In headlines long since eclipsed by the global pandemic, 2019 was the worst year for Indonesian wildfires since 2015, when emissions from fires in the country frequently outstripped the daily average coming from all US economic activity. The dramatic increase in 2019 came despite government reforms following the devastating 2015 fire season, including restrictions on forest clearing and the planned restoration of drained peatland. While Indonesia may not be as widely cited as other countries in reports about climate change, it is among the world’s top 10 emitters, due in large part to wildfires and the deforestation that results. But neither the fires nor the deforestation are an accident. Both are driven by the world’s appetite for a single ingredient: palm oil.
Take time to read through the ingredients of products in your kitchen and bathroom, and chances are you’ll see palm oil appear, in some form or other, again and again. These ingredients are frequently disguised by names including “palmitate,” “palmate,” “sodium laureth/lauryl sulphate,” “stearate” and “stearic acid,” along with the more obvious “palm oil” and “palm kernel oil.” Because palm derivatives are used in as much as 50% of all packaged goods, you’ll likely find them in everything from ice cream and chocolate to lipstick, soap and shampoo.
Palm oil’s prevalence should not be surprising. It is one of the cheapest types of vegetable oils to produce, and in many food products it has replaced notorious trans fats, whose negative health impacts much of the Western world became aware of beginning in the 1990s. Until recently, palm oil was also the major ingredient in European biodiesel. And it’s the highest-yielding vegetable oil, requiring less land to produce than alternatives like rapeseed, soy and sunflower oils.
But despite the crop’s efficiency, each palm oil tree still requires approximately 3 meters in diameter of clear space around the base for growth. This means large areas of rain forest are being destroyed to make way for oil palm plantations. Indonesia and Malaysia account for 85% of global palm oil production; currently, Indonesia is being deforested faster than any other country in the world, due solely to palm oil production. This ecosystem devastation has both eliminated carbon-storing tree species and caused the number of orangutans, elephants, tigers, and rhinos to decline at alarming rates, landing many on the endangered species watchlist. It has also come at the expense of local “smallholders” (many of them tribes whose existence predates the countries where they now live), who are enticed to sell land rights at bargain prices without a clear understanding of the resulting impacts.
Further, the fastest way to clear land for palm oil production is by burning, which is polluting cities with smog, causing widespread health issues, and releasing vast amounts of carbon into the atmosphere. These fires often become “megafires,” as so many did in 2015, when Indonesia suddenly became the world’s 4th-largest emitter. Additionally, many oil palm plantations are on carbon-rich peatlands, which, when exposed, release even more previously trapped CO2.
In 2004, rising concern from local communities and environmentalists spurred the creation of the Roundtable on Sustainable Palm Oil (RSPO), with founding members including Unilever and the Worldwide Fund for Nature (WWF). The RSPO developed requirements for Certified Sustainable Palm Oil (CSPO) with the goal of protecting land, helping local farmers, supporting affordable pricing, and safeguarding local communities and workers. CSPO through the RSPO has a trademark label used by corporations that include the Campbell Soup Company, Cargill, Conagra, General Mills, Kellogg, Mars, Sysco, The J.M. Smucker Company, Procter & Gamble, Unilever, and hundreds more. Today, almost 20% of global palm oil production is RSPO certified.
Unfortunately, the good intentions of the RSPO have been a challenge to realize. It wasn’t until 2018 that the RSPO updated its principles and criteria to include an explicit “No Deforestation, No Peat, No Exploitation” (NDPE) ban on the practices of destroying forests, planting palm on carbon-rich peatlands, and exploiting local populations. In the meantime, some corporations had already made such commitments, forcing the certification entity to play catch-up. On the other hand, the RSPO has faced ongoing criticism about the lack of successful enforcement of its standards, with investigations suggesting that, particularly prior to the 2018 update, members continued contributing heavily to deforestation and other destructive practices. Finally, many members’ RSPO commitments have been incremental, with companies such as Wilmar, the world’s largest palm oil trader, continually pushing back its NDPE commitments, and most recently exiting the promising High Carbon Stock Approach (HCSA) in an apparent attempt to avoid its sustainability commitments.
As investors, we still believe RSPO commitments are a meaningful indicator of a company’s intention to use sustainable palm and address deforestation and other issues in its supply chain. But we have also begun to look beyond future commitments, to a company’s transparency around its current use of palm oil, and particularly, its ability to trace the palm it uses to the plantation level–the only definite way to ensure it is not running afoul of NDPE commitments. The Hershey Company, for example, a significant user of palm oil by global standards, increased its plantation-level palm oil traceability from 26.75% in 2018 to 52.3% by the second half of 2019, based on purchasing more of its overall volume from mills with stronger transparency practices, and in some cases by removing suppliers altogether. This followed Hershey’s achievement of 100% RSPO CSPO beginning in 2017, another sign of true commitment to progress.
Somewhat further behind, Unilever, the world’s second-largest buyer of palm oil, traces 92% of its core palm oil volume to the mill level, but does not document significant traceability to the plantation level. That said, the company has been publishing complete lists of its suppliers and mills since 2018. Now it remains to be seen whether a technological solution that Unilever began piloting in 2019 can effectively trace most of its palm oil back to the plantation level, and help the company meet its commitment to source 100% RSPO CSPO this year. Another large brand, Colgate-Palmolive, has partnered with Earthworm (formerly The Forest Trust) to help meet plantation-level traceability goals by 2020, with an interim goal of using 100% RSPO-certified palm oil. Thus far the partnership has helped the company achieve 100% mill traceability for palm oil, 97% for palm kernel oil, and 53% for palm oil derivatives.
Still others, including large US brands like Walmart, Kellogg, General Mills, Kraft Heinz and Kroger, trail further on their commitments and progress, scoring in the “middle of the pack” range in WWF’s 2020 Palm Oil Buyers Scorecard; those scored as “laggards” included Conagra, Target, Whole Foods Market and Wendy’s. Even more problematic, according to WWF, is that a quarter of the 173 invitees to its scorecard survey did not respond at all, less than a third of respondents require suppliers to be deforestation-free, and still fewer require palm oil traceability to the mill (let alone the plantation) level.
With the 2020 dry season entering full swing in Indonesia and Malaysia, widespread fires are already being reported this year. In the meantime, the global pandemic has caused Indonesia to cut its budget for detecting and combating these wildfires, while COVID-19 makes local populations still suffering from smoke-related respiratory ailments more vulnerable than ever. The risk that near-term palm oil impacts will be exacerbated is real. And if corporations do not accelerate the pace of change, even greater risks lie ahead.
But there is broad consensus that sustainable palm oil is possible. The opportunities–for local populations, for endangered species and habitat, and for the global climate–are massive. The missing ingredients are pressure and time. To make the sustainable palm thesis a reality, we as investors and consumers must apply sustained pressure on the corporations that now inexorably connect us to the forests of Indonesia and Malaysia. When we give these corporations no choice but to invest the money, time and resources needed to fully and rapidly transition to sustainable palm oil, the recovery can begin.
