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Who gets to define sustainable palm oil?

Leading palm oil producers Indonesia and Malaysia are actively promoting their own standards of sustainable palm oil production.

Very few commodities are more geographically concentrated in their production than palm oil. In 2020, Indonesia and Malaysia produced 59 per cent and 26 per cent, respectively, of the world’s palm oil. Sometimes referred to as “red gold”, the naturally reddish vegetable oil is widely used in cooking, food processing, cosmetics, chemical production and as a biofuel.

Palm oil is an important source of economic growth and livelihoods in both countries. But it has also been associated with environmental degradation and human rights abuses. As a response to growing consumer awareness of these issues in the US and Europe, in 2004, the World Wildlife Fund (WWF), Malaysian Palm Oil Association and a few multinational companies including Unilever started the Roundtable on Sustainable Palm Oil (RSPO), a voluntary initiative that promotes sustainable production of the commodity through certification schemes and standards.

Western users of palm oil have long been putting pressure on their Asian suppliers to improve sustainability practices. In 2009, the EU applied restrictions on Asian palm oil biofuel imports. Lim Keng Yaik, former Malaysia’s Minister of Primary Industries, called it “green neocolonialism.”

The RSPO tries to apply pressure from consumers in affluent Western markets to producers in Asia. But in recent years, governments and industry groups in Indonesia and Malaysia increasingly see the RSPO as too demanding and having too much say in the global supply chain.

“Sometimes I use the word ‘cartel’ [to describe RSPO],” says Dr. Ahmad Parveez Ghulam Kadir, director-general of the Malaysia Palm Oil Board (MPOB).

Turning the table, both countries initiated their own national certification schemes: in 2011, the Indonesian Sustainable Palm Oil (ISPO) standard was born. Four years later, Malaysia unveiled its equivalent, the Malaysian Sustainable Palm Oil (MSPO) standard. Since then, both countries have been campaigning globally to win recognition of their standards, and the right to define sustainable palm oil on their own terms.

‘Green’ palm oil: who should decide?

RSPO has strong buy-in in the European market with 86 per cent of non-biofuel palm oil imported by the 28 EU member states and Switzerland being RSPO-certified in 2019. Globally, however, RSPO certified palm oil only accounts for 19 per cent of total annual production, most of which is sold to Europe. In stark contrast, in the world’s top two importing countries, India and China, RSPO makes up only 3 per cent and 4 per cent of the market, respectively.

Dr Parveez said that in order to gain RSPO certification, producers have to cut profits, which is not really sustainable. “What I feel uncomfortable about is [that the RSPO] keep on changing their goalposts, keep on making it more difficult, more stringent, adding more features.”

As national standards, ISPO and MSPO are rapidly advancing in their home markets. By the end of 2020, the Indonesian Palm Oil Association (GAPKI) issued 682 certificates covering a total of 3.78 million hectares of land or 27% of Indonesia’s planted palm oil area. The adoption of MSPO is even more impressive. The agency claims that 95.8 per cent of Malaysia’s total oil palm planted area is now covered by MSPO certification.

The standards are making inroads at a time when the EU continues to ask tough questions on the commodity’s sustainability. In 2019, the updated EU Renewable Energy Directive declared palm oil-based biofuel inconsistent with the EU’s environmental policy due to its deforestation risks. The European Commission designated palm oil as a feedstock of high “indirect land use change”(ILUC) risk and announced a phase-out of palm oil as a biofuel by 2030.

The move triggered strong responses from Indonesia and Malaysia as half of the EU’s imported palm oil is used as biofuel. In December 2019, Indonesia put forward a formal complaint against the EU at the World Trade Organization (WTO), the world’s first WTO palm oil trade dispute case. Indonesia’s director-general of foreign trade, Indrasari Wisnu Wardhana, said the EU’s policy would not only impact Indonesia’s palm oil exports to Europe, but would also tarnish the image of palm oil products globally.

Malaysia quickly followed suit and filed its own complaint to the WTO’s Dispute Settlement Mechanism. The two countries also launched a global media campaign to rebuild the image of Southeast Asian palm oil. The disputes add urgency to the promotion of ISPO and MSPO as an effort to regain the right to define what constitutes “sustainability” in palm oil production.

crude palm oil

Screening crude palm oil in North Sumatra, Indonesia Image: YT Haryono / Alamy. 

Two steps forward, one step back

As national standards, both ISPO and MSPO are backed by government enforcement to raise the level of sustainability in palm oil production. Like the RSPO, both cover general themes on legality, environmental accountability, social responsibility and business practices, but are less stringent in most of those aspects. A comparison of 7 palm oil sustainability standards ranks the RSPO at the top and MSPO and ISPO at the bottom, with the ISPO lagging far behind others.

Over the years, the two countries have attempted to strengthen the standards. In 2014, Indonesia made ISPO certification mandatory for all producers other than smallholder farmer. In 2016, it set up a special working group asking multiple stakeholders to help update the standard in order to increase its international recognition. The group added human rights protection and traceability and transparency principles to the framework and later set out to have independent monitoring of certification implementation. The final aim was to make certification mandatory for smallholders.

