May 28, 2014
CHANGING THE SUPPLY CHAIN FOR PALM OIL: HOW IT PROTECTS FORESTS, CURBS CLIMATE CHANGE, AND ENHANCES SHAREHOLDER VALUE
PROBLEM WITH CURRENT PALM OIL PRODUCTION: Palm oil is the most widely used vegetable oil in the world, present in over half of packaged products on supermarket shelves, from bakery snacks to lipstick and cosmetics. In the last decade, global production of palm oil has more than doubled. Unfortunately, palm oil is too often grown by burning valuable tropical forests and peatlands to make room for palm oil plantations- releasing massive quantities of CO2 and destroying the habitats for critically endangered species. In fact, due to high levels of deforestation and conversion of carbon-rich peatlands, Indonesia— the world’s largest producer of palm oil— has been ranked by the World Bank as the 3rd largest emitter of greenhouse gases globally.
POTENTIAL RISK FOR INVESTORS: The supply chain for palm oil is complex, composed of suppliers and traders operating in Southeast Asia and around the globe under a web of often weak and variable local, state and country regulations. For decades, companies that wanted to avoid examining or taking responsibility for their palm oil supply chains were able to do so because of the opaque nature of the industry. In recent years, however, high-profile public campaigns have alerted consumers by publicly linking major household brands that use palm oil in their products to the rampant deforestation and human rights abuses taking place on the ground. These campaigns have exposed companies—and their shareholders—to significant brand and reputational risks, and made deforestation in the supply chain impossible for companies to ignore. Consequently, deforestation for palm oil has rapidly become a high-priority risk and bottom-line issue for major corporate brands and their shareholders.
SOLUTION: COMPANIES COMMIT TO PURCHASING RESPONSIBLE & SUSTAINABLE PALM OIL: Under pressure from consumers and investors, many major palm oil consuming companies such as Nestle*, Unilever*, and Starbucks* have taken steps to address the impacts of their supply chain by pledging to only purchase palm oil from sustainable sources. Instead of burning down large tracts of new forests, suppliers can grow palm oil on land that has been previously cleared and is currently unused, or has low quality soil. In fact, the Indonesian government has acknowledged that it can meet its palm oil expansion goals through 2020 without clearing more land. Corporations that purchase large quantities of palm oil for their branded products can and have started to leverage their purchasing power to influence the palm oil supply chain and require that their palm oil suppliers stop cutting down tropical forests to grow palm oil.
CHALLENGES TO ACHIEVING SUSTAINABLE PALM OIL: Changing one of the world’s most environmentally degrading industries faces significant challenges. In 2005, the Roundtable for Sustainable Palm Oil (RSPO) was established to set guidelines and establish a certification scheme for sustainable palm oil production. The RSPO’s stated aim is to “transform markets to make sustainable palm oil the norm”, and sets its standards based on consensus from its members, which include companies in the palm oil industry. Unfortunately, the RSPO’s current definition of ‘sustainable’ is too weak to curb the environmental impacts of palm oil production. Specifically, the RSPO certification fails to include critical protections for secondary forests and peatlands in its standards. The RSPO also fails to enforce compliance among RSPO members. Furthermore, many companies rely on GreenPalm ‘offsets’, rather than preventing the physical acts of deforestation by their suppliers. The shortcomings of the RSPO became more widely recognized when the RSPO failed to approve strengthened provisions this past year. Consequently, companies that relied on RSPO certification to address the risks associated with palm oil production have found themselves again under fire for failing to eliminate deforestation from their supply chains.
INVESTORS PRESS FOR FULL TRACEABILITY TO ENSURE DEFORESTATION-FREE PALM OIL: To mitigate the environmental impacts of their palm oil supply chain and the reputational risks associated with it, investors are increasingly urging companies to take direct responsibility for purchasing palm oil from suppliers that uphold strong standards for sustainable production. Rather than relying solely on the RSPO to set and implement standards for sustainable production, investors are urging companies to work directly with their suppliers to ensure that the palm oil they purchase is not driving deforestation, climate change, and human rights abuses.
Recently, major companies including Kellogg’s*, Mars*, L’Oreal*, Procter & Gamble*, and Wilmar* have pledged to develop fully traceable, deforestation-free supply chains. Specifically, these companies have adopted policies for ensuring that all palm oil must be fully traceable back to growers verified as adhering to 1) no development on High Carbon Stock* or High Conservation Value forests, 2) no development on peatlands, regardless of depth, with restoration where possible, and 3) no human rights violations, including respect for land tenure rights and Free Prior and Informed Consent from local communities and respect for workers’ rights. Aggressive timelines for achieving these principles are critical. While some companies have adopted a target date of 2020 for achieving compliance, others including Kellogg’s and industry leaders like Wilmar have recognized the urgency of tropical deforestation and consequently adopted more aggressive timelines for eliminating deforestation in their supply chains by 2015.
When major companies set requirements for their suppliers, the choice for suppliers is either to comply or risk losing significant market access. The purchasing power and influence of these global brands over their suppliers’ practices has the potential to drive sweeping change throughout the supply chain. The hour-glass structure of the palm oil supply chain, with just a handful of major traders controlling the flow of the majority of the world’s palm oil, means that the palm oil traders are a critical leverage point for affecting change. Consumer brands that put pressure on these palm oil traders to provide deforestation free palm oil can help unravel the supply chain and drive sweeping change across the palm oil supply chain.
HOW INVESTORS CAN AND HAVE DRIVEN CHANGE: Investors concerned about the risks associated with deforestation and climate change have been instrumental in pressing their companies to adopt sustainable palm oil commitments, and drive change through the supply chain.
For example, in 2013 Green Century filed a shareholder proposal urging Kellogg’s to adopt a zero-deforestation palm oil commitment.This, in turn, resulted in pressure on Wilmar—the world’s largest and historically most notorious palm oil trader, which had recently signed a major joint venture partnership with Kellogg’s. Green Century also coordinated a letter signed by 40 other institutional investors urging Wilmar to require that its suppliers change their growing practices to provide deforestation-free palm oil. By the end of December 2013, Wilmar announced a groundbreaking policy to end deforestation and peatland development in its palm oil supply chain, which represents approximately 45% of global palm oil trade. By 2020, Wilmar’s policy will have eliminated an estimated 1.5 gigatons of carbon emissions, which is equivalent to the annual emissions from Central and South America combined in 2010.
In the following months, investors secured similar commitments from General Mills*, Smuckers*, Safeway*, and Proctor & Gamble, requiring their suppliers to provide fully traceable, deforestation free palm oil, and putting crucial pressure on some of the world’s largest palm oil traders and suppliers. A few months after Wilmar’s announcement, another major palm oil trader, Golden Agri-Resources*, joined Wilmar in adopting a zero deforestation commitment. Together, these two traders control over 50% of global palm oil trade, and play a critical role in curbing deforestation and transforming the industry.
IMPLEMENTATION: WORKING WITH SUPPLIERS TO ACHIEVE ZERO DEFORESTATION: Putting these new and strengthened policies into practice requires that companies work closely and collaboratively with their suppliers to achieve compliance. Once companies have defined and set their expectations for purchasing only deforestation-free palm oil, they then need to map their supply chains, and work with their suppliers to develop action plans for improvement. Many companies have chosen to partner with The Forest Trust (TFT), an international environmental organization that has earned the reputation and trust among both industry and advocacy organizations for helping companies ‘clean up their supply chains’ and implement zero-deforestation commitments.
To secure a deforestation-fee supply of palm oil, the industry is working to achieve ‘natural segregation’ of the supply chain, whereby entire refineries only process palm oil that is fully traceable to growers verified as deforestation-free. There are only about 3-10 refineries that ‘treat’ palm oil in each country, with the majority concentrated in Indonesia and Malaysia. If those refineries were to commit to making sure that 100% of the palm oil they process is from deforestation-free sources, the costs, logistics, and overall complexities associated with securing separate supply chains for palm oil verified as deforestation-free would be significantly reduced.
Investors should press their companies to support this transition by phasing out GreenPalm ‘offset’ certificates as fast as possible in favor of purchasing physically certified palm oil. Purchasing RSPO Mass Balance palm oil can support refineries in their transition towards zero-deforestation, as it fosters greater uptake of physically certified oil. Purchasing RSPO Mass Balance on its own, however, does not meet the criteria for deforestation-free commitments, and refineries will need to additionally demonstrate that they know the source of all the palm oil they process, and that they are progressively increasing the percentage of palm oil coming from growers verified as adhering to no deforestation, peatland development, or human rights violations.
INVESTORS PRESS FOR TRANSPARENCY, ACCOUNTABILITY, AND REPORTING ON PROGRESS: Investors require transparent, rigorous reporting on relevant key performance indicators in order to make informed risk assessments and investment decisions. Consequently, investors concerned about palm oil related risks should push the companies in which they invest to establish clear accountability mechanisms that support and demonstrate continual progress in implementing strong responsible sourcing policies. Key performance indicators and metrics that stakeholders should look for as evidence of company progress are:
- The company has a clear policy committing to No Deforestation (including protection of HCS Forests, peatland of any depth, and HCV areas), to No Exploitation (including protection of human rights, fair treatment of workers, and recognizing community land rights), and to a fully traceable and legal supply chain;
- A time-bound action plan for implementing the policy;
- Partnership with a trusted third-party NGO to support implementation;
- Regular reporting on implementation progress, with suggested metrics including:
- % Volume coming from suppliers with deforestation-free sourcing policies
- % Traceable to mill
- % Traceable to plantation
- % coming from sources that are assessed and working toward compliance with company policy
- % coming from sources that are assessed and Compliant or Low Risk
- % purchases of physical RSPO certified oil
- A commitment to use third-party independent auditors to verify progress and implementation;
While there is no ‘one size fits all’ approach to ending deforestation for palm oil, transparent disclosure will be critical for demonstrating progress on the journey towards sustainable palm oil.
CONCLUSION: Gone is the time where companies could claim ignorance about the practices occurring in their supply chains, ushered in by an era of heightened expectations for transparency and accountability. Investors and consumers expect companies to drive and uphold strong sustainability commitments throughout their entire supply chain.
Shareholders can and will continue to play a critical role in pushing companies to clearly demonstrate how palm oil related risks are being managed so that the company’s brand will not be targeted and linked to illegal deforestation in high profile campaigns or media exposés. Further transformation of the palm oil supply chain is not only possible, but urgently necessary to protect forests, the climate, and shareholder value.
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Green Century Capital Management is an environmentally responsible investment advisory firm that manages two fossil fuel free mutual funds. Founded by a partnership of non-profit environmental advocacy organizations in 1991, Green Century provides people who care about a clean, healthy planet the opportunity to keep their money out of environmentally irresponsible companies and use the leverage of their investment dollars to encourage environmentally responsible corporate behavior. Visit Green Century at greencentury.com.
*As of March 31, 2014, Unilever NV American Depositary Receipt; Starbucks Corporation; Kellogg Company, The Procter & Gamble Company, General Mills, Inc., The JM Smucker Company, and Safeway, Inc. comprised 0.00% and 1.17%; 0.89% and 0.30%; 0.26% and 0.00%; 3.55% and 0.00%; 0.53% and 0.01%; 0.00% and 1.24%; and 0.15% and 0% of the Green Century Equity Fund and the Green Century Balanced Fund, respectively. Other securities mentioned were not held in the portfolios as of March 31, 2014. The holdings of the Green Century Funds may change due to ongoing management of the Funds. References to specific investments should not be construed as a recommendation of a security by the Funds, their advisor, administrator, or distributor.
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