Understanding Palm Oil and Deforestation

Deforestation: a new risk emerging for companies and investors

palm tree plantation

Palm oil is an inexpensive and highly versatile oil derived from the fruit of the oil palm tree, a native of West Africa’s tropical forests. It is found in half of all consumer goods on the shelves today in Western grocery stores, from chocolate, ice cream, and baked goods to soaps, lotions, and detergents. Palm oil is also used as a petroleum substitute (a biofuel) to power vehicles, heat homes, and manufacture plastics.

  Palm oil plantations produce more useful oil per unit of land than any other crop. Due to its high yields and many uses, palm oil is the most actively traded edible oil in the world, with 90 percent of its global production traded on the world market.

And with annual sales of $50 billion, palm oil is big business. Indonesia and Malaysia have expanded their plantations and tripled production over the past 15 years, and today they account for 85 percent of global production. In Sub-Saharan Africa and Latin America, large-scale palm oil production is growing rapidly and cash-strapped countries are jumping on the bandwagon, as demand is expected to grow.

The Problems With Palm Oil

For decades, however, the palm oil business has been criticized for its links to corruption, social injustice, and deforestation. In Southeast Asia, government officials award oil palm growers legal rights to clear forests, often in exchange for bribes, and generally without regard for the customary rights of the people living within affected areas.

Companies exploit confusing, contradictory, and unclear regulations related to land ownership. To make way for plantations, palm oil companies often force indigenous peoples and other forest dwellers off their land and sometimes use slave and child labor. In 2012, 59 percent of the Indonesia’s 1,000 palm oil companies were linked to land conflicts with local communities.

 Forest clearing for palm oil, including in peatlands, has pushed iconic species like Bornean orangutans and Sumatran elephants and tigers to the brink of extinction and has added hundreds of millions of tons of carbon pollution to the atmosphere.

To the extent that the palm oil industry paid attention to concerns about deforestation or the exploitation of vulnerable communities, it responded with mostly cosmetic measures. Occasionally, some companies did the right thing. But mostly, business-as-usual moved plenty of money into the pockets of well-placed palm oil executives, bankers, and corrupt officials. Governments promoted or tolerated this “collateral damage” in the name of economic development. Yet—contrary to public opinion—in Indonesia the entire plantation sector contributes only 2 percent of gross domestic product, despite massive public subsidies.

Change is Coming

But change is on the horizon. In the past two years, the palm oil sector has experienced unprecedented progress. Since 2014, a number of major multinational agricultural powerhouses, led by some of the most unlikely converts—collectively controlling roughly 60 percent of global palm oil trade—have made unprecedented commitments to break the link between palm oil and deforestation, while also protecting the rights of local communities.

As Paul Polman, chief executive officer of Unilever, has said: “It only takes a handful of sizable companies to reach a tipping point and to transform markets.”