Investors turning up the heat on Asia’s palm oil buyers

The cost of growing appetites

Amidst Asia’s rising urbanisation and growing middle class, the region’s growing demand for personal care products, processed foods, and dining out is putting unprecedented pressure on palm oil production.

Unless urgent progress is made in achieving sustainable and transparent supply chains, satisfying Asia’s thirst for palm oil will come with significant environmental and social cost, undermining local communities, critical forests, and global climate change goals. The PRI’s Investor Working Group on Sustainable Palm Oil is therefore expanding its engagement efforts to include major Asian palm oil buyers, whose influence on regional supply chains has the potential to turn this critical commodity into a sustainable development success story. 

Palm oil, the highest yielding and most versatile vegetable oil, is a key ingredient in half the consumer goods products on our supermarket shelves. Yet the 2019 forest fires across Indonesia were a stark reminder of the risks and impacts of unsustainable production. Exacerbated by unusually dry conditions, the fire and resultant toxic haze not only devastated local communities and ecosystems, racking up US$ 5 billion in economic losses. Crucially, it released around 700 Mt of CO2 into the atmosphere —an amount equivalent to South Korea’s annual emissions —pushing the world further into climate chaos. Images of the region in a burning inferno, just like what we have seen more recently across Australia, should therefore serve as a wake-up call for what would become the norm in a 3 or 4 degree warmer world. 

Addressing emissions from the agriculture, forestry and land use (AFOLU) sector, which accounts for 24% of global emissions, will be central to mitigating climate change.

“How we use land for food, fuel and fibre must become a key part of the climate and sustainable development solution,” says Dr Keith Lee, Senior Vice President of WWF’s Asia Sustainable Finance team based in Singapore.

“This is also a necessary condition for creating resilient and sustainable investment portfolios, and investors must harness their power to drive ambitious commitments by their portfolio companies to eliminate deforestation and human rights abuses through supply chains”.

Investors must harness their power to drive ambitious commitments by their portfolio companies to eliminate deforestation and human rights abuses through supply chains

Dr Keith Lee, Senior Vice President, WWF Asia Sustainable Finance team

Asian demand can make or break sustainable development outcomes

In 2019, 10 Asian nations together accounted for 61% of global palm oil consumption—and this is set to grow. Not only could palm oil consumption double by 2050, but it will increasingly be consumed in Asia, which could be home to 65% of the middle class by 2030. Indeed, Asia’s Fast Moving Consumer Goods (FMCG) sector is projected to grow at a CAGR of 8% between 2018 and 2025 compared to 5.4% globally. Will this growth exacerbate deforestation, climate change and human rights abuses in supply chains, or will it instead support sustainable and inclusive development in the region as well as global climate change mitigation efforts?  

This question is particularly important for producer countries Indonesia and Malaysia, where palm oil production is intrinsically tied to livelihoods. In Indonesia, for example, 40% of palm oil is grown by smallholders. To date, producers have also not been adequately rewarded by markets for implementing sustainable practices, with only around half of RSPO-certified palm oil sold as such. Clear commitments to buy sustainable palm oil – and to support smallholders to improve planting practices – would therefore go a long way in ensuring all stakeholders are mobilised and will benefit from the transition to sustainable supply chains.

Asian companies behind Western peers in implementing environmental and social safeguards

Analysis by WWF’s Asia Sustainable Finance team of 29 Asian food manufacturers with palm oil-dependent products suggests they are not yet adequately addressing palm oil related risks or driving sustainable outcomes in their supply chains. While these companies do acknowledge the importance of sustainability or the Sustainable Development Goals and Paris Agreement, few are moving beyond disclosing broad sustainability policies. For instance, board-level oversight of sustainability is not translated into associated KPIs for management or dedicated sustainability teams to turn commitments into action. Further, only half of the assessed companies extend sustainability commitments to their supply chains and just over a third monitor suppliers’ environmental and social performance. 

Additionally, despite palm oil being a key raw material for these companies, commitments and action to ensure the commodity is produced sustainably are largely missing. Nine participate in the Roundtable for Sustainable Palm Oil (RSPO) and have commitments to procuring 100% sustainable palm oil, however only six have zero deforestation commitments more broadly. Only four companies disclose their palm oil use and only six disclose what percentage of their palm oil is certified sustainable—both necessary metrics to track progress towards sustainable palm oil supply chains.  

There is therefore an urgent need for investors to drive greater ambition and transparency by their portfolio companies to tackle deforestation in consumer good supply chains through engagement with these companies. This will become a necessary condition for both companies and investors to develop relevant and comprehensive disclosures under the Task Force for Climate Related Financial Disclosures (TCFD) disclosures. In doing so, it will also be central to fulfilling investor commitments on issues like climate change and deforestation.

Investor engagement is escalating to drive urgent progress in this critical sector

Since 2011, members of the PRI Investor Working Group on Sustainable Palm Oil have been engaging with companies across the palm oil value chain, with the ultimate aim of creating a more sustainable palm oil industry. This engagement has primarily focused on the producers, refiners and traders of palm oil, and more recently several South East Asian banks. 

Shareholder engagement has made good progress. Several of the palm oil producers being engaged are now implementing No Deforestation, Peat or Exploitation policies and making progress towards 100% sustainable palm oil production. While ongoing engagement with South East Asian banks has seen a growing awareness of deforestation as a risk and more stringency in lending policies to the palm oil sector. Despite this, there is still a long way to go to transform the entire industry. 

“Through stewardship, institutional investors must act collaboratively to address growing systemic issues, with an explicit focus on achieving real-world outcomes,’ says Paul Chandler, Director of Stewardship at the PRI.

”In seeking to promote the transition to a sustainable palm oil industry, it is vital that investors escalate their stewardship efforts, using all the tools available to them to achieve this.”

In seeking to promote the transition to a sustainable palm oil industry, it is vital that investors escalate their stewardship efforts, using all the tools available to them to achieve this

Paul Chandler, Director of Stewardship, PRI

As the urgency to avert climate chaos and environmental collapse mounts, institutional investors will play a key role in driving sustainability outcomes through their stewardship and engagement efforts. By collaborating to push Asian FMCGs to make ambitious time-bound commitments to source 100% sustainable palm oil, investors can use their leverage to promote a more sustainable industry.

 

 

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