Sunday 14 Jul 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on April 29, 2024 - May 5, 2024

Despite the palm oil industry bending over backwards to green up its act in the last few decades, it is still under fire. Critics cannot shake the image of palm oil as the nemesis of biodiversity, or worse, the big bad wolf of tropical deforestation. No matter how hard palm oil producers try to play a good character, they still end up being cast as a villain in an environmental saga.

Recently, Global Witness has raised alarms over agricultural products in US supermarkets, linking them to deforestation comparable in size to Los Angeles. Based on the findings of Trase, a sustainable trade data initiative, they spotlighted palm oil as a key factor in the US’ association with deforestation in tropical regions from 2021 to 2023. In this report, Indonesia accounts for an incredible 95.4% of the 41,500ha lost, while Colombia and Malaysia contribute 3% and 1.5% respectively to this forest destruction.

Yet, back in 2011, Indonesia set a firm boundary against deforestation, no longer allowing palm oil companies to expand into primary or virgin forests. Fast-forward to 2021, and the payoff is clear — a 75% drop in deforestation rates from 2020 — the lowest forest loss since records began in 1990. Rarely acknowledged, also, Indonesia keeps 95.6 million hectares under forest cover, an area more than twice the size of California.

For Malaysia, palm oil-driven deforestation is yesterday’s news. It has set a ceiling for palm oil cultivation area at 6.5 million hectares. Due to urban sprawl, the figure has fallen even further to 5.6 million hectares, shrinking the impact of Malaysia’s palm oil on the environment.

Critics’ pushback against palm oil encompasses not just environmental concerns but social ones as well. The emphasis on issues like land and labour rights, especially the well-being of migrant workers, underscores the breadth of the challenges palm oil-producing nations face.

Against all odds, the industry has shown that the commodity can be, and is generally produced sustainably by taking environmental, social and governance (ESG) aspects into account. The adoption of the standards of the Roundtable on Sustainable Palm Oil (RSPO), Malaysian Sustainable Palm Oil (MSPO), and Indonesian Sustainable Palm Oil (ISPO) shows that the cultivation of oil palm and environmental stewardship can indeed go hand in hand.

Of the 332 million hectares used for vegetable oils worldwide, only 8.6% is palm oil, and of this fraction, 4.5 million hectares of land are RSPO-certified. In Malaysia, the adoption of the MSPO certification has reached an almost universal level, with over 97% of plantations holding this certification.

The industry is redefining what is possible in sustainable agriculture, with the Malaysian Palm Oil Board spearheading the development of over 700 technologies to be leveraged in industry. It has made significant strides in adding higher-value benchmarks, with usage for oleochemicals and biofuels reaching 37% in 2023, up from 28% in 2013. This shift towards non-food applications demonstrates the industry’s ability to diversify and reduce its environmental footprint.

Although palm is more sustainable than other vegetable oils, is the affluent North really paying attention? Is it understood clearly that sustainability is not attainable without inclusivity? Half of the world’s palm oil is grown by smallholder farmers. The boom in the business has helped them boost income and escape poverty. Still, smallholders’ average yield is around 3.25 mt/hectare, half the 5.9 mt/hectare yield achieved by the best palm oil companies.

Sadly though, the opposite seems true, and the sector continues to face unfair treatment. NGOs are calling for importers to tighten restrictions on producer nations because of claims of ongoing deforestation. The guiding mantra is “No Deforestation, No Peat and No Exploitation”.

Europe is gearing up to enforce the European Union Deforestation Regulation (EUDR), which will block imports of commodities linked to recent deforestation. While setting strict standards for palm oil imports aims to encourage sustainability, EUDR might unfairly impact many in the supply chain, especially smallholder farmers who lack the resources to comply with its complex requirements. In the US, a push for the FOREST Act, formally known as the Fostering Overseas Rule of Law and Environmentally Sound Trade Act, highlights a similar crusade for green accountability in trade practices.

Relying solely on regulation has led to perceptions that the developed North has lost touch with reality by relentlessly raising the bar. This view is vindicated by the World Trade Organization’s (WTO) landmark ruling against the EU in March 2024 for limiting the use of palm oil as a biofuel. The WTO identified the EU’s treatment of Malaysia in the Renewable Energy Directive II context, particularly regarding palm oil biodiesel, as “arbitrary or unjustifiable discrimination”. This decision emphasises the long-standing misconceptions against a vital industry.

Going forward requires a win-win approach. Since new land is limited, investors may help green the palm oil business by nudging it to focus on high-value products and downstream growth. The shift began with six palm oil companies featured on the F4GBM index, Bursa Malaysia’s ESG benchmark for stocks. While these are above-average ESG performers, more companies need fresh capital to join the fray and move the needle meaningfully. With plush ESG funds, the industry can further improve its sustainability efforts — think digitalisation for traceability, automation, plantation mechanisation, cutting-edge farming technologies and net zero opportunities.

These increased investments would reinforce the industry’s role in feeding the world with sustainable vegetable oil and aid climate mitigation and biodiversity conservation. Also, by allocating ESG funds to smallholder farmers rather than industrial plantations, we will ensure that sustainability is not a privilege but a shared goal across the board.

Just as the industry has gone the extra mile to enhance its green credentials, it now calls for investors to champion the sustainability cause further, by equipping the palm oil ecosystem with the necessary tools and ensuring that every player in producing countries, has a fair shake at the table.

Dr Hezri Adnan is the director of group sustainability at Bursa Malaysia

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