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In Indonesia, corporate commitment to sustainable palm oil

It is the most debated of oils.

For many environmentally conscious consumers in developed countries, it is something to boycott, associated with the destruction of orangutan habitat.

For poor families across the developing world, it is an economical food to buy at the lowest possible cost.

For millions of farmers in developing countries, it is the basis of their livelihoods, a crucial driver of rural economic growth, and a major export income earner.

Through recent initiatives, businesses and governments involved in the palm oil supply chain have agreed that they want to keep developing it – but in a sustainable way.

Their challenge is to define what sustainable means – and to find ways of achieving it.

Researchers from the  Center for International Forestry (CIFOR) have described the destruction of swathes of rainforest to make way for palm oil, in Indonesia and Malaysia, as an “ecological disaster”.

In a recent book, Palms of controversies: Oil palm and development challenges, the authors wrote, “In the span of a few decades, Indonesia has seen the conversion of more than 5 million hectares of primary forest, Malaysia over 4 million, Nigeria 1 million, and about the same amount has been converted in the rest of the world,”

Yet, the authors also insist that there was nothing wrong with palm itself, as it yields more oil than competing plants for any given area of land.

“The challenge is to encourage forms of oil palm development which keeps the negative impact on biodiversity and local people to a minimum,”  says CIFOR consultant researcher Sophia Gnych.

“The industry needs measurable outcomes to achieve verifiable sustainability. Yet there isn’t a single definition for this word,” she says.

Another CIFOR scientist, Pablo Pacheco stresses the importance of moving towards shared definitions on what constitutes sustainable palm oil.

Pacheco considers that important progress has been made to establish the essential criteria mostly through the Roundtable on Sustainable Palm Oil  forum.

“It’s important to find common ground,” he says. “The zero deforestation commitments can trigger progress towards sustainability, but more consideration has to be given to inclusion of smallholders in supply chains and protection of local tenure rights.”

He gave the example of high carbon stock (HCS) commitments, that will likely be embraced by major corporate groups as a way to meet their commitment to zero net deforestation.

Sustainable profits

Director of the Indonesia program at the Climate Policy Initiative (CPI), Jane Wilkinson, is working closely with multinational Unilever, one of the world’s largest buyers of palm oil.

It is about understanding better the links between public regulations and mechanisms and private initiatives for sustainability…and how public-private institutional arrangements are able to support the transition towards sustainable oil palm.

Pablo Pacheco, scientist, CIFOR

“The objective is that by 2020, Unilever will be able to say: ‘We buy all our palm oil from traceable and certified sustainable sources and we can prove it’,” says Wilkinson.

As of December 2014, the company said it could trace 70 per cent of its global palm oil purchases to 1,800 known crude oil mills.

Unilever will present its work in progress with CPI at next month’s Global Landscapes Forum: The Investment Case in London.

Unilever’s ultimate objective is to ensure that its supply chain is deforestation-free. It will strive for a net positive environmental impact and for improved livelihoods of smallholder farmers.

Without a new approach, achieving this goal will be a challenge, acknowledges Wilkinson, because so many local traders buy from small farmers and local small-medium plantation companies and it is costly to guarantee sustainability on a farm-by-farm basis.

“Unilever have set ambitious business, environmental and social objectives. In improving smallholder livelihoods, Unilever are trying to deliver a public good,” Wilkinson said. “However to do so they will require new partnerships with governments at the local, national and international levels, business and local communities.”

At last September’s UN Climate summit, when the New York Declaration on Forests,  was signed, four of the largest multinationals sourcing palm oil from Indonesia, (Wilmar, Cargill, Golden Agri Resources and Asian Agri) unified their individual sustainability commitments under the separate Indonesia Palm Oil Pledge.

They were joined by the Indonesian Chamber of Commerce and Industry and later by another firm, Musim Mas.

“After purchasers such as Unilever, we are moving down the value chain with producers,” says Dominic Waughray, head of public-private partnerships at the World Economic Forum.

He witnessed the sustainability movement’s inception with Wilmar’s commitment at the Davos forum last year, and he says the dynamic is now extending to the financial sector.

“Public bodies with concessional finance have realized they could use their money to leverage private sector action,” Waughray says. He believes that international banks gathered at last year’s  Banking Environment Initiative “felt they needed to adapt and offer products to finance this effort, in another interesting shift across the value chain”.

“This is a fundamental reshaping of the sector rather than a single company making commitments.”

Public private palm

With the new Indonesian government renewing a moratorium on deforestation permits across peatlands and primary forests, attention is now turning to the huge investments needed to convert the industry to better practices, down to the 1 million smallholder farmers who cultivate much of the country’s palm.

Massive intensification of production on those farms’ existing land – on the ground enforcement of the moratorium – will be the only way of achieving Indonesia’s plans to boost output without clearing more forests.

Waughray says the Palm Oil Growers Association had estimated the corresponding investment in new seeds, training and substitute income for farmers while their new trees grew to fruition to represent $8,000 per hectare – or $16 billion in total – which would be returned over eight years.

“A development agency with the best will does not have $16 billion to spend in Indonesia, and palm oil growers are suggesting a new fund financed by a levy of $16 per ton of crude palm oil exported and $30 per ton on derivatives,” Waughray says.

And while this would not be sufficient to cover the investment in the short term, he suggests that the levy could be used to support local banks in offering loans to smallholder farmers at reduced rates.

“This would be a great example of public-private partnership and an opportunity for those with concessional finance to lock into these domestic initiatives, for example by matching them with co-funding,” he says.

“A commitment by the Palm Oil Pledge signatory multinationals to buy oil from participating farmers at a minimum price would be the last link in the chain.”

Initiatives such as the Pledge or Unilever’s strategy will need sound science to and good governance to back up their plans.

Local structures need to be strengthened to help smallholder farmers manage the transition towards sustainability. In a study of the Central Kalimantan region of Indonesia, CPI found that individual farmers would have difficulties making the jump on their own.

Co-ops appear to be better equipped to help them, but the most efficient form of organization in the region was found to be private companies assisting their network of supplier farmers.

CIFOR’s current research is focusing on “assessing business models across different economic and institutional contexts, and how improved partnerships can be built between oil palm companies and small-scale growers that are able to improve benefit sharing,” says Pablo Pacheco.

“It is about understanding better the links between public regulations and mechanisms and private initiatives for sustainability,” he says, “and how public-private institutional arrangements are able to support the transition towards sustainable oil palm”.

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