Palm oil’s tussle with ESG

THE Malaysian palm oil industry has had its long-standing struggle with environmental, sustainable and governance (ESG) matters long before the term came about.

As the world’s most produced and traded edible oil, palm oil’s versatility can be seen through its use in a wide range of food and non-food products, which led to the remarkable palm oil consumption growth.

A commonly used vegetable oil, it also well known for its high crop yield. Both traits combined makes the crop an important source of economic growth and livelihoods especially for its top two producers, Indonesia and Malaysia.

However, palm oil is often linked with negative social and environmental issues, such as the large amount of greenhouse emissions and land deforestation that occur as a result of palm cultivation.

This bad reputation was further exacerbated this year when US Customs and Border Protection (US CBP) banned imports from three of Malaysia’s firms on suspicions of forced labour.

The US CBP has said it found forced labour indicators such as excessive hours, abusive living and working conditions, debt bondage, intimidation, physical and sexual violence, as well as retention of identity documents.

The three are Top Glove Corporation Bhd from the rubber gloves sector; and FGV Holdings Bhd and Sime Darby Plantations Bhd from plantations.

But contrary to its stigma, palm oil is the most efficient crop in terms of oil yield to land use, said Kenanga Investment Bank Bhd (Kenanga Research) analysts Marie Vaz and Adrian Kok.

“To produce one tonne of oil, palm only requires 0.26 hectares of land, whilst its biggest competitor soy would require 7.7 times that amount at 2.0 hectares of land,” the duo said in a special report in May.

“According to the International Union for Conservation of Nature, palm oil accounts for 35 per cent of global vegetable oil production on only 10 per cent of global land use, proportionately less land usage than its peers.

“Meanwhile, it is estimated that soybean oil accounts for 26 per cent of global vegetable oil production on 40 per cent of global land use, based on data compiled by Our World in Data from UN Food and Agriculture Organization (FAO) 2017.”

The misconception portrayed by international organisations vilifying palm oil over rival oils has been damning to the industry reputation, Kenanga Research said, while brands that highlight the exclusion of palm oil in their products and attempt to substitute palm oil with other less efficient oils are either greenwashing or are sorely misinformed.

“Since rival oils have lower yields versus palm oil, replacing palm oil is not a solution at this point,” the analysts added.

“However, ensuring that palm oil is produced sustainably will be the best way forward for the industry and the planet.”

Building up credibility for the country

SUSTAINABILITY is growingly crucial in the local palm oil industry as Malaysia is the world’s second-largest supplier of palm oil. Notably, palm oil constitutes 30 per cent of the global oils and fats production, and plays a significant role in fulfilling the demand in the global oils and fats market.

As such, Malaysia has come up with its own mandatory certification scheme named the Malaysia Sustainable Palm Oil (MSPO) for all players in the palm oil industry, including plantation, processing (milling), supply chain, and downstream processes (refinery).

This is a scheme that aims to promote and ensure the sustainability of the industry. Currently, the scheme which increases the standards of sustainability is undergoing public review. This scheme also aims to ensure that all players comply with these standards.

The Malaysian government has been working closely with MPOB to support all the players in the industry, especially smallholders to ensure that they fulfil and/or meet the requirements.

Based on the latest statistics by the Malaysian Palm Oil Certification Council (MPOCC), out of a total of about 5.9 million hectares of palm oil plantation, 5.17 million hectares of plantation and 1.081 million hectares of smallholders (88.13 per cent) have received the certification.

“In my opinion, I believe that with this move coupled with support across the board, the palm oil industry is moving in the right direction,” commented Heriot-Watt University Malaysia associate head of its school of engineering and physical sciences, Professor Dr Denny Ng, to BizHive.

“Based on my observation, it may take time to educate and empower the local farmers and get them to shift from old to current practices. However, I wish to highlight that the engagement between planters and industry players has greatly improved over the years.

“In addition, the pressure from the international buyers on the demand for certified oil has catalysed the need for the industry to obtain Roundtable on Sustainable Palm Oil (RSPO) and MSPO certifications.”

Right now, the Department of Standards Malaysia (Standards Malaysia) together with the Malaysian Palm Oil Certification Council (MPOCC) are in the process of reviewing the MS 2530:2013 series standards.

The Draft Malaysian Standards (DMS) was developed by the Working Group for Malaysian Sustainable Palm Oil and is monitored by Technical Committee on MSPO under Standards Malaysia. There are eight DMS that are being developed and will undergo public comment.

The Public Comment for all drafts began on May 1, 2021 and runs up to July 4, 2021.

 

Greater demand for sustainable palm oil needed

THE demand for certified palm oil is increasing globally, Kenanga Research said, which was a step in the right direction, “but this comes at a higher cost to palm oil producers.”

“Currently, the demand for sustainable palm oil is mostly driven by Europe and America with corporate giants such as Nestle and Unilever committed to using 100 per cent responsibly-sourced palm oil by 2020.

