Amundi Discussion Papers Series

DP-23-2017

June 2017

Palm Oil The environmental dilemma Elsa Blotière, Julien Grouillet, Aurélie Renard, ESG Analysis

SRI

Finalised at 6 March 2017

For professional investors only

Summary

alm oil, used mainly and on a massive scale today by the agri-food and cosmetic industries, is severely criticised. PThanks to its high yield and very interesting physical properties for these industries, palm oil is the most consumed vegetable oil in the world. With 62 million tonnes produced annually, it represents 38% of the world production of vegetable oil but occupies less than 10% of the surface of vegetable oil crops. Indonesia and Malaysia are the main producers and provide 85% of palm oil.1 However, oil palm cultivation is accused of contributing significantly to the destruction of primary forests, mainly in Indonesia and Malaysia, causing irreversible harm to biodiversity and huge fires, with extremely serious health consequences on local populations and on those of neighbouring countries. Oil palm cultivation also gives rise to many social conflicts due to the non-respect of local communities’ rights to their land, and this holds true for all producing countries. Finally, palm oil has often been called into question for its high content in saturated fatty acids, which are believed to increase the risk of cardiovascular disease. This study enabled us to draw up a situational analysis of environmental and social issues related to oil palm plantations by studying a sample of listed companies. Local legislations, private or government certifications, corporate initiatives are all vectors to improve practices. However, despite a significant amount of data and information provided by the various stakeholders, it is very difficult to draw up a clear mapping of the responsibilities of companies, national and local governments and other stakeholders, because transparency, communication and practices vary widely from one party to another. Some issues are still insufficiently considered by companies and other stakeholders, notably the social issue of human rights, or the environmental issue of greenhouse gas emissions and effluents.

1 Oil World, 2016

Amundi Discussion Papers Series - DP-23-2017 3 That said, there is a positive development in the practices and transparency shown by companies, even though the sector is regularly affected by very significant controversies. Under these conditions, the Best-in-Class approach is the best option given the difficulty of substituting other vegetable oils for palm oil, with its attractive characteristics and high yield.

4 Amundi Discussion Papers Series - DP-23-2017 Table OF CONTENTs

Introduction 7

I. Palm oil 8

1.1. Definitions 8

1.2. Uses 10

1.3. Palm oil production 12

1.3.1. Palm oil supply chain 12

1.3.2. Main producer countries 14

1.3.3. Trend in global production 15

1.3.4. Local contexts in Indonesia and Malaysia 15

1.3.5. Importing countries 20

1.4. ESG issues 22

1.4.1. Environmental issues 22

1.4.2. Social issues 30

II. Standards 30

2.1. Roundtable on Sustainable Palm Oil (RSPO) 30

2.2. Indonesian Sustainable Palm Oil standard (ISPO) 36

2.3. Malaysian Sustainable Palm Oil (MSPO) 36

2.4. Other certification systems and initiatives 37

2.5. Whistleblowers and transparency tools 37

III. Study and analysis 38

3.1. Methodology 38

3.2. Ratings summary 45

Conclusion 47

Bibliography 49

Discussion Papers list 51

Amundi Discussion Papers Series - DP-23-2017 5 6 Amundi Discussion Papers Series - DP-23-2017 PALM OIL THE ENVIRONMENTAL DILEMMA

Introduction Used for thousands of years in cooking and cosmetics, palm oil remains heavily criticised and has been the subject of many articles and controversial studies. Palm oil cultivation is accused of being one of the biggest contributors to primary forest destruction, causing huge fires and irreversible damage to biodiversity and treading on the rights of local communities. Some plantations have been cited for failing to comply with migrant workers’ rights or using child labour. Finally, some years ago palm oil received a lot of bad press for its high content in saturated fatty acids, which are believed to increase the risk of cardiovascular disease. All this does not prevent it from being the most consumed vegetable oil in the world. With 62 million tonnes produced each year, palm oil and palm kernel oil account for 38% of world production of vegetable oil but occupy only 7% of vegetable oil crop surfaces. Indonesia and Malaysia produce 85% of palm oil1. This first study dedicated to palm oil seeks to understand related environmental and social issues so as to determine the veracity of the accusations above and establish an inventory of best practices. The study examines a sample of companies whose operations are upstream from the palm oil value chain. We will start by outlining the social and environmental issues associated with the production of oil palm, then the main standards and certifications that aim to structure a more responsible palm oil market. Finally, in the third part, we will highlight the summary performances of the companies in our sample.