In 2020, Indonesia and Malaysia produced 59% and 26%, respectively, of the world’s palm oil.

The openness was short-lived. Procedures to update the ISPO became less transparent after 2016 and ended up excluding many stakeholders from the process. In March 2020, a new presidential regulation on ISPO was issued with added articles about transparency and mandatory smallholder certification by 2025. However, articles on human rights protections, traceability and independent monitoring that appeared in earlier drafts disappeared from the final regulation, to the general dismay of NGOs.  

Joko Sarijito, manager of WWF Indonesia’s sustainable commodities project, told China Dialogue that “ISPO standards require all growers and factories to have minimum legal requirements as mandated by Indonesian law”, but some sustainability standards related to natural resources conservation and indigenous people rights should be strengthened.

Though less stringent than the RSPO, mandatory national standards are “better placed to achieve full national coverage of produced volume”, points out a 2020 United Nations Development Programme report. It also highlights that, as a private scheme, RSPO faces resistance from some stakeholders for its certification costs and perceived inadequate price premium.

The biggest challenge to “full national coverage” comes from smallholder farmers who manage roughly 40% of Malaysia and Indonesia’s oil palm-planted areas. Their per hectare yield can be 50 per cent lower than that of large-scale commercial farms because of lack of knowledge and access to high-quality agricultural inputs such as fertilisers, while incomplete and inefficient harvesting also plays a role. Their response to the yield gap is to cut down forest to plant more palm trees. While rolling out certification schemes, helping smallholders to boost their per hectare yield on existing land is a crucial step toward sustainability.

Low education and income are often barriers for smallholder farmers to certify their palm oil. Land ownership is another hurdle. RSPO, MSPO and ISPO all require proper record of land ownership as a prerequisite for certification, a condition that many multi-generational smallholder farmers often cannot meet.  

The role of smallholders

Bringing in smallholder farmers has been central in Malaysia and Indonesia’s push to expand coverage of their national standards. Dr Parveez, the MPOB director-general, told China Dialogue that one of Malaysia’s strategies is to create “sustainable palm oil clusters” consisting of 1,000–1,500 smallholder farmers. MPOB has designated officials to manage such clusters and cover certification fees for farmers. Under the scheme, certification costs per hectare are between $30 and 35, much lower than the $87–215/hectare for the RSPO, as estimated by a 2016 study.

In Malaysia, where nearly 96 per cent of areas planted with oil palm have been MSPO-certified, smallholders remain the most challenging segment. Smallholders (both organised and independent) only account for about 22 per cent of all certified planted areas, while they cultivate nearly 40 per cent of planted land. The government has mandated that all remaining smallholder farmers will have to be certified by the beginning of 2022 or face suspension or termination of their licences.

In 2019, the Indonesian government published a National Sustainable Palm Oil Action Plan aimed at accelerating smallholder certification by coordinating the actions of 14 government agencies. But Indonesia is lagging behind in certifying smallholders largely because of the land-ownership issues. As of October 2020, only 0.21 per cent of oil palm planted areas controlled by smallholders were ISPO-certified.

palm-oil-smallholder

Harvesting the crop of a small-holder in Sumatra. Image: Greenpeace/John Novis.

“Indonesia is too big. Its palm oil is produced in so many different areas, which makes certification more difficult,” Robert Hii explains. Hii was born in Malaysia and runs CSPO Watch, an independent industry monitoring website.
 
He argues that Malaysia’s heavier reliance on palm oil exports makes it more sensitive to the sustainability demand of downstream buyers. But Indonesia consumes 30-35 per cent of its own palm oil, so the motivation to get certification is low. “What Indonesia says is we have enough certified palm oil to satisfy the European and US market, why do we need to certify the rest?” Hii said.

Support for the small farmers

Boosting the average yield of smallholder farmers is one of the reasons why the governments are guiding them through the certification process, which tends to raise their knowledge and improves planting techniques. Higher efficiency reduces the pressure on land and deforestation.

Malaysia has banned the conversion of primary forests and carbon-rich peatland into oil palm plantations and has committed to put a cap on planted areas, stipulating that they must not cover more than 6.5 million hectares in 2023. In 2019, total planted area in Malaysia has already reached 5.9 million hectares but because of the 2023 cap, annual growth started shrinking to below 2 per cent after 2019. By comparison, between 2001 and 2016, the annual growth rate of oil palm plantation was over 9 per cent. 

Since 2011, Indonesia has also permanently banned the exploitation of primary forests and peat swamp forests for palm oil, pulp and timber production, although Greenpeace claims that deforestation still happens.

Dr Parveez told China Dialogue that despite the cap on total planted area, Malaysia is still aiming to increase yield per hectare by another 50 per cent through improved breeding techniques aided by genome technology, tissue culture, mechanisation and other means.

The potential for smallholder farmers to increase yield is very high. “Just boosting their production by one additional tonne per hectare per year, you will get an extra 2 million tonnes out of Malaysia… and 5-6 million tonnes out of Indonesia,” said Hii. Combined, this increased yield constitutes 10 per cent of the total 2020 global production.

