s engagement efforts on the topic are framed and guided by companies’ level of certification against the standard. This provides an objective and internationally recognized benchmark of sustainability performance.
Action is needed to mitigate the environmental and social risks related to the production of the most efficient vegetable oil. Ensuring sustainable palm oil production requires investor engagement throughout the value chain with clearly outlined expectations – and consequences.
Peter van der Werf is engagement specialist in Robeco’s Active Ownership team.
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