1 https://www.commoditybasis.com/palmoil_prices

Amundi Discussion Papers Series - DP-23-2017 7 I. Palm oil

1.1. Definitions The oil palm, Elaeis Guineensis, is cultivated for its fruit and seeds that produce oil (known as palm oil), mainly used in food and cosmetic products. These palm trees produce fruit three years after planting, have optimal yield between 7 and 18 years and an average life of 25 years. They can reach up to 20 meters high. Bunches of fruit harvested on oil palms (called Fresh Fruit Bunches, FFB) contain dozens of fruits and serve as the unit of measure used in the production of palm oil. As an indication, a mature oil palm can produce between 18 and 30 tonnes of FFB per hectare2. The fruits from a tree are harvested several times a month. Each fruit is the size of a large olive and contains 50% of oil that comes from the pulp (Crude Palm Oil, CPO) or its kernel (palm kernel oil). The fibre left over from palm kernel oil production processes provides a product called palm kernel expeller which can be used in animal feed, or in the manufacture of products such as paper and fertilizer3. The raw product is called “red palm oil” because of its red colour linked to its carotenoid-rich composition. In Europe, however, palm oil is most often consumed refined, i.e. after bleaching and deodorisation. It can be eaten in raw form or refined form. Only a quarter of palm oil and palm kernel oil is consumed in raw form around the world. In South-East Asia, Africa and some areas of Brazil, palm oil is mainly consumed in its raw state, while in Europe and the United States, it is used refined. Composition Palm oil contains, like any oil, almost 100% of lipids, approximately 50% of which are saturated fatty acids (mainly palmitic acid). It is rich in betacarotene and vitamin E.

Fatty acid content of some vegetable oils (%) Palm Soybean Rape Sunflower Olive oil oil Oil Oil Oil Fatty acids 45-55 11-21 2-8 10-16 9-26 Monounsaturated 38-45 17-26 56-65 15-26 56-87 fatty acids Polyunsaturated 9-12 54-72 26-32 62-70 4-22 fats Source: USDA/FAS 2011

2 http://www.wilmar-international.com/our-business/tropical-oils/plantations/milling-of-fresh-fruit-bunches/, 3 http://greenpalm.org/about-palm-oil/what-is-palm-oil 2016

8 Amundi Discussion Papers Series - DP-23-2017 The chart below shows the composition of the main food fats. From a nutritional point of view, palm oil is similar to butter. Palm oil is therefore no more harmful than other fats. In fact, there is no such thing as a “good” or “bad” oil as none of them contain a complete spectrum of essential fatty acids. Furthermore, the results of published studies are often antagonistic. The link between fatty acids and obesity, or fatty acids and cardiovascular disease, is complex. However, the major disadvantage of palm oil lies in the fact that it provides only one main saturated fatty acid: palmitic acid. In unbalanced diets, this acid accumulates in the body. This accumulation is favoured by modern man’s ability to store energy for a rainy day (a legacy of his hunter-gatherer ancestors).4

Comparison of food fats (fatty acid content normalised as a %)

Coconut oil Butter Palm oil 1 Lard Cotton oil Peanut oil Soybean oil Olive Oil Corn oil Sunflower oil Linseed oil Safflower oil Canola oil 0 20 40 60 80 100

Saturated fats Polyunsaturated fats: linoleic acid Polyunsaturated fats: alpha-linolenic acid Fatty acids: oleic acid Source: POS Pilot Plant corporation, 2010 Characteristics and properties Among its main properties: •• Because of its high content in saturated fatty acids (SFA), palm oil is solid at room temperature (unlike fluid oils, which only contain 15% of SFA at most). Palm oil derived from the pulp of the oil palm fruit is a concrete fat, i.e. solid at room temperature, like palm kernel oil (derived from the almond), copra (coconut fat), and cocoa butter. Palm oil is rich in saturated fats and palmitic acid. •• SFA-rich oils are more resistant to oxidation and therefore do not go rancid easily. They have a natural preservative effect which extends products’ shelf life. They are also more resistant to heat treatment (stable in cooking and frying).

