A new law designed to uproot deforestation from European supply chains has been bitterly opposed by palm oil producer countries Malaysia and Indonesia who say it will marginalise smallholder farmers unable to meet high sustainability standards. But Indonesia’s smallholders’ union has welcomed the new law and appealed for help from companies, governments and donors to meet the requirements.
The European Union’s (EU) new regulation gives forest-risk commodities like palm oil, beef, wood, cocoa and soy 18 months to comply with rules that require producers to prove that their crops were not grown illegally or linked to deforestation.
Indonesia and Malaysia have slammed the EU’s deforestation law as “discrimination” that will impoverish millions of smallholders. The two countries, which produce 85 per cent of the world’s palm oil – 30 per cent of which is cultivated by 3 million smallholders – have also threatened to stop all palm oil exports to Europe.
However, Indonesia’s Palm Oil Farmers Union (SPKS) has dismissed these threats as “excessive” and said it welcomes the EU’s new law, because it proposes financial and technical support for small farmers to grow sustainably, promotes a living wage for farmers, and pushes for better traceability systems.
A key requirement of the new law is for farmers to provide geographical data that traces palm oil fruit back to the farm where it was grown. A poll conducted by non-profit Madani, reported by Mongabay last week, revealed that small farmers fear they won’t be able to comply with the EU’s traceability rules because of the informal methods used in palm oil transactions.
Aida Greenbury, senior sustainability advisor to SPKS, said smallholders needed more support from large palm oil companies’ corporate social responsibility funds or profits, or from governments and donors, to meet the law’s requirements, which include establishing reliable traceability methods.
Indonesian small farmers deserve this support, she said, because they have been exploited historically, with many having been pushed off their land and promised lucrative returns for planting palm oil plantations that have not materialised.
An investigation by Gecko Project last year revealed that that Indonesian villagers are losing millions because many big palm oil producers are not complying with regulations that require them to share their profits with local communities.
Greenbury said she hoped the EU regulation would secure the long-term sustainability of farmers’ livelihoods, “overcome the legacy that is imprinted on them, turn farmers into business partners rather than objects, and give small farmers the fair treatment they deserve”.
SPKS has been working with the High Carbon Stock Approach initiative, a non-profit, to develop a no-deforestation toolkit and an incentives mechanism for smallholders to cultivate oil palm sustainably in Indonesia, which Greenbury said she hopes companies will provide more funding for.
According to a study by Chain Reaction Research (CRR), a non-profit that scrutinises deforestation risk in supply chains, compliance costs for palm oil companies that help smallholders with traceability efforts could be as much as 3.5 per cent of revenues.
That cost is small, given that firms that do not comply could lose up to US$14.3 billion in reputational value, CRR concluded.
Undoing progress
Musim Mas, an Indonesian palm oil company that sources 40 per cent of its fresh fruit bunches from independent smallholders and has trained thousands of small farmers in sustainable cultivation techniques, said the deforestation law risked erasing work done over the last decade to include smallholders in palm oil supply chains.
“Given the current requirements, producers will be tempted to ‘de-risk’ their supply chains by limiting their exposure to smallholders, or even simply excluding them,” said Carolyn Lim, the company’s group corporate communications lead.
Smallholders may be deemed a risk if they do not posses formal land rights – a common scenario in Indonesia – or if they do not share data on the boundaries of their farms, Lim said, noting that some farmers may not want to disclose this information with foreign governments unknown to them.
“Our industry has progressed enough to satisfy the EU market with ‘compliant’ palm oil products. But while the regulation might exclude deforestation from the EU, it will do nothing to support an end to deforestation through improved supply chains,” said Lim.
She also noted that the impact of the EU law on smallholders would not be reviewed until 2028/2029.
Conflict resolution
Ruben Brunsveld, deputy director, Europe Middle East and Africa, for the Roundtable on Sustainable Palm Oil (RSPO), a global standards body for green palm oil, said companies should have enough time to implement the requirements – and this includes helping smallholders comply with the rules.
“[Companies] need every part of their supply chain to be able to pass [traceability] data all the way down to smallholder farmers in rural areas of Indonesia, Malaysia and other grower countries,” he said.
“That will require time, energy and money from companies to invest in their supply chains. They have 18 months to do that. But technically everything is possible. We need to keep smallholders in the ecosystem and connected to the European market.”
RSPO members, he said, are in a strong position, as they are already required to provide full traceability to the mill level. Europe is the biggest market for RSPO-certfified palm oil. Globally only 20 per cent of the palm oil trade is RSPO-certified.
Brunsveld added that “misunderstandings on both sides of the aisle” had led to tension between Europe and Southeast Asia over the environmental impact of palm oil, and these differences needed to be resolved for the EU’s law to be effective.
“In Europe, there hasn’t been enough recognition of the large strides that have been made [to reduce deforestation by the palm oil trade] over the last five to 10 years. In Asia, it’s perceived that Europe wants to implement a market-driven ban on palm oil,” he said.
“We need a constructive dialogue. Malaysia and Indonesia, and the European Commission, need to work together to finalise this legislation,” he said. “We need to recognise that palm oil is a global supply chain, and deforestation and climate change are global issues.”
Europe is responsible for 10 per cent of historical deforestation through the agricultural commodities it buys, according to EU data. The regional block imported US$6.4 billion worth of palm oil and palm oil products in 2021, 70 per cent of which came from Malaysia and Indonesia.