“However, Malaysia’s main export countries are China and India which are less demanding of sustainable palm oil, preferring cheaper alternatives,” the research house continued.

It is estimated that only two per cent of China’s and three per cent of India’s palm oil imports are RSPO certified, compared to certification rates in the European Union of 80 to 90 per cent.

Globally, it is estimated that environmentally certified palm oil accounts for only 19 per cent of global production, of which 42 per cent comes from Malaysia and 51 per cent from Indonesia.

“Clearly, more work needs to be done to push for sustainable palm oil demand, but palm oil majors have already bit the bullet by concentrating on sustainable palm oil supply ahead of demand requirements,” Kenanga Research said.

Heriot-Watt University’s Ng believe every party in the value chain has room for improvement, especially for smallholder plantations.

“This is due to the fact that smallholders may have limited resources as compared to a mega plantation. Therefore, having them adhere to the same practices may not be as practical,” he said adding that more support should be given to local smallholders.

“In addition, downstream players should also play an instrumental role to ensure that they support certified palm oil.”

For shared prosperity, Ng proposed that all incentives obtained from the sale of certified oil can be shared with all stakeholders.

“Currently, we do not have a clear mechanism for the distribution of incentives and there is a limited number of buyers who are willing to pay a higher price for certified palm oil.

“To ensure the sustainability of our palm oil sector, we must also emphasize the need for waste management in the industry. Over the years, many technologies were developed to convert waste, known as biomass. The waste is converted into value-added products and energy. However, to date, biomass is not fully utilised in Malaysia.

“In a nutshell, the concept of circular economy should be applied in the palm oil industry to achieve full sustainability. By having a circular economy in place, we can re-design the products and convert them into other resources that can be used within the country and economy.”

Meanwhile, from a tech perspective, palm oil players can utilise technology to address ESG concerns.

“Traceability of the products within the value chain is the key to address some of the concerns by the palm oil industry. Therefore, we may use technologies such as drones, sensors and to improve traceability.

“Besides that, a systematic framework can be applied to assist the stakeholders to improve the traceability of their products.”

Ng further proposed mechanisation as another important area for the palm oil industry to consider in all areas from plantation to processing.

“Although there are many efforts to develop mechanisation for the harvesting system, the technology available cannot be applied widely due to the current plantation landscape.

“Thus, we need to introduce more innovative technology and planting strategies that will be suitable for our local environment.

“In summary, no ground-breaking technologies are being introduced and applied in the industry. We need to change as the palm oil industry must evolve to prepare for the advent of the fourth industrial revolution. By adopting new tech, we will be able to enhance the overall efficiency of the palm oil industry.”

ESG efforts exist, but plantations’ visibility lacking

IN spite of all their hard work, palm oil players surprisingly suffer from poor exposure to its good efforts towards ESG.

AmInvestment Bank Bhd (AmInvestment Bank) analyst Gan Huey Ling affirmed that the Malaysian plantations scene has “poor optics”.

Negative publicity from the US CBP ban on Malaysian palm products from FGV Holdings and Sime Darby Plantation has amplified the misperception that the palm oil industry in Malaysia is fraught with labour abuse.

“This, coupled with the EU’s ban on palm biodiesel from year 2030F onwards, are expected to exert pressure on the ESG ratings of the palm oil sector. As such, we only have a three-star ESG rating for most of the palm oil companies in our coverage,” Gan said in her own plantations ESG analysis.

“Overall, we believe that the palm industry’s weakest links within the ESG framework are fire (under Environment), greenhouse gas (GHG) emissions (Environment) and labour practices (Sustainability).”

For example, during dry weather, the issue is open fire burning. Haze resulting from fires in Indonesia triggers accusations of open fire burning. Although the plantation companies do not practise open fire burning to clear land, the risk is that neighbouring fires or fires started by smallholders would spread to the estates owned by the planters.

This is prevalent during periods of drought such as that in the third quarter of 2019. In Indonesia, smallholders are allowed to use fire to clear the land. On average, smallholders in Indonesia own less than two hectares of land although government definition allows for ownership of up to 25 hectares of land.

GHG emissions are mainly from palm operations and conversion of land into oil palm. According to a 2009 RSPO report, greenhouse gas (GHG) emissions from palm oil operations amount between 920 and 2,007kg of carbon equivalent emissions per tonne of CPO per year.

Most of the GHG emissions from palm operations come from palm oil mills’ effluents.

Gan saw that GHG emissions from the conversion of grass land or forests to oil palm estates are estimated to range from 425kg to 7,813kg of carbon equivalent emissions per tonne of CPO per year. To reduce GHG emissions, the three large Malaysian planters have set up biogas power plants, methane capture plants and filter belt presses. IOI Corporation, Sime Darby Plantation and Kuala Lumpur Kepong Bhd have also set targets to reduce GHG within a certain time period.