4 http://www.cirad.fr/actualites/toutes-les-actualites/articles/2010/science/huile-de-palme-et-idees-re- cues 2016 http://web.archive.org/web/20161130084359/http://alimentation-sante.org/wp-content/ uploads/2012/11/Presentation_Hd-P_1112.pdf

Amundi Discussion Papers Series - DP-23-2017 9 Coconut oil Butter Palm•• oilThese characteristics influence the taste and texture of end products, 1 Lardnotably the creaminess, crunchiness and crispiness brought, to a large Cotton oil Peanut oilextent, by fat. Its smooth, creamy texture and lack of smell make palm oil Soybean oilvery attractive for many products, notably biscuits. Olive Oil Corn•• oilIt does not contain any trans fatty acids, which are harmful for health. Sunflower•• oilOil palm is a high-yield crop. It takes only half the surface to produce Linseed oil Safflower oilthe same volume of oil as other oleaginous plants. Palm oil is also one Canola oilof the cheapest vegetable oils in the world. •• Palm0 oil plantations20 require ten40 times less land60 than other 80oil-producing100 crops

Saturatedand fats are non-GMO. The fruit can be harvestedPolyunsaturated two to fats: three linoleic times acid a month. Polyunsaturated•• Palm oil fat iss: alsoalpha-linolenic the most acid consumedFatty oil acids:worldwide. oleic acid The following chart shows the global consumption of the 17 main oils and fats.

Global oil and fat consumption (in million tonnes)

Palm Oil Soybean Oil Rapeseed Oil Sunflower Oil 2 Others Tallow & Grease Lard Butter Palm Kermel Oil Cottonseed Oil Groundnut Oil Coconut Oil 0 10 20 30 40 50 60 Source : Oil word 2013, Amundi Research

However, it is very difficult to determine the amount of palm oil consumed per person as it is an ingredient of many industrial food products. Palm oil consumption is often involuntary, as “hidden” oil forms part of the composition of many products. The WWF estimates that palm oil and palm kernel oil are present in nearly 50% of supermarket products in France and that it takes one oil palm tree to cover the annual consumption of a French family with one child5.

1.2. Uses Palm oil can replace most of the other vegetable oils and has very many uses. Food accounts for 80% of its uses but it is also used in non-food products such as cosmetics, paints, lubricants, and lacquers (from palm oil derivatives).

5 http://www.wwf.fr/nos_priorites/reduire_l_empreinte_ecologique/changer_les_modes_de_production_agricole/ huile_de_palme_durable/ 2016 http://web.archive.org/web/20161206155405/http://www.wwf.fr/nos_priorites/ reduire_l_empreinte_ecologique/changer_les_modes_de_production_agricole/huile_de_palme_durable/

10 Amundi Discussion Papers Series - DP-23-2017 Fuels presently account for only 1% of the volume of crude palm oil consumed in the world. This breakdown is very different in Europe, however, where agrofuels account for more than 40% of palm oil consumption. Palm oil is used in biodiesel and represented 31% of vegetable oils used in biodiesel in Europe in 2014 (behind rapeseed oil, 63%)6. Around 50% of consumer staples contain palm oil and 70% of cosmetics and household detergents contain palm oil derivatives.

