This article first appeared in Forum, The Edge Malaysia Weekly on July 17, 2023 - July 23, 2023

Environmental, social and governance (ESG) issues have gained prominence in the business sector, primarily through socially conscious and institutional investors demanding increased attention in these areas. This focus has increased in recent years as the ESG focus is seen as a way of mitigating risks and identifying new opportunities. It has become an important business consideration across industries, including the palm oil industry.

ESG attempts to reconcile the impact of economic activity with the inescapable and inconvenient truth that palm oil is crucial to us. Our growing world relies on vegetable oils, including palm oil, so if it is not manufactured, it must be grown. The question that arises is how to conduct business in a manner that is socially responsible and environmentally sustainable while also meeting the demands of the current industry and ensuring a transition that benefits future generations. Fortunately, there is encouraging news: many palm oil companies in Malaysia, which is the world’s second largest palm oil producer, are already taking proactive measures on their ESG agenda. However, this progress remains largely unknown to society. Let’s explore the areas in which the industry has taken steps to initiate its ESG journey and the achievements thus far.

Biodiversity is one of the most significant environmental issues involving the agricultural sector. Many palm oil companies have demonstrated their commitment to zero deforestation under the No Deforestation, No Peat, No Exploitation (NDPE) policies guiding the industry. They will not only ensure no deforestation and no new development on peat areas within their operations, but also strive to maintain an open and dynamic approach to continuous improvements in respect of the reduction of greenhouse gas emissions by capturing the biogas produced in palm oil mill effluent treatment and using the captured biogas to generate electricity. The recent operationalisation of two biogas plants in Terengganu, supplying 2mw of power directly to Tenaga Nasional Bhd’s grid, further exemplifies the industry’s notable progress towards embracing a circular economy model.

In the context of legal obligations, palm oil companies in Malaysia are required to comply with the Malaysian Sustainable Palm Oil (MSPO) standard. It was made mandatory on Jan 1, 2020. As the name implies, this standard ensures sustainable palm oil production in the country. In addition, the MSPO standard has recently been reviewed and revised. The revision process was overseen by various agencies and organisations, including non-gervernmental organisations such as the World Wide Fund for Nature and palm oil growers and producers. Professional bodies such as the Academic Research on Palm Oil Sustainability Network also played a role in supervising the revision. As a result of this collaborative effort, the revised MSPO standard has undergone significant changes. One notable change is the introduction of Dec 31, 2019, as the cut-off date for deforestation, among other modifications. These updates reflect the commitment to addressing environmental concerns and promoting sustainability within the palm oil industry. This is on par with the requirement of a deforestation-free commodities regulation recently approved by the European Union parliament.

Furthermore, the Malaysian Palm Oil Green Conservation Foundation has initiated several programmes to improve biodiversity and conserve wildlife in Malaysia. The foundation, for example, has provided funding to the Sabah Wildlife Department to conduct population surveys of orangutans and to assess their long-term viability. The foundation has also commenced a 10-year project in collaboration with the Sabah Forestry Department called the One Million Forest-Tree Planting campaign in 2019.

In terms of the social aspects, labour exploitation concerns such as forced labour, child labour, debt bondage, indigenous land rights as well as poor living and working conditions, just to name a few, have been associated with the palm oil industry.

As part of the NDPE policies, many palm oil producers are committed to respecting the rights of not only their workers but also indigenous peoples and local communities. For example, in 2022, IOI Corp used a process of “free prior and informed consent” to resolve decades-long land dispute cases with local communities. In the same year, United Plantations also employed a similar approach to amicably resolve a land dispute in its Indonesian operations.

Over the years, the Malaysian palm oil industry has demonstrated its commitment to social sustainability by achieving significant milestones. Notably, the country’s ratification of several international human rights instruments, including the Protocol of 2014 to the Forced Labour Convention, serves as a positive indication of the industry’s progress in addressing social sustainability issues.

Nonetheless, society is not just about workers and the surrounding community. It also involves society. In this context, it examines how the industry has improved people’s quality of life. The Malaysian palm oil industry has helped lift many people out of poverty by providing more than three million direct and indirect employment opportunities, and nearly 500,000 smallholders are involved in this business.

The governance aspect involves evaluating the efficiency of a company’s management and its commitment to prioritising the welfare of its stakeholders. Palm oil companies have an advantage in this regard as they possess experience in meeting auditing requirements, not limited to mandatory sustainability certification programmes like MSPO. Furthermore, many palm oil companies have embraced voluntary systems such as the Roundtable on Sustainable Palm Oil and International Sustainability and Carbon Certification, in addition to standard ISO certifications like ISO 14001, among others. These initiatives demonstrate their commitment to sustainability and environmental stewardship. These initiatives greatly contribute to their understanding and fulfilment of the governance aspect within the framework of ESG principles.

Palm companies are well-versed in the corporate governance aspects of their operations. This includes demonstrating management commitment and fulfilling responsibilities, as well as ensuring compliance with legal requirements, including upholding customary rights, conducting business ethically and adhering to anti-bribery practices. Additionally, they have established systems to address complaints and grievances promptly and transparently.

Since companies are expected to take full responsibility for the products they put on the market, being able to make the value chain journey visible through traceability is key to securing transparency and trust. Palm oil companies are not exempt from making sustainability claims. For example, Sime Darby Plantation, the world’s largest producer of certified sustainable palm oil, has taken a major step forward to create a deforestation-free supply chain and launched a publicly accessible database that allows anyone to trace the origin of its products right down to the mill where they are processed.

ESG represents a comprehensive framework that addresses the various aspects of sustainable development, which has been a long-standing challenge for palm oil companies. This approach recognises not only the environmental impact of palm oil production but also the importance of social considerations and strong corporate governance. By embracing ESG principles, palm oil companies now have a structured framework to effectively navigate the complexities of sustainability and strike a balance between environmental concerns, community well-being and financial viability. This integrated approach not only benefits the companies themselves but also ensures the long-term sustainability of the palm oil industry, creating positive impacts for multiple stakeholders. Through their commitment to ESG, palm oil companies can demonstrate responsible practices, enhance transparency and contribute to the broader achievement of sustainable development goals.

Hong Wai Onn is a chartered chemical engineer and a Fellow of the Institution of Chemical Engineers and the Royal Society of Chemistry. He is the author of A Chemical Engineer in the Palm Oil Milling Industry.

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