In the past year, the United States has banned the imports of palm oil and rubber-based products from three Malaysian companies following allegations of labour abuse. Environmental issues have tended to dominate the attention on these industries, but the bans bring social issues to the fore forcing agribusiness to assess their obligations to their workforces. Are such regulatory bans the best way to address the social issues prevalent in the industry? What else can be done to ensure that social sustainability is integrated into governance systems?
Two of the world’s largest palm oil producers, Malaysian planters, FGV Holdings and Sime Darby Plantation (SDP) were slapped with import bans in September and December 2020, respectively, by the United States Customs and Border Protection (USCBP) following allegations of forced labour in production. Allegations against FGV include physical and sexual violence, debt bondage, the retention of identity documents and child labour.
The rubber industry has not gone unscathed either. Malaysia-based subsidiaries of the world’s largest medical glove maker, Top Glove, and TG Medical had imports of its products blocked by US customs authorities in July last year following allegations of labour abuse. Whistle-blower reports have made headlines about their living and working conditions grabbing the attention of rights groups and ultimately, US customs.
The SDP said in February that their internal assessment did not turn up evidence of systemic forced labour issues in its Malaysian operations. However, a complaint to the Malaysian Securities Commission alleging that SDP had made wrongful disclosures in its 2019 sustainability report now pits the planter in legal action against its accuser Duncan Jepson, managing director of NGO, Liberty Shared. SDP commenced legal proceedings against the NGO on 11 March in a bid to obtain information about the complaint filed by Jepson, that it says would allow it to close any alleged gaps in its operations. This will be a keenly watched landmark case.
Malaysia has been prominent in US import disputes, however the palm oil companies implicated are thought to be supplying from their Indonesian plantations and refineries. Import bans may cause irreversible reputational risk to these companies, even after the issues have been resolved. Some in the industry worry that buyers will fear the risk of guilt-by-association and withdraw their business on a group-wide basis, with a regional or global impact. Questions also arise for popular sustainability standards like the Roundtable on Sustainable Palm Oil (RSPO). Major palm oil buyers, including US food company, General Mills and chocolate maker, Hershey, are reportedly shying away from making their purchases from FGV and SDP, citing concerns over reputational damage.
Import bans add a new mechanism for disputes, beyond the World Trade Organisation (WTO), where Malaysia and Indonesia have been direct parties in three and over two dozen cases, respectively. Labour rules are also on the rise in Australia, Canada and the United Kingdom. Will regulatory challenges accelerate how social issues are currently addressed in the industry? What else can be done?
Treat the causes, not the symptoms
The palm oil industry charges that such bans are unfair asking for time to be granted to fix the problem, rather than suffer import cuts that could hurt their industries and its workers. Almost 85 per cent of the global palm oil supply is produced in Indonesia and Malaysia. The palm oil industry not only accounts significantly towards the gross domestic product of these countries but supports millions of plantation workers and smallholders.
Import bans are also limited in efficacy. Despite the ban on rubber product imports, some experts do not see major trade disruptions given the surge in demand for latex gloves amid the Covid-19 pandemic. The palm oil sector is also still performing well despite boycotts and economic downturn caused by the Covid-19 pandemic. In 2020, FGV had its best performance in five years, with its revenue increasing six per cent from the previous year. In the long term, domestic consumption of palm oil in Indonesia and Malaysia is also expected to increase.
When slapped with import bans, companies may move quickly to investigate the allegations in their supply chain. But they need to be more proactive in preventing the social issues that have long been associated with the industry. Bans risk triggering reactionary measures that fail to root out the causes of weak social governance and sustainability measures.
Hiccups in measuring social sustainability
To treat the causes of social sustainability issues, we must be able to understand and assess them.
Compared to environmental factors, social sustainability is more difficult to monitor and verify as it requires physical assessments on the ground. Indicators measuring social sustainability can also be hard to quantify and it also relies on employees having the avenues to freely report issues without recourse.
In the first half of 2020, assessing social responsibility was further complicated by Covid-19. Movement restrictions imposed in Malaysia and Indonesia to curb the spread of the disease disrupted the assessment of environment, social and governance (ESG) compliance on the ground. Some companies adopted technology to continue monitoring work but admitted that they were not a proper substitute for field audits.
Several companies also argue that there is a lack of metrics in measuring social sustainability. As a result, there has been a strong emphasis on the easily measured environmental factors, sometimes at the expense of social ones, in assessing ESG. Unclear metrics also lead to conflicting assessments.
How do we get better?
In the Singapore Institute of International Affairs’ report, “ESG in Practice: A Closer Look at Sustainability in ASEAN’s Palm Oil and Pulpwood Sectors”, 28 organisations were engaged to better understand the challenges of implementing ESG standards on the ground forming ideas on how to mediate them.
First, better transparency and traceability in ESG data reporting is needed. For instance, the industry would stand to benefit from common information-sharing platforms, which could be coordinated by industry certification bodies such as the RSPO or Forest Stewardship Council (FSC). Such platforms, where the industry can also share best practices, could boost both industrial standards and disclosures, which in turn could help policymakers craft robust regulations.
To account for social sustainability in ESG evaluation, the industry and financial sector also need to better define ways to measure and value social factors. For example, methodologies such as the Social Return on Investment (SROI) have been put forward to ensure that ESG evaluations do not focus narrowly on environmental factors at the cost of social ones.
As external pressures mount on the industry, major companies are trying to remain committed to social sustainability. For instance, many have already adopted various International Labour Organisation conventions throughout their operations. Some companies have also tried to improve their diversity credentials by hiring more women for permanent positions and by setting up occupational health and safety committees to improve workplace conditions.
Companies must continue to be proactive in the prevention of social issues, instead of only responding when there are external pressures from regulatory bodies or stakeholders. This will help ensure that companies adopt a holistic approach to ESG – engaging with both environmental and social requirements.
The authors of this commentary are Khor Yu Leng, political economist, Segi Enam Advisors and associate fellow (sustainability), Singapore Institute of International Affairs (SIIA); Nadirah Sharif, research associate, Segi Enam Advisors and Siti Bazilah, senior executive (sustainability), SIIA.