Stockholm (NordSIP) – Last year’s COP15 prominently put biodiversity and natural capital at the centre of global sustainable investment agenda. Among the many issues covered by these broad categories, palm oil is a recurrent and salient concern on account of its impact on climate change via deforestation.
To address this issue, and on the heels of recent controversies, Swedish asset manager (AM) Atle, which markets products under the Humle Fonder brand, organised a round-table discussion about palm Oil. Atle took advantage of the visit to Stockholm by Paolo D’Odorico, Thomas J Graff Professor of Natural Resources at the University of California at Berkley, who joined NGOs, asset managers, and financial advisors on Tuesday, August 22nd, for a discussion on this topic.
Palm Oil – Pros
The Palm Oil industry is a relatively controversial sector among sustainable investors and consumers. The controversy stems from the fact that not all is bad about palm oil but some of it is very bad. As an input for food products, palm oil is particularly appealing because it is naturally semi-solid at room temperature. This physical property is appealing in baking because solid and semi-solid fats mix with flour in a manner that produces a more desirable texture in the baked product. Moreover, it also does not oxidize rapidly, which allows it to lengthen the shelf life of processed foods.
Alternatives to palm oil are generally liquid fats such as rapeseed oil and other vegetable oils that need to go through a process called hydrogenation to achieve the equivalent physical properties. However, this process generates a trans fat. While that intermediate product might possess desirable baking properties, trans fats are a well-established source of cardiovascular disease. Thus, from a healthcare perspective, palm oil is a good alternative.
There are also a number of popular products derived from palm oil that are commonly used in cosmetic and hygienic products. According to the Global Cosmetic Industry magazine, “palm oil is a superior ingredient for making good quality balms, creams, salves, lipsticks and many other cosmetic products. It has no scent or taste, produces a creamy texture, keeps products moist, binds ingredients together and extends shelf life.”
Moreover, Sweden’s Ax Foundation argues that palm oil “is an extremely productive crop that requires less water, less land, less fertilizers and less pesticides than other oil plants. Palm oil production supports several million people financially, many of them small farmers. Palm oil produced in a socially and environmentally sustainable manner is therefore a good option.”
The Palm Oil Industry – Cons
However, palm oil is extracted from palm trees which grow best in tropical environments. 85% of palm oil comes from fields in Indonesia and Malaysia, where it is produced by encroaching on tropical rainforests by a mix of large plantations and smallholders. Estimates suggest that palm oil fields cover 270 thousand km2, or 0.18% of the land surface of planet Earth.
The implication for sustainable investors becomes evident when considering that “if tropical deforestation were a country, it would rank third in CO2 emissions,” equivalent to 8% of annual CO2 emissions, according to the World Resources Institute (WRI). “Annual gross carbon dioxide emissions from tree cover loss in tropical countries averaged 4.8 gigatons per year between 2015 and 2017”, or 0.013% of the global estimated 35.74 gigatons of CO2 produced annually in the same period.
Moreover, as Rain Forest Rescue argues, as much as 61% of the palm oil imported into the EU is used as biofuel. Since 2009, the mandatory blending of biofuels into motor vehicle fuels has been a major cause of deforestation, the German NGO argues. This fact has made palm oil a major battlefield in the war for sustainable renewable energy in Europe.
Lastly, controversies about palm oil are not confined to environmental impacts. In 2019, 4.42 million people in Indonesia worked in the palm oil industry, according to the Indonesian agriculture ministry (via ILO). Plantation workers have little bargaining power and capacity to advocate for themselves. This raises the other controversial, but less prominent, concern of labour rights violations and toxic working conditions in palm oil plantations.
Atle’s Palm Oil Round Table Discussion
Two months ago, an investigation by Sveriges Natur, a Swedish environmental NGO, found that AAK AB, a Swedish-Danish food company and one of the largest Palm Oil companies in the world, was buying palm oil from illegal palm plantations in the Tesso Nilo nature reserve, on the island of Sumatra in Indonesia. Since 2016, there has been a ban on plantations in the reserve to protect the rainforest and biodiversity. Despite this, Sveriges Natur’s investigation found that AAK trades with at least 20 mills that buy palm fruits from the area. These findings are made worse by the fact that AAK has made a commitment to 100% sustainable palm oil by 2025. Worse still, these findings echo others from 2020, suggesting that either little has been done to address this issue or that the efforts that have been made were not successful.
The issue is problematic for Swedish asset managers such as Alecta, Lannebo, Nordea, SEB, Skandia, Danske Bank, Öhman and Atle, which have invested in the company. To address this issue, Atle, a Swedish investment management company that markets mutual funds under the Humle Fonder brand, organised a roundtable discussion on the topic, allowing participants to engage with Professor D’Odorico and learn from his academic research.
The round table included sustainability experts representing non-governmental organizations, asset managers, and financial advisors and focused on the issues of legitimate property rights, customary access rights, ethical production, investments and consumption, forest regeneration, data transparency, accountability and regulation, among many other issues.
Property Rights and Communal Agricultural Methods
Participants’ main concern focused on whether it was possible for palm oil production to be sustainable in light of the problems described above. Palm oil production is practised by large plantations and by small landowners. The issue, as D’Odorico argued, is that while most investors focus on the legality of the land where the palm oil is produced, the truth is that property rights, as we understand them in the West, don’t necessarily make sense for local Indonesian communities. Traditionally, these groups exploit the land communally and in a shifting cultivation style.
“Small landowners often do not have a property title for the land they use. Large plantations, on the other hand, are run on a larger scale thanks to concessions that the state auctions off. While these are official and legal, they are not free of ethical controversy. Sustainable investors must consider whether these concessions displaced local communities and whether the amount of tropical forest being auctioned off is consistent with ecological balance. They need to evaluate whether primary forests are destroyed to establish new plantation and the magnitude and significance of greenhouse gas emissions and habitat loss associated with the land use change in these land concessions. Legal palm oil is not necessarily ethical palm oil,” D’Odorico argues.
According to David Seekell, PhD, Head of Sustainable Investing and ESG at Atle, who engaged with AAK on this issue, this was one of the problems. AAK faces a tradeoff between environmental and social concerns. Researchers have found that palm cultivated in the national park often comes from marginalized communities who’s customary rights were ignored when the park was established and surrounding lands were given as concessions to other groups. AAK argues that lasting change comes from engaging these producers and supporting their production outside the national park, rather than blacklisting them without providing legal alternatives.
Alternatives, Consumers and Transparency
The benefits of palm oil also argue against its abandonment. “The use of alternative vegetable oils like rapeseed oil in baked foods is also requires hydrogenation to create similar physical as palm oil, which results in trans fats. Moreover, they are also less efficient. It would take more than 6 times the amount land and considerably more water to produce a less desirable rapeseed oil-based alternative to palm oil,” D’Odorico says, echoing the Ax Foundation’s point.
While transparency is crucial, it is not always the golden bullet. Consumers cannot be expected to be able to address this issue given present trends. “Palm oil is pervasive in so many of our consumption goods that it would be impractical to expect consumers to avoid it. It would also probably be unjust to lower-income consumers who would have to bear an added cost. Instead, the burden should fall on companies to ensure sustainable production practices and on investors to incentivise these practices,” Seekell argues.
Another concern expressed by Seekell was the pervasiveness and complexity of palm oil in consumer goods. “While the presence of palm oil in food products is relatively easy to identify, the same cannot be said of cosmetic products where derivatives of palm oil might be used, rather than the oil itself. These derivatives are well identified but are so chemically specialised that even an advanced consumer would struggle to recognise them as such,” Seekell says.
“Consumers should have as much information as possible to make an informed decision, but the focus should be on companies,” D’Odorico agrees. “More transparency about the source of palm oil and the entire supply chain is crucial for investors and regulators to ensure that companies abide by the correct standards and ESG commitment. WRI as well as the Land Matrix database rovide relevant data that can be used to monitor deforestation. If companies are required to complement and update this data, all would benefit,” D’Odorico adds.
Regulation, Accountability, Certificates and Inclusion
Increased transparency is one of the main goals of the EU Deforestation Regulation (EUDR) approved in April 2023. The new legislation, which came into effect at the end of June, seeks to ensure that European consumption does not contribute to deforestation and forest degradation and reduce carbon emissions caused by EU consumption and production by at least 32 million metric tonnes a year.
To this end, the EUDR requires sellers to ensure that their products are deforestation-free, are produced in accordance with the relevant legislation of the country of production; and are covered by a due diligence statement. Perhaps most important of all, sellers must provide “geo-location coordinates, latitude and longitude of all plots of land where the relevant commodities and products were produced, as well as date or time range of production.”
The main hope is that increased transparency demanded by the EUDR will bring about a higher standard of accountability for companies towards the public and the state, but also to its investors. However, D’Odorico insists that accountability must also reflect the inclusion of a wider circle of stakeholders in the creation of standards and in monitoring whether they are actually upheld by companies. “Monitoring and certification that is overwhelmingly dominated by industry cannot be the answer to this problem. NGOs and local stakeholders must also be included,” D’Odorico argues.
“Certificates are only as useful as they are credible. Industry bodies and industry-set standards are not sufficient. Companies cannot regulate themselves. There’s a clear conflict of interest. And even if they could, they cannot see the whole picture unless they include inputs from other stakeholders, like local communities, whose interest and welfare may otherwise be ignored,” D’Odorico explains.
“There are at least 9 sustainability certifications applied to palm oil, including some that are supposed to be administered by independent groups, such Malaysian Palm Oil Certification Council. However, there isn’t always independent evidence that they are effective. The Roundtable on Sustainable Palm Oil (RSPO) is the best studied because it has been around the longest and has financial backing from big companies and NGO’s. Research generally shows that RSPO has a beneficial impact, but that the impact is incomplete and often much less than what consumers probably imagine when buying a product says ‘sustainable palm oil’,” Seekell concludes.