Consumer goods firms, retailers and banks with commitments to cut deforestation out of their supply chains and financial portfolios risk tarnishing their green pledges by buying from Southeast Asian conglomerates that clear forests through other forest-risk businesses, such as mining and logging.
Most no-deforestation commitments, known in the industry as No Deforestation, No Peat and No Exploitation (NDPE) policies, only apply to the palm oil supply chain rather than the entire corporate entity of a company’s suppliers, a study by Chain Reaction Research (CRR), a consortium of non-profits AidEnvironment, Profundo, and Climate Advisors.
This could expose major palm oil buyers such as Johnson & Johnson, Nestlé and Procter & Gamble to reputational risk should regulations and sustainability standards hold brands accountable for the full deforestation footprint of the companies from which they procure palm.
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Six of the 10 largest palm oil growers in Indonesia, including industry giants like Sinar Mas and Salim Group, have mining businesses, while five of the 10 biggest coal mining firms, for example Adaro Group, also have palm oil operations.
Mining of all kinds, including minerals used to make car batteries and solar panels, comes with a large deforestation footprint in Indonesia. Mining has overtaken palm oil as the leading driver of deforestation in Indonesia in recent years.
Similarly, many of the largest timber plantation developers, for example Indonesia’s Royal Golden Eagle and Malaysia’s Samling Group, also operate in the palm oil sector. A 2021 study found that all large palm oil refineries have sourced oil from firms that had cleared 133,040 hectares of tropical forests to develop timber plantations between 2016 and 2021.
However, currently cross-commodity deforestation risks have been overlooked in regulations, certification schemes and supplier codes of conduct, the report asserts.
For instance, the Roundtable on Sustainable Palm Oil (RSPO), the lead standards body for green palm oil, lacks explicit criteria for cross-commodity deforestation risk, according to the report.
Also, the European Union’s newly introduced law on deforestation-linked imports, which requires companies to prove that their supply chains are not contributing to forest loss, focuses on domestic firms and their product streams instead of the structure of upstream companies.
But closure scrutiny of the deforestation footprint of group corporate entities is coming, the study’s authors predict.
“Big consumer goods buyers of palm oil, and certainly also the large traders, refiners and oleochemical companies, should worry about their current status of not being specific enough about the companies they’re sourcing palm oil from,” Gerard Rijk, an equity analyst at Profundo, told Eco-Business.
“They face a huge reputational risk now that environmental groups will start to focus on that theme. That moment is coming sooner rather than later,” he said.
Could cross-commodity pledges curb deforestation?
As the palm oil sector – an industry that has been widely reviled for environmental destruction for more than two decades – is far more advanced than the mining, logging or paper sectors at drawing up no-deforestation policies, the report’s authors suggest that the palm trade takes the lead in driving cross-commodity NDPE pledges.
Some 16 of the 21 major palm oil players in Indonesia have NDPE policies, compared to only three of the biggest industrial tree plantation firms. Not a single Indonesian mining company has an NDPE policy in place.
NDPE policies have been credited with helping to reduce the deforestation rate for palm oil in Indonesia, with refiners using their leverage over growers to boost compliance. Cross-commodity NDPE policies could lead to signicant reductions in deforestation in Indonesia and Malaysia, the report argues.
Malaysian conglomerate Samling, which has business interests in property, forestry and palm oil, is one example of where scrutiny of a firm’s entire group operations has had serious business consequences. The company, which has a NDPE policy in place for palm oil, was found to have deforested in its timber operations, which prompted several consumer goods firms to remove the company from their palm oil supplier list.
“By requiring NDPE compliance from their business partners for both palm oil and industrial tree operations, palm oil refiners can be key enablers in reducing deforestation and addressing global climate and biodiversity crises,” the report reads.
It also acknowledged that there has been push-back from industry groups, who are not keen on taking on the extra costs and more stringent requirements of cross-commodity compliance.
“Commodity supply chain actors regularly use the price increases of overlapping global crises – the Covid-19 pandemic, the Russian invasion of Ukraine, the drought in South America affecting the vegetable oil market – as arguments to delay or postpone extra policy costs,” the report reads.