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.[i] 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.[ii] 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.[iii]

And with annual sales of $50 billion, palm oil is big business.[iv] 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.[v] 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.[vi]

For decades, however, the palm oil business has been criticized for its links to corruption, social injustice, and deforestation.[vii] 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 landownership. 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.[viii] In 2012, 59 percent of the Indonesia’s 1,000 palm oil companies were linked to land conflicts with local communities.[ix] 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.[x]

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.[xi] Occasionally, some companies did the right thing.[xii] 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.[xiii]

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[xiv]—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.”[xv]

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[i] WWF, “Palm Oil,” http://wwf.panda.org/what_we_do/footprint/agriculture/palm_oil/.

[ii] RSPO, “Why Palm Oil Matters in Your Everyday Life,” http://www.rspo.org/file/VISUAL%20-%20Consumer%20Fact%20Sheet.pdf.

[iii] UNCTAD, “alm Oil Commodity Profile,” http://www.unctad.info/en/Infocomm/AACP-Products/Palm-oil/.

[iv] A. T. Kearny, “New Oils for the New World,” https://www.atkearney.com/documents/10192/924901/New+Oils+for+the+New+World.pdf/039e3845-6564-4930-8181-1f223cbbcc33.

[v] FAOSTAT data, http://faostat3.fao.org/; R. Kongsager and A. Reenberg, Contemporary Land-Use Transitions: The Global Oil Palm Expansion, GLP Report 4 (Copenhagen: GLP-IPO, 2012), http://www.globallandproject.org/arquivos/Kongsager,_R_and_Reenberg_A_(2012)_Contemporary_land_use_transitions_The_global_oil_palm.pdf; UNCTAD, “Palm Oil Commodity Profile,” http://www.unctad.info/en/Infocomm/AACP-Products/Palm-oil/.

[vi] GIST and GCP, “Creating Demand for Sustainable Palm Oil through Tariff Policies in India and Indonesia,” Global Canopy Programme, 2014

[vii] M. Colchester et al., Promised Land: Palm Oil and Land Acquisition in Indonesia: Implications for Local Communities and Indigenous Peoples (Moreton-in-Marsh, UK, and Bogor, Indonesia: Forest Peoples Programme and Perkumpulan Sawit Watch, 2006),http://www.forestpeoples.org/sites/fpp/files/publication/2010/08/promisedlandeng.pdf.

[viii] E. B. Skinner, “Indonesia’s Palm Oil Industry Rife with Human-Rights Abuses,” Bloomberg Businessweek, July 18, 2013,http://www.businessweek.com/articles/2013-07-18/indonesias-palm-oil-industry-rife-with-human-rights-abuses.

[ix] S. E. Hadinaryanto, “Special Report: Palm Oil, Politics, and Land Use in Indonesian Borneo (Part I),” Mongabay.com, April 24, 2014,http://news.mongabay.com/2014/0424-Hadinaryanto-palmoil-kalimantan.html.

[x] D. Sheil et al., “The Impacts and Opportunities of Oil Palm in Southeast Asia: What Do We Know and What Do We Need to Know?” Center for International Forestry Research, 2009; Badan Pusat Statistik, “Economic Indicators,” Monthly Statistical Bulletin, October 2012, cited as data source in “Growth in Indonesia: Is It Sustainable? Drivers of Recent Economic Growth,” by M. Henstridge, D. Sourovi, and M. Jakobsen, Oxford Policy Management Ltd.

[xi] “Consumer Groups Slam Greenwashing in Sustainable Palm Oil Marketing,” National Geographic News Watch, August 8, 2013,http://newswatch.nationalgeographic.com/2013/08/08/consumer-groups-slam-greenwashing-in-sustainable-palm-oil-marketing/.

[xii] In 2011, largely in response to pressure from retail companies, consumers, and bankers, Indonesia’s agrogiant Golden Agri-Resources banned deforestation on its own palm plantations, and boutique producers in Brazil and Central America managed to produce small quantities of palm oil without deforestation.

[xiii] Henstridge et al., “Growth in Indonesia”; the 2 percent figure comes from Indonesia’s own statistics, cited by Badan Pusat Statistik, “Economic Indicators.”

[xiv] This figure includes Wilmar, Golden Agri-Resources, and Cargill, which respectively control approximately 45, 10, and 5 percent of the global palm oil trade.

[xv] Center for Global Development, “Unilever CEO Paul Polman Wins Commitment to Development Award for Global Leadership in Efforts to Reduce Tropical Deforestation,” press release, December 16, 2013, http://www.cgdev.org/article/unilever-ceo-paul-polman-wins-commitment-development-award-global-leadership-efforts-reduce.

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Gabriel Thoumi, CFA is a Senior Fellow at Climate Advisers where he provides global financial analysis for mitigating systemic climate risk while advising on “greening” capital markets for clients and coalitions.

He has 15 years of experience managing and deploying frameworks to improve global capital markets sustainability through risk mitigation and return enhancement. Previously, for Calvert Investment Management, he valued global equity, index, and fixed income portfolios and their component positions in the utilities, energy, materials, chemicals, and financial sectors. He worked on quantitative index construction and asset allocation strategies. He engaged Fortune 500 CEOs on approaches to mitigating climate risk using financial risk management tools. He led initiatives to improve financial accounting of exchange-listed products and incorporated natural capital into financial tools. He wrote the winning Agriculture Supply Chain Adaptation Facility for the Global Innovation Lab for Climate Finance.

His research on capital markets has been cited by Forbes Magazine and the Guardian as key reasons why markets can improve our societies’ collective ability to mitigate climate change. He has co-authored numerous papers including a recent paper in Science on standardizing payments for ecosystem services.

Formerly, for the U.S. Government, as Senior Director Finance and Carbon Markets, he led a team publishing confidential analysis on Latin American REDD+ financial readiness. At Morgan Stanley’s climate change mitigation company, he conducted due diligence on derivatives and financed infrastructure projects. At Wells Fargo, he managed $4 billion daily in commercial bank lending and priced financial risks for over 2,000 financial counterparties while managing a $16 billion fixed income portfolio to protect public deposit accounts, and he sold financial products while supporting fixed income trading. At American Express, he consulted on behavior finance modeling. At Intel Corporation, he forecasted Asia-Pacific market demand. His career began in art history and natural resources management.

He sits on the board of the Network for Sustainable Financial Markets and 2 Degrees Investing Initiative. He has an MBA and MSc from the University of Michigan where he was a Consortium and Erb Institute fellow. He is a frequent speaker, author, and lecturer for various universities. He also is a Certified Ecologist by the Ecological Society of America and LEED AP (BD+C) and LEED AP (O+M). Finally, he sits on the Metropolitan Washington Council of Governments Air and Climate Public Advisory Committee advising regional clean air policy.