Palm oil derivatives: are sustainability promises lost in the supply chain?

Complexities in tracing and transparency mean sustainability leaders may be falling short of their own commitments on palm derivatives and oleochemicals.

A small producer holds up oil palm fruit in Pachiza, San Martin, Perú. Image: CIFOR, CC BY-SA 3.0, via Flickr.

Global palm oil production hit new highs of 77 million tonnes in 2021. About one-fifth of this was certified against the leading industry standard, the Roundtable on Sustainable Palm Oil (RSPO). But it’s not clear who should be responsible for increasing the proportion, with buyers blaming a lack of available certified materials and producers citing a lack of demand.

In this the second of a two-part series exploring palm oil derivatives, following on from the first which illustrated how derivatives are made, we explore how some of the major players in the industry are doing in terms of sustainability, and how they could improve. 

The palm derivatives sector produces many key ingredients for everything from foods to fuels, cosmetics, pharmaceuticals and plastics. It presents a unique opportunity to create positive change which could ripple out to the wider palm oil industry.

Around 8 per cent of palm oil and 70 per cent of palm kernel oil used globally goes in to producing “oleochemicals” – compounds chemically derived from animal or vegetable oils or fats – according to the environmental consultancy Efeca. The market for these value-added products is tipped to grow, especially as palm and other plant-based materials like soy and coconut become increasingly popular as “renewable hydrocarbons”.

This is in line with societies’ widening acceptance of the need to move away from fossil fuels. However, derivatives exchange hands so frequently along the supply chain that it can be very challenging to determine their sustainability, including whether they were produced free from deforestation and worker exploitation.

Traceability and transparency matter

When it comes to sourcing sustainable materials, traceability and transparency should go hand in hand. The former can back up claims a company makes about its products, while the latter demonstrates willingness to make the information publicly available.

Despite the strong demand for segregated volumes from our members, there is just not enough supplies. The system transition gap from mass balance to segregated is significant.

Arnaud Bonisoli, sustainable supply chain project manager, Transitions

Huge multinationals, like Wilmar International, Cargill and Golden Agri-Resources, have vertically integrated supply chains. This means their operations span the entire chain from oil palm plantations to product manufacturing, including operating refineries and oleochemical plants. They therefore have an advantage in sourcing certified material for oleochemical production and in demonstrating the principles of traceability and transparency.

For example, according to its 2021 Sustainability Report, Wilmar achieved 98.2 per cent traceability to its palm oil mills, and its ongoing monitoring and progress reporting makes it transparent. However, many smaller companies, especially those operating downstream, cannot see their supply chains so clearly. Their sourcing is likely to be highly fragmented, derived from different oleochemical suppliers. They may not even know where to begin.

Since December 2014, labelling regulations in the EU have required food products to clearly indicate if they contain palm oil. But this isn’t the case with non-food items like cosmetics, cleaning products, plasticisers, pharmaceuticals, paints, agrochemicals and explosives.

These products use more oleochemicals than food products do, but transparency on their sourcing remains poor. This limits the power of consumers to demand sustainable products, as most do not know what palm oleochemicals are, and are unaware of their prevalence. Similarly, the lack of attention from governments and NGOs on the sustainability of derivatives and the oleochemical sector has likely hampered progress on improving supply chain practices and companies’ sourcing policies.

‘Renewable hydrocarbons’

In recent years, plant-based materials from palm, soy and coconut have become increasingly popular feedstocks in industrial processes. They are often called “renewable hydrocarbons” and can be used to synthesise bio-based “polyols” – which are precursors in polyurethane plastic production – plasticisers, catalysts and other materials.

In 2020, South Korea’s largest chemical company LG Chem announced plans to start replacing its fossil fuel feedstocks with renewable hydrocarbons supplied by Finnish refiner, Neste. Then, in 2021, Neste signed a long-term agreement to supply renewable hydrocarbons to petrochemical giant LyondellBassel, for the company to begin producing bio-based “polymers” – building blocks for producing materials which traditionally rely on petrochemicals, such as nylon fabrics, food packaging and auto parts.

As the world becomes more focused on reducing carbon emissions in line with the Paris Agreement, these “low carbon” alternatives to petrochemicals are gaining traction. But is it just clever marketing? We must tread carefully on using palm, and other forest-risk commodities like soy, as industrial feedstocks to produce hydrocarbons.

