A controversial commodity
Palm oil can be heated to very high temperatures, is very long-lasting and spreadable and is therefore a very useful and versatile raw material. Unfortunately, high demand has led to devastating consequences for the environment. In South East Asia, and especially on the island of Sumatra, huge plantations have been created in recent decades and enormous areas of rainforest have been cleared in the process. Indigenous peoples are losing their livelihoods and endangered species such as orangutans, elephants, tigers and rhinoceroses are losing their habitat.
Palm oil is extracted from the pulp of the oil palm fruit. With a global market share of 30 per cent, it is the most important vegetable oil, followed by soybean oil. More than 85 per cent of all palm oil is produced in Indonesia and Malaysia, while India, Indonesia, China and the EU account for the biggest import volumes. Globally, the consumption of palm oil has increased from 37.58 million tonnes in 2007 to 62.22 million tonnes in 2016.
#RSPO and Forest Trust
The Roundtable for Sustainable Palm Oil (RSPO) standard comprises a large number of binding criteria for the cultivation of palm oil, such as the Prohibition of logging. A refinery that is RSPO-certified does not necessarily supply certified palm oil. The RSPO certification only proves that certain minimum standards have been met. Another standard is the Forest Trust, which allows each company to define its own criteria, meaning they can be more or less strict. RSPO is definitely to be preferred over the Forest Trust.
#Different grades of sustainability for palm oil
- Identity Preserved (IP)
- Segregated (SG)
- Massbalanced (MB)
- Book & Claim (BC)
Serious impact on the Environment
The climate also suffers. When swamps are drained and forests slashed and burned to clear space for plantations, large quantities of greenhouse gases are emitted into the atmosphere. In addition, the monoculture farming practised on plantations exacerbates soil erosion and increases the susceptibility of plants to pathogens, while the excessive use of fertilisers pollutes the groundwater. The serious consequences of such bad farming practices can already be felt and there is therefore increasing pressure both from non-governmental organisations (NGOs) and politicians for action to be taken. The crucial question is: How can palm oil be used without harming people or the environment?
Getting to the root causes is part of the engagement dialogue
For Union Investment, this is a highly topical subject. The first step is to get to the root causes of the issue. Here, the focus should not be purely on the producers, but also on other companies in the supply chain, including consumer goods companies that buy finished products and banks that finance palm oil plantations.
Union Investment met a large number of company representatives for talks in 2016, including representatives of Henkel, one of the biggest global Producers of laundry detergents, cleaning agents and cosmetics, which often use palm oil as a basis. Moreover, Union Investment also maintains a close dialogue with NGOs such as the World Wide Fund for Nature (WWF) and the Südwind Institute. The aim is to find new ways of handling palm oil that are as sustainable and eco-friendly as possible.
In this context, Ingo Speich, Head of Engagement and Sustainability at Union Investment, visited companies in South East Asia, the most affected region, to see the situation for himself. For him, one thing is certain: “All companies with business activities involving palm oil are subject to greater litigation, regulatory and reputational risk, regardless of whether they are Producers or processing companies.” At the heart of the problem are environmental concerns, as previously described, and in some cases also human rights violations. Union Investment has raised these issues with all participating companies.
Politicians press for more sustainability
Political pressure is now growing in South East Asia. In the past year alone, Singapore was under a smoke cloud – or haze as it is known – for almost two months, which had a huge impact on people’s lives and on businesses. NGOs claim that the emissions caused by fires in Indonesia in 2015 exceeded the levels of emissions created by the entire Chinese economy in the same year. Consequently, political representatives in Singapore have been putting pressure on companies as well as the two biggest Palm oil producing nations, Indonesia and Malaysia. This political pressure means that publicly listed companies can no longer avoid the subject of sustainability.