Palm oil uses worldwide

19% Oleochemistry

1% Biofuels Food industry 80%

Source: World: Le Monde no. 20336, 12 June 2010, p. 14/ Palm oil uses in Europe in 2014

Industrial use & Animal feed 5%

Food 34% 45% Biodiesel

Electricity and 16% heating

Source : Europe : 2011 USDA 2012 https://www.transportenvironment.org/sites/te/files/ publications/2016_05_TE_EU_vegetable_oil_biodiesel_market_FINAL_0_0.pdf

6 https://www.transportenvironment.org/sites/te/files/publications/2016_05_TE_EU_vegetable_oil_biodiesel_mar- ket_FINAL_0_0.pdf 2016 http://web.archive.org/web/20170224145234/https://www.transportenvironment.org/ sites/te/files/publications/2016_05_TE_EU_vegetable_oil_biodiesel_market_FINAL_0_0.pdf

Amundi Discussion Papers Series - DP-23-2017 11 The table below is taken from the “Petit guide vert de l’huile de palme” (Little green guide on palm oil) by Adrien Gontier, a blogger who set himself a challenge of spending a year without consuming palm oil. This guide gives a few examples of the many uses of palm oil, which is consumed mainly in refined form in industrialised countries.

From palm tree to supermaket

Oil Palm tree

Fruits Palm (Crude palm Kernels Oil)

Palm oil Kernel Oil cake Oil (Residue from the pressing)

Chemical Food Pharmacolo- Health & Animal feed and oil industry gy-chemical Beauty industry industry

Ink Food Conditioner Liquid soaps Meat Plastics additives Toothpaste Cleaning Eggs Biofuels Fine breads Solid soaps products Cheese Pastries Hygiene Solid soaps Chocolate Drugs Hygiene Céreals Soups Prepared foods

Source: http://alternatives.blog.lemonde.fr/2012/05/11/et-la-palme-de-la-vie-sans-palme- revient-a/ 2016 http://web.archive.org/web/20160420044417/http://alternatives.blog. lemonde.fr/2012/05/11/et-la-palme-de-la-vie-sans-palme-revient-a/ 1.3. Palm oil production 1.3.1. Palm oil supply chain The palm oil supply chain7 combines a multitude of actors, the main being producers, traders, manufacturers and retailers.

7 http://www.rspo.org/files/begin/comment-se-lancer/index.html http://web.archive.org/ web/20160308173125/http://www.rspo.org/files/begin/comment-se-lancer/index.html 2016

12 Amundi Discussion Papers Series - DP-23-2017 Producers Traders Manufacturers Retailers Cultivate Stock/carry oil Produce Distribute labelled oil palms ingredients goods

Produce fresh fruit Buy and sell oil Produce consumer Sell goods to bunches goods consumers

Transform fruit into Refine palm oil Pack/label crude oil consumer goods

Source: RSPO 2016

Roundtable on Sustainable Palm Oil (RSPO) infographic on the palm oil supply chain

REFINERY Note: volumes in this infographic are averages. /FRACTIONATION PLANT There is a lot of variation in processing, transport capacity, and ingredient use. 2 0 s 0 e , n 000 ton 100 tonnes /hours

80% 20% Olein COLLECTION PORT Stearin PLANTATION MARGARINE Fresh fruit bunch MANUFACTUER (FFB)

