The journey towards a sustainable palm oil industry is a tough one, with many challenges ahead. But we do believe that those companies that are willing to change for the better need help from various partners. This is part of our responsibility to work on a brighter and sustainable future. We believe that helping the most sustainable players in this industry to become truly sustainable is the way forward. At the same time, we will not hesitate to divest from palm oil companies that are unwilling or unable to make the required progress.
For some investors the negative aspects are reason enough to remove palm oil companies from the investment universe all together. This begs the question whether engagement can help to transform the industry. Contrary to popular opinion, and not opting for the easiest solution, we believe it can, as long as clear rules and principles are observed.
Robeco has been discussing sustainability issues with palm oil producers in Malaysia and Indonesia for a number of years now, with different levels of success and hence different outcomes. The environmental, social and governance (ESG) issues associated with palm oil, with extensive deforestation to create new plantations at the core, have been subject to one of the longest running engagement programs at Robeco.
We have also brought new rules to the game. In order to be part of our investment universe, palm oil companies need to meet some clear objectives. In 2019, Robeco stepped up its process around palm oil, requiring all investee companies to become members of the Roundtable of Sustainable Palm Oil (RSPO) and to have at least 20% of their plantations already certified, with a clear roadmap to moving to 100%. From 1 January this year, the threshold for RSPO certification was raised to 50%, with a clear pathway to having at least 80% certification by the end of 2024.
Robeco uses engagement to help companies reach these objectives. For those companies that fell just above the indicated 20%, and now the 50% RSPO certification threshold, Robeco set up a structured enhanced engagement program to support them to achieve the set certification target. We only team up with best-in-class companies to help them meet the requirements for a sustainable palm oil industry.
Over the last three years, the active ownership team has been engaging with six companies based in Malaysia, Indonesia and Singapore. The 2019-initiated enhanced engagements came to an end in December 2021, with four companies successfully reaching the 50% certification threshold. Robeco’s updated palm oil policy came into effect during this quarter, and our engagement program addresses those investable companies that remain below a 80% certification level. As part of the program, we actively divested from two companies that no longer meet our minimum standard for palm oil: in our assessment they had not made enough progress.
By far the biggest issue has been with producers clearing forest – sometimes pristine rainforest – in their concession to prepare plantations for planting new palm trees to meet growing demand. Part of the problem occurs because palm oil production is highly fragmented in countries such as Indonesia, where 40% of the crop comes from two groups of smallholders.
The first group consists of organized small-scale farmers that sell their palm oil to the processing facilities of the large listed companies. Second, you have the independent smallholders who sell to whoever pays the best price. Palm oil is an important means for these producers to earn their livelihood, giving them access to global supply chains. However, their small scale renders it difficult for them to pay the certification costs that are no problem for the large industrial companies.
We expect the companies we are engaging with to use their role to support these groups of smallholders to actually get organized and certified, as well as press their governments for higher standards and higher risk management systems. We realize real progress is needed, but we believe companies can only make it with help of other stakeholders.
The efficiency of palm oil is significant compared to other oils in terms of the quantity produced per hectare, with very little need for fertilizers. It is important to recognize the sheer value of palm oil to these emerging economies, and try to strike a balance between sustainability and much-needed economic activity in emerging markets.
This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation. The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license. An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.