 

Deforestation

Deforestation is particularly harmful to the environment as a third of global carbon emissions are stored in tropical rainforest, but when trees are burned or removed, this carbon is released back into the atmosphere, increasing global temperatures.

Kenanga Research saw that from 2002 to 2020, Malaysia lost 2.7 million hectares alone of humid primary forest (a loss of 17 per cent) while Indonesia lost 9.75 million hectares of humid primary forest (loss of 10 per cent), making up 34 and 36 per cent respectively of their total tree cover loss.

Globally, palm oil ranked third among crops that cause deforestation, behind maize and soy, but the main culprit for deforestation is in fact livestock.

“On a national level, Malaysia and Indonesia that make up 85 per cent of the world palm oil supply have taken active measure to minimise the rate of deforestation.

“Malaysia’s Plantation Industries and Commodities Ministry Secretary General Ravi Muthayah has recently (in 2021) reiterated the countries’ commitment to limit total oil palm cultivated area at 6.5 million hectares, with no encroachment to forest areas by banning conversion of permanent forest reserved area for oil palm cultivation and no new planting allowed in peatland areas.

Indonesia saw a 75 per cent drop in deforestation between 2019 to 2020, according to the Ministry of Environment and Forestry, a steady decline since 2015 which is a result of multiple policies aimed at protecting the country’s forests which include permanent ban on issuing new permits to clear primary forests and peatlands, a moratorium on new oil palm plantation licenses, and increased enforcement against environmental violations.

Even though deforestation rates are declining, it is important to note that it is still ongoing.

“On a corporate level, Sime Darby Plantations and IOI Corporation both have a No Deforestation, No Peat, No Exploitation (NDPE) policy,” it noted. “Additionally, IOI Corporation is committed to reforestation, and the protection of high conservation value (HCV) of 3,655 hectares, high carbon stock areas and other conservation land set aside of 11,509 hectares.

“As for Sime Darby Plantation, they have a total of 46,435 hectares identified for HCV and Conservation Set Asides (CSA) land across its global operations.

“When it comes to new development for Sime Darby Plantation, a thorough assessment is required to avoid deforestation; this include considering six HCVs, and if any of the six criteria are met, Sime Darby Plantation will not proceed with the development.”

 

Fire and haze

In the past, fires at plantations have been linked to slash and burn activities by farmers, smallholders, and oil palm companies.

If left unchecked, open burning activities during extreme droughts can easily spread from sparks carried by wind or peat fire that can travel underground, exacerbating the fires. Kenanga Research noted that the latest major incidents in South East Asia were in 2019 and 2015 after the major incident back in 1997.

To address this, most local palm oil players implement a zero burning policy and no peat to mitigate the harm caused by fire during the dry season that can result in a transboundary haze.

“Since the slash and burn method is a far cheaper way of land clearing for local farmers and smallholders, the oil palm giants have established ongoing collaboration efforts with neighbouring communities, government bodies, civil societies and industry associations,” Kenanga Research observed.

“Sime Darby Plantation has a near real-time online hotspot dashboard to monitor beyond a five-kilometer radius of their concession areas via satellite systems.

“As for 2020, the year did not see a transboundary haze situation in the South East Asia likely on slower clearing efforts due to Covid-19. The effectiveness of ongoing fire prevention efforts has yet to be seen, but we concur that active and transparent monitoring facilities are a step in the right direction.”

 

Labour

Among other matters, mounting scrutiny of labour rights issues at plantations, ranging from forced labour, exploitative and dangerous working practices have rattled the sector in recent years.

From primarily focussing on environmental concerns, the plantation sector is increasingly prioritising labour and human rights.

The bigger players are already addressing these concerns head on, and it is important to note that with RSPO or MSPO certification (which the palm oil majors tend to have) most social and labour issues are prioritised and audited by third parties.

AmInvestment Bank’s Gan believed that the issue was more of a miscommunication.

“The three large planters in our coverage are now taking the effort to explain the calculation of wages to their workers,” she said in her analysis.

“Hotlines have also been established for workers to voice their grievances anonymously.

“As it is difficult to monitor every oil palm estate, we believe that the onus is on the estate supervisor/manager to ensure fair treatment and enforcement of good practices.”

Gan further said that labour practices may have to be constantly audited, adding that plantation companies would have to go above and beyond RSPO requirements in the long term.

“A few plantation companies in Malaysia have set up panels to engage with non-government organisations (NGOs) directly,” she added.

“Also in the future, the planters may have to engage independent third-party consultants to audit their labour practices periodically as checks and balances. We reckon that costs relating to ESG compliance would rise going forward.”

To address labour and human rights concerns, IOI Corporation conducts internal as well as external monitoring with audit certifications, labour specialist such as BSR and NGOs such as Finnwatch and Tenaganita.

It is also important to note that IOI Corporation does not engage in recruitment fees (or runners) for pre-employment of workers, which has been a key issue behind the scandal, abuse and mismanagement of foreign workers.