Training smallholder farmers has become central to certification efforts in Malaysia and Indonesia. According to MPOB, the Malaysian government not only shoulders all the certification costs of farmers, provides personal protection equipment and storage space for chemicals, but also runs training sessions, roadshows and social media campaigns to raise awareness among the smallholders.

GAPKI has also organised workshops and good agricultural practice trainings to increase smallholder capacity and competency on sustainable plantation management and assist them in certifying and implementing ISPO. Sometimes it also helps with fertiliser procurement and transportation.

Due to a lack of research, the effectiveness of certification schemes such as RSPO, ISPO and MSPO in delivering sustainability improvements on the ground is still debatable. A study looking at Indonesian Borneo (Kalimantan) discovered “no significant difference” between RSPO and non-RSPO plantations in terms of sustainability metrics. However, it did find that certified plantations tend to achieve greater yields.

The impact of wider adoption of MSPO and ISPO is also under-studied. A recent report from Global Forest Watch shows that primary forest losses in Malaysia has dropped by 60.5 per cent in the last four years, from 185,000 hectares in 2016 to 73,000 hectares in 2020. Dr Parveez attributes the decline to the expansion of the MSPO scheme in the country which now covers 5.19 million hectares, which is 4.3 times the planted areas certified by RSPO.  

Winning over the buyers

Lately, both Malaysia and Indonesia have been actively publicising their efforts to improve palm oil sustainability, hoping that more international buyers will accept their sustainability standards. The Tokyo Olympics has included MSPO and ISPO, along with RSPO, as acceptable certificates in its Sourcing Code for Sustainable Palm Oil.

In 2018, the Indonesian Palm Oil Board signed a tripartite Memorandum of Understanding (MOU) with the Solvent Extractor Association, India’s largest industry group for plant-based oil, and Solidaridad, a Netherlands-based NGO, to recognise ISPO as a “legitimate sustainable framework for palm oil production and trade between Indonesia and India,” along with India’s own standard, India Palm Oil Sustainability (IPOS). The following year, MPOB followed suit with a similar MOU aiming at aligning MSPO with IPOS for joint promotion. 

When signing the MOU with MPOB, Atul Chaturvedi, president of SEAI, said: “Time has come to prepare countries for having their own national standard, rather than looking elsewhere.”

China, the world’s second largest palm oil importer, bought 7.6 million tonnes of the oil in 2019 – 13 per cent of the world total. But the Chinese government, businesses and the general public have yet to warm up to the idea of palm oil sustainability. No sustainability requirements are imposed on imported palm oil and certified products have close to zero visibility in the Chinese market.

Nevertheless, China will not be able to stay out of the sustainability debate for long. As India readies itself for the recognition of ISPO and MSPO, industries in Malaysia and Indonesia have turned their attention to China.

Malaysia has engaged Chinese counterparts to prepare the entrance of MSPO to the Chinese market. In 2019, MPOB signed an MOU with the China Green Food Development Center (CGFDC), aimed at allowing CGFDC to incorporate the MSPO scheme in its certification of the Green Food label, providing an entry point for Malaysia’s own certified palm oil into China.

When China’s foreign minister, Wang Yi, visited Malaysia in October 2020, he issued a joint statement with his counterpart Dato’ Seri Hishammuddin Tun Hussein acknowledging “the significance and importance of the trade-in commodities, especially that of palm oil.” Both sides agreed to strengthen cooperation in promoting sustainability requirements for palm oil products which adhered to the MSPO and China’s Green Food label.

Dr. Parveez spoke highly of China’s recognition of the MSPO, even though so far there are no sustainability requirements for imported palm oil in China. “We want the positive image for Malaysian palm oil to be spread in China… one day, it won’t be surprising that buyers in China will demand sustainable palm oil. When that time comes, we are already there.” He says.

The MPOB is also cultivating a relationship with the Beijing Winter Olympics 2022. “This will be another milestone for us, for the recognition of our MSPO. Just like Tokyo Olympics.” Dr Parveez said.

Indonesia’s GAPKI puts equal emphasis on exploring cooperation with China. Bandung Sahari at GAPKI’s sustainability department told China Dialogue that they hope ISPO will become part of those recognised sustainability standards with the same acknowledgement as the RSPO when the Chinese market imposes sustainability requirements through certification.

Meanwhile, a conversation about setting up China’s own domestic palm oil sustainability standard has already begun. Experts have told China Dialogue that if China does produce its own national standard, the question of which overseas standard to recognise will remain open.

If major palm oil markets accept ISPO and MSPO, will the more stringent RSPO be side-lined? Benjamin Loh, manager of WWF Malaysia’s sustainable palm oil project, is not that worried. “We would like to see MSPO be widely accepted as the norm in the global supply chain, especially in India and China,” he told China Dialogue.

“Markets that currently do not demand certification would benefit from MSPO as a starting point towards enhanced sustainability in the future. This will also eventually lead to increased sustainability requirements within the MSPO standard as we all know that sustainability is an ever-improving initiative,” he said.

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

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