Palm oil was once heralded as the biofuel solution, but it soon became clear that with respect to land clearance and deforestation, it had a much higher carbon footprint than fossil fuel equivalents. These same issues apply to using palm for reducing petrochemical dependence in manufacturing products like bioplastics.

Oleochemical companies and certification

Refined palm oil and refined palm kernel oil, stearin and palm fatty acid distillate are the major feedstocks for producing palm-based oleochemicals. (Find out more about these terms in Part One of this series).

From the refiners, these products may be bought by traders, or in the case of vertically integrated companies, move directly to oleochemical production facilities. The result is value-added oleochemicals, which may be processed through further chemical transformations and finally sold to manufacturers where they become ingredients in end products.

The oleochemicals market is dominated by several companies handling large volumes of palm oil, palm kernel oil and their derivatives. These companies have been very involved in developing bio-based materials and were early adopters of sustainable sourcing commitments. Some of the major Southeast Asian companies manufacturing oleochemicals include Kuala Lumpur Kepong, Sinar Mas, Wilmar International and Sime Darby. European companies such as BASF, Evonik Industries and Croda are also major manufacturers.

For those oleochemical manufacturers that are members of the RSPO, it’s possible to assess how well their commitments translate into uptake of certified palm oil, by referring to their annual communication of progress (ACOP) reports. These reveal that many of the largest companies are falling short on sourcing certified materials.

With revenues of 78.6 billion euros (US$80 billion) in 2021, German-headquartered BASF is the world’s leading chemical producer. It relies on palm for over 800 ingredients that go into cosmetics, detergents, coatings and pharmaceuticals. The company published their first sustainable palm commitment in 2011 and extended it in 2015 through their palm sourcing policy.

According to its 2020 ACOP, in that year BASF sourced nearly 500,000 tonnes of palm oil, kernel oil and derivatives – around 0.5 per cent of the world’s palm oil consumption. Just half of this came from certified sources. The company will need to step up if it wants to reach its commitment of 100 per cent RSPO-certified palm and palm kernel oil derivatives by 2025.

One action that BASF could take to close the certification gap is supporting smallholders, who grow oil palm on land less than 50 hectares in area. The company’s palm commitment does acknowledge the need to include smallholders in supply chains but, based on its ACOP, it has not started purchasing RSPO credits from independent smallholders.

Another major supplier of speciality oleochemicals is Evonik Industries, also a German firm, which provides products for agriculture, coatings, pharmaceuticals and plastics. In 2020, it sourced 101,834 tonnes of palm oil, kernel oil and derivatives. Around 40 per cent was RSPO-certified, a marginal improvement on its previous year.

Traceability scores published on Evonik’s website reveal that over 70 per cent of its volumes are not traceable to the plantation. This leaves a lot of uncertainty over whether the company’s palm oil has been produced responsibly. Yet Evonik has committed to 100 per cent RSPO-certified palm products by 2023.

While it seems unlikely that the company will meet this target, any effort that Evonik makes to increase the volume of certified palm it uses will demonstrate a commitment to supporting the sustainability efforts of growers, and likely improve the company’s ability to trace its products.

Malaysia’s Sime Darby, as the world’s largest producer of certified sustainable palm oil, and a producer of oleochemicals, may be expected to lead the pack in supplying certified oleochemicals. In 2020, it produced 2.36 million tonnes of palm oil – around 3 per cent of global production – and some 64 per cent of this was RSPO certified.

However, the supply of this certified material does not seem to trickle down to the company’s subsidiaries operating in the oleochemical sector. Emery Oleochemicals is a 50:50 joint venture between Sime Darby and PTT Chemical International. Headquartered in the US, it serves speciality oleochemicals to a wide range of sectors including agriculture, heavy industry and consumer products.

According to their 2020 ACOP, in that year they sourced 142,296 tonnes of palm oil, kernel oil and derivatives. But a mere 6.5 per cent of this was RSPO certified. This makes it highly unlikely that the company will meet its commitment to source 100 per cent RSPO-certified products by 2025. The company cites “low customer demand” for RSPO-grade materials as a reason for slow progress, but this conflicts with the consensus that downstream users struggle to find suppliers of certified oleochemicals.

Why are companies lagging?  

It’s easier to call out companies that actually engage with the RSPO process. These are the ones that have made their records available, which in theory makes them accountable. But for every company engaging, there are many more with supply chains that are completely opaque.

While companies in the oleochemical sector are taking steps to source certified material, they generally rely on the RSPO’s mass balance supply chain system. Widely seen as an entry point to sourcing sustainable palm oil, mass balance allows palm oil mills to take in fruit from both certified and non-certified growers and mix the two together. The term is used because the amount, or “mass”, of certified fruit that comes into a mill must be equal to, or in “balance” with, the amount of certified oil that leaves it (factoring in oil extraction rates).

This system makes it difficult for those sourcing oil to know whether it has come from conventional plantations that operate without the social and environmental safeguards embedded in the RSPO’s guiding principles. By the time oil has passed through refineries, oleochemical plants and on to manufacturers, tracing it back to the plantation is nigh on impossible.

Recognising the challenges around oleochemicals, in 2019 a group of companies tied to the sector came together to form Action for Sustainable Derivatives (ASD). ASD is an industry-led collaboration of players in cosmetics, home and personal care, and oleochemical industries with the aim of achieving responsible production and sourcing of palm oil derivatives.

Their recent annual report judges there to be collective transparency for about 1 per cent of global palm production, 8–10 per cent of the global palm-based oleochemical market, and about 10–20 per cent of the palm-kernel-oil-based oleochemicals market.

Transparency results also confirmed similarities in the supply base of ASD members, with 78 per cent of the world’s palm oil mills present in all ASD member’s supply chains. In the current market of certified sustainable palm oil, buyers rely on the RSPO’s mass balance certification approach, and this creates risks of being tied to ongoing deforestation and worker exploitation.

Speaking with China Dialogue, Arnaud Bonisoli, sustainable supply chain project manager at Transitions – an organisation that co-facilitates ASD with BSR (Business for Social Responsibility) – said that “despite the strong demand for segregated volumes from our members, there is just not enough supplies”. He added: “The system transition gap from mass balance to segregated is significant.”

The RSPO’s segregated supply chain keeps certified palm products separate from those not certified, and offers a guarantee of traceability back to certified plantations. However, it comes with a higher price premium and creates an additional adminstrative and logistical burden for companies.

By the time these products move to companies that manufacture hundreds of different palm-based oleochemicals, the infrastructure required to keep them physically separate can be hard to provide. That is why there are fewer segregated materials available, and why the oleochemicals sector still relies heavily on mass balance.

In December 2021, several ASD members along with WWF and Transitions submitted a Resolution to the RSPO, questioning the robustness of the mass balance model, notably for oleochemical users. They requested that the RSPO strengthen the model with stricter requirements that would facilitate a transformation to the segregated model.

In July 2022, the RSPO launched a survey to get the views of its members and stakeholders on the model. This was the initial stage of the expected study aiming to recast the most commonly used certification scheme of the palm oil sector.

The way forward?

While their certified volumes could still be increased, many of the large companies named here are forerunners in supply chain due diligence. But smaller companies operating downstream have limited capacity to assess the sustainability risks associated with their supply chains.

The proposed EU regulation on deforestation-free commodities is likely to push European companies in the right direction, but whether it will achieve the desired effect is uncertain. There are reasonable concerns that increased pressure on growers from consumer markets will instead push a preference for markets like India and China where the main criteria for palm oil buyers is low cost – all but eliminating the opportunity to generate price premiums for sustainable palm oil.

There is a consensus on the need to increase smallholder inclusion in palm certification schemes, and this is something the RSPO is focused on. For companies sourcing certified materials, there is significant opportunity to close their certification gap by purchasing credits to support smallholders in getting certified. With nearly 40 per cent of the world’s oil palm grown on smallholdings, this would go a long way to increasing the availability of certified materials.

Awareness of the prevalence of palm oil in the form of oleochemicals is lagging, especially regarding non-food applications. This is hampering progress on certification and sustainable sourcing.

Companies embedding oleochemicals in their manufacturing lines to reduce their dependency on fossil fuels must proceed with caution. This doesn’t mean that palm oil cannot offer solutions in sectors reliant on fossil fuels, but without the traceability offered by segregated supplies, the guarantee of sustainability is lost in the complexity of the chain.

This article was originally published on China Dialogue under a Creative Commons licence.

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