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Engaging for sustainable palm oil

03-10-2016 | Insight | Peter van der Werf Palm oil is used in many products including food and cosmetics. It is faced with several environmental and social issues that have become a reputational risk. We are engaging with companies in this industry to improve their performance on issues such as human rights, deforestation and labor standards.

Speed read
  • Palm oil companies face environmental and social issues
  • This can expose investors to financial and reputational risks
  • We are engaging with several companies in this industry

Palm oil is an edible oil, which yields more oil per hectare of land than any other crop and is therefore more profitable. It accounts for almost 30% of the total edible oil market. In the last years, production and demand have increased dramatically, bringing economic prosperity to the countries producing and trading it, especially Indonesia and Malaysia. The two countries together account for around 85% to 90% of global palm oil production.

Issues in palm oil cultivation

Growth in palm oil production is challenged by significant environmental and social issues that have become a reputational risk and potentially undermine the industry’s growth model. The main risks are deforestation, fire and haze and human rights.

Deforestation
According to the World Wildlife Fund, an area the size of 300 football fields of rainforest is cleared each hour to make way for palm oil production. This has an indirect impact in the shape of greenhouse gas (GHG) emissions as the removal of forest releases carbon into the atmosphere. Also, the removal of acres of rainforest threatens biodiversity, along with the habitat of species such as the orangutan.

Fire and haze
Peat is soil that contains more than 65% of organic matter. Peatland degradation starts with clearing and draining, often through burning. Once started, fires can burn three to four meters underground, continuing for months or even years. Fire and the resulting haze are common in Indonesia. In 2015, haze was declared an emergency in multiple provinces, causing more than half a million cases of acute respiratory illness.

Human rights When huge areas of forests are cleared, local communities are displaced without consent. Land grabbing is common in palm oil plantations, which poses huge reputational risks for the companies down the value chain. The palm oil industry has been linked to major human rights violations, including child labor and poor working conditions.

When environmental and social risks are not managed properly, they may result in financial and reputational risk for investors. For example, violation of regulations regarding palm oil cultivation could lead to suspension of the certification status of a plantation, with a loss of the certification premium as a result. Similarly, conflicts with local communities and laborers could lead to industrial stoppages and operating losses. Pressure from NGOs may also cost the company’s license to operate and result in  loss of clients.

Engagement

We identified companies such as traders, processors, food producers and retailers. We believe together these companies can influence various parts of the chain to deliver and use more sustainable palm oil. We started our engagement on this topic in 2014 and we are now mid-way. We set five objectives for the companies in our engagement:
  1. Respect human rights
  2. Enforce better Labor conditions at suppliers
  3. Implement Sustainable agricultural practices
  4. Pay living wages rather than minimum wages
  5. Support capacity building of small farmers (smallholders)

Highlights of our engagement

During the last few years, we have seen the largest traders and processors develop palm oil policies to ensure palm oil is not derived from any form of exploitation.

Traceability is becoming increasingly important for companies. Companies that cannot trace back to the source of their products may increasingly find that access to market is closed for them or that they have less favorable pricing terms. Buyers like Carrefour are actively encouraging their palm oil suppliers to work with a separate supply chain for sustainable palm oil.

Nestlé sources 50% of its palm oil from smallholders, for Wilmar this is 40%. Olam has committed to an ambitious plan to develop 30,000 hectares for smallholder palm oil production in Gabon.

ADM has achieved around 92% mill traceability until the third quarter of 2015. Golden Agri Resources (GAR) has mapped the supply chain to the mill level and aims for full 100% traceability by end of 2017. Bunge achieved 67% traceability back to the mill at the end of 2015. While we value traceability advancements, we will continue to ask for further traceability back to the fields, which is an even more daunting task.

Conclusion

As most companies under engagement have shown commitment to sustainability in their palm oil sourcing and have established a palm oil policy, the next step for them is to track and monitor progress. Companies like GAR, Wilmar, ADM, and Bunge have also gone a step further by updating stakeholders on their progress through regular communication on their website. We believe that the industry needs to progress on these lines.
 
We will continue to engage with the largest growers. As they are at the start of the value chain and most exposed to the risks on the ground, we urge them to ensure that no more land is cleared nor peat is drained and food security is addressed by adopting better agricultural practices like improving yield, water management, and pest control methods. Ensuring land rights are being respected is also important to ensure the license to operate.
 
We will endorse improving traceability and certification systems for processors and traders to increase customer confidence in exploitation-free palm oil. We will push for better supply chain management systems at the processors in order to set clear expectations to the growers and refiners on the sustainability aspects of palm oil. 

Despite the important progress made, there is a long way to go. We continue to engage to ensure that the much needed industry transformation continues. This would lead to a sustainable palm oil trade that benefits the companies, investors and society at large.

Peter van der Werf

Engagement Specialist
"We add value to our investment portfolios by assessing how companies deal with ESG risks and create more awareness at the companies of the materiality of these risks. Social issues are challenging to assess but have the ability to significantly hurt a company’s license to operate, reputation and brand value."

Biography

Peter van der Werf is engagement specialist at RobecoSAM’s Governance and Active Ownership department and engages with companies to address social issues. This dialogue aims to encourage companies to improve on the most material sustainability issues to enhance their competitiveness and profitability, as well as generating clear benefits for investors, companies and society.

Mr. van der Werf covers the consumer staples, consumer discretionary and healthcare sector. Specific areas of expertise are labour rights, supply chain management, nutrition management and social issues in the Food & Agri sector. He is member of the steering comite of the Principles for Responsible Investing working group on Labour Standards in the agricultural supply chain. Building on his previous experience in the Food & Agri sector he is involved in impact investing research efforts within the Robeco group. Mr. van der Werf gained over four years of professional experience in business development in frontier markets before joining RobecoSAM in 2011. Mr. van der Werf holds a master’s degree in Environmental Sciences from Wageningen University with a minor in Entrepreneurship.

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Peter van der Werf
Engagement Specialist


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