4 25kg 5 s ,0 e 00 tonn

2 e 100gr 5 n 0 ri g g palm oil r mara

2 0 s 0 e , n 000 ton

2 s 5 ie COOKIE 0 k gr coo MANUFACTUER 15gr palm oil

COLLECTION PORT MILL

90 tonnes 18 tonnes FFB/hour palm oil / hour

http://www.sustainablepalmoil.org/sourcing/ 2016

Amundi Discussion Papers Series - DP-23-2017 13 Coconut oil Butter Palm oil 1 Lard ThisCotton study oil focuses mainly on the practices of a sample of palm oil producing companiesPeanut oil which can also be diversified in refining and trading activities. When Soybean oil takingOlive a closerOil look at the cultivation processes of oil palm plantations, there are two segmentsCorn oil 8: Sunflower oil Linseed• Planting: oil It takes one year to germinate seeds and plant seedlings in Safflowernurseries oil before the young plants can be transplanted to the fields. The Canolaseedlings oil are planted every 9 metres, i.e. 128 to 140 trees per hectare. 0 20 40 60 80 100 • Cultivation: Oil palm trees start producing fruit 30 months after having Saturatedbeen fats planted in the fields and commercialPolyunsaturated harvesting fats: linoleiccan start acid six months Polyunsaturatedlater. At this fats: stage,alpha-linolenic yield acidis still fairly limited.Fatty acids: Maximum oleic acid yields are achieved when the plant is 7 to 18 years old. An oil palm has a commercial life of around 25 years. Yields depend on various factors including the age of the oil palm, seed quality, weather conditions, soil quality, plantation management, harvest time, and lastly fruit treatment. Palm Oil • SoybeanTreatment: Oil FFB maturity is essential to optimise the quality and quantity of Rapeseedoil. Harvested Oil fruit should be treated within 24 hours in order to minimise Sunflowerthe accumulation Oil of fatty acids. The FFB are sterilised in mills by high 2 Others Tallow &pressure Grease steam. The fruit is separated from the bunches, then processed in a pressingLard machine to obtain crude palm oil and palm kernel oil. The crude palmButter oil is centrifuged to extract waste and water. The process continues Palm Kermelwith theOil refining of crude palm oil, while the kernel is pressed.T he emptied Cottonseed Oil Groundnutfruit bunches Oil and liquid waste are then reused as a fertilizer in plantations. Coconut Oil 1.3.2. main producer countries 0 10 20 30 40 50 60 Originally from West Africa, the oil palm isSource now :grown Oil word mostly 2013, Amundiin Indonesia Research and Malaysia. These two countries account for nearly 85% of global palm oil production, i.e., in 2012, 48 million tonnes of the 55 million tonnes produced worldwide.

Top 10 palm oil producer countries (in tonnes)

Brazil Guatemala Ivory Coast Honduras 3 Papua New Guinea Colombia Nigeria Thailand Malaysia Indonesia 0 10000000 20000000 30000000

Source: FAO 2013, Amundi Research

8 http://www.wilmar-international.com/our-business/tropical-oils/plantations/cultivation/ 2016

14 Amundi Discussion Papers Series - DP-23-2017 Coconut oil Butter Palm oil 1 Lard Cotton oil Peanut oil Soybean oil Olive Oil Corn oil Sunflower oil Linseed oil Safflower oil Canola oil 0 20 40 60 80 100

Saturated fats Polyunsaturated fats: linoleic acid Polyunsaturated fats: alpha-linolenic acid Fatty acids: oleic acid

Palm Oil Soybean Oil Rapeseed Oil Sunflower Oil 2 Others Tallow & Grease Lard Butter Palm Kermel Oil Cottonseed Oil Groundnut Oil Coconut Oil 0 10 20 30 40 50 60 Source : Oil word 2013, Amundi Research

Brazil Guatemala In order toIvory meet Coast constantly growing demand, oil palm cultivation is developing Honduras 3 aroundPapua the New world. Guinea Our study focuses primarily on the two main producers of palm oil, IndonesiaColombia and Malaysia. Nigeria 1.3.3. TrendThailand in global production Malaysia From just underIndonesia 5 million tonnes in 1976, global palm oil production rose to 62.6 million tonnes in 2015. It is currently the most produced vegetable oil in the world 0 10000000 20000000 30000000 in volume terms. Most of the additional volumes are produced in Central and South America (3.4 mt), in Thailand (1.8 mt) and West AfricaSource: (2.4 FAO mt). 2013, Amundi Research

Trend in global production (in million tonnes)

70 60 World 50 Malaysia 4 40 Indonesia 30 20 10 0

Source: Oil World 2016, Amundi Research

1.3.4. Local contexts in Indonesia and Malaysia INDONESIA Geography and general presentation Localisation of oil palm concessions in Indonesia

Source: Amundi, WRI/Global Forest Watch 2016

Amundi Discussion Papers Series - DP-23-2017 15 Indonesia is the largest archipelago in the world with more than 17,000 islands. It spans 5,000 km and can be divided into four distinct geographical groups which, from West to East, are: •• The Greater Sunda Islands – Sumatra, Java, Kalimantan (Indonesian part of Borneo) and Sulawesi; •• The Lesser Sunda Islands – Bali, Lombok, Flores, Sumba, Sumbawa, and Timor; •• The Maluku Islands, also called the Moluccas, •• Western New Guinea, also known as Papua (formerly Irian Jaya). The Indonesian climate is equatorial, hot and extremely humid. Temperatures vary between 24°C and 34°C, with humidity levels of 80%. There are two seasons: a dry season (from April to October) and a rainy season (from November to April). Indonesia has a very rich biodiversity. In 2013, economic activity broke down as follows: services 41%, manufacturing industry 24%, mining industry 11%, agriculture 14% and construction 10%. Indonesia is mainly a low-wage economy, with a young population of more than 250 million inhabitants, half of whom are under 309. The country has substantial agricultural resources (palm oil, rubber, cocoa, coffee, etc.), but also energy and mining (coal, oil, liquefied natural gas)10. The Indonesian agricultural sector employs more than 35% of the active population11. Palm oil activities Oil palm (plantations and farming) is a strategic sector for Indonesia. In 2008, Indonesia became the world’s leading palm oil producer, ahead of Malaysia, thanks notably to privatisation programmes of previously state-owned land. According to data from the Indonesian ministry of agriculture, the total area of land devoted to palm oil is 8 million hectares (4m ha in 2000) and could reach 13 million hectares in 2020. In 2010, palm oil accounted for between 6% and 7% of Indonesian GDP12. State-owned plantations play a modest role in the Indonesian palm oil industry compared with large private groups, which produce about 50% of the country’s palm oil. Smallholders represent 35% of production13. Furthermore, the sector has a very specific structure due to the presence of tycoons, wealthy businessmen who control, typically with their families, a group of companies operating in various industries, notably palm oil. Many Indonesian players (including listed companies) are controlled by these tycoons and the

9 https://www.tresor.economie.gouv.fr/10309_presentation-indonesie 2014 10 http://www.diplomatie.gouv.fr/fr/dossiers-pays/indonesie/presentation-de-l-indonesie/ 2016 11 http://www.lemoci.com/fiche-pays/indonesie/#sthash.Yowm9Wbq.dpuf 2016 12 http://d2ouvy59p0dg6k.cloudfront.net/downloads/profitability_and_sustainability_in_palm_oil_ production__update_.pdf 2012 13 http://www.indonesia-investments.com/business/commodities/palm-oil/item166 2016

16 Amundi Discussion Papers Series - DP-23-2017 25 largest groups controlled by these families account for nearly one third of the area cultivated with palm oil (and 98% of the planted area of the Kalimatan region). The presence of this type of conglomerate, which often has close ties with local authorities, adds to corruption risks in this sector, with fraudulent land appropriations. Given the environmental impacts generated by palm oil crops, in 2011, Indonesia signed a two-year moratorium with Norway to put a temporary halt to the granting of new deforestation permits for forests and peatlands in the country. In return, Indonesia received $1 billion from Norway for the preservation of its forests. In May 2015, Indonesian president Joko Widodo extended the moratorium for another two-year period. Several cases of violation have been reported, however. It should be noted that even if the moratorium is respected, large companies maintain broad latitude to expand oil palm crops as most of them have not yet cultivated all the usable land listed in their landbank14.

Palm oil production in Indonesia and exports

2008 2009 2010 2011 2012 2013 2014 2015 Production 19.2 19.4 21.8 23.5 26.5 30.0 31.5 32.5 (millions tonnes) Exports 15.1 17.1 17.1 17.6 18.2 22.4 21.7 26.4 (millions tonnes)

Exports 15.6 10.0 16.4 20.2 21.6 20.6 21.1 18.6 (in $bn) Sources: Indonesian Palm Oil Producers Association (Gapki) & Indonesian Ministry of Agriculture, www.indonesia-investments.com 2016

In 2011, the Indonesian Government launched its Master Plan for Accelerating and Achieving Economic Development, targeting notably the palm oil sector, and aiming to accelerate the country’s development, whose “fruits and prosperity will be assessed fairly by the population”15. The development of the palm oil sector could improve gross domