By Jeanne Stampe, Head, Asia Sustainable Finance , WWF and Lise Pretorius, Sustainable Finance Engagement Manager, WWF | 11 September 2018
“Current solutions to transform the way we use land for food, and palm oil in particular – despite seeing significant progress – will remain ineffective as long as Asian companies and banks continue to buy and finance unsustainable palm oil.”
Palm oil is the most widely consumed, yet one of the most contentious, vegetable oils on the planet. This high-yielding and versatile food commodity is in half the items on our supermarket shelves, but not without a cost: deforestation and the degradation of critical ecosystems, climate change, and abuses of labour and human rights.
As demand continues to grow amidst rising affluence, and with the agriculture and forestry, and land use (AFOLU) sector already contributing to 24% of the world’s greenhouse gas emissions, how we use land for food must become a critical part of the climate solution rather than the problem as things stand now.
Parts of the market are forging ahead.
Many of the sector’s large brands have sustainable sourcing policies in place, albeit varying in strength. These at least require certification to the most widely adopted certification standard, the Roundtable on Sustainable Palm Oil (RSPO) which is being revised to account for its shortcomings, or go further to include No Deforestation, No Peat, and No Exploitation (NDPE). Many international banks, too, go beyond RSPO to include NDPE commitments, and investors representing US $6.7 trillion have called for the RSPO revisions to catch up to these leading market practices.
Financial institutions representing US $81.7 trillion are also backing the Taskforce for Climate-Related Financial Disclosures (TCFD), which calls for the disclosure of forward looking and science based climate strategies and has recommendations for the food and beverage sector. Some banks are already rewarding more sustainable companies with loans that tie the cost of capital to environmental, social and governance (ESG) ratings – including companies in food supply chains.
While these developments are not without their challenges – for example how to monitor and enforce NDPE commitments – the arguably bigger threat to the sector is the continued “leakage” of unstainable palm oil into a secondary market with slacker requirements.
There are at least three reasons behind this, which must be addressed if we want to transform the palm oil sector into a sustainable development success story:
- The first is the tendency for companies to ‘clean-up’ supply chains by buying from already-sustainable suppliers. Rather than solving the problem, this merely displaces deforestation to surrounding landscapes, and will persist as long as smallholders are excluded from more progressive companies’ programmes. Given limited resources, technical capacity, or incentives, smallholders will continue to grow through expansion – often onto land critical to ecosystems and climate health – rather than through efficiency gains.
- The second is that the market will pick up what the pristine supply chains do not want. India is now the world’s largest importer of palm oil, while growing demand from emerging markets for palm oil is a key driver of deforestation in Indonesia and Malaysia. In fact, the major growth markets for palm oil are exactly those markets with softer sustainability standards – not only in China and India, but also the Middle East and Eastern Europe.
- The third is that Asian banks continue to lend to those sourcing or producing unsustainable palm oil without requiring time bound improvements on sustainability criteria as conditions for lending.
A new report by WWF and CLSA, one of Asia’s leading capital markets and investment groups, Keep Palm outlines how companies, banks and investors can play a role in lifting the entire industry’s sustainability standards:
The WWF and CLSA report recommends that end buyers – the regions’ retailers, consumer goods companies, restaurants, and hotels commit to and disclose progress against time bound plans for sourcing RSPO certified and NDPE compliant palm oil and to achieving 100% traceable (to the plantation ) supply chains.
This ‘clean-up’, however, should not merely displace the sector’s problems. At least a portion of procurement for sustainable supply chains should come from smallholders, preferably by helping smallholders to achieve RSPO certification. At the same time, the focus needs to go beyond individual plantations and projects to ensure the sustainability of wider landscapes and the communities that depend on them, finding multi-stakeholder solutions that simultaneously protect vital ecosystems and forests and uplift local communities.
Lastly, the region’s financiers play a critical role in supporting these solutions. Banks can start by disclosing how issues of climate, deforestation, labour, and human rights are managed in their lending portfolios; they can follow their international peers in requiring sustainable production practices by clients; and help smallholders improve their practices through innovative funding mechanisms.
Investors, too, can continue to engage with portfolio companies across supply chains and sectors, including the banks financing them, to push for more ambitious adoption of best practices and more transparency around business practices.
“Transparency is key to the solution – public reporting and commitments enforce accountability and this is true for small and large corporations, investors and the public sector”
– said Elena Philipova, Head of ESG Proposition, Thomson Reuters. Thomson Reuters ESG data shows that only a quarter of Asian headquartered companies disclose emissions reduction targets.
“Companies who disclose emissions reduction targets have significantly higher ESG ratings on average than companies who do not and these ratings are starting to impact the cost of capital”.
Home-grown initiatives such as the Singapore-based South East Asia Alliance for Sustainable Palm Oil (SASPO) and the China Sustainable Palm Oil Alliance indicate an emerging commitment to sustainable palm oil in the region. Facilitating collaboration between multinational brands, small-and-medium-sized enterprises, and civil society, these initiatives highlight the potential for multi-stakeholder solutions to drive the industry forward.
By building on this momentum and leveraging the impact of the regions banks and investors, the sector’s stakeholders can go a long way in helping palm oil reach its potential to contribute to, rather than undermine, sustainable development.
Palm oil can be and must be a critical part of the solution to food security, regional sustainable development and the global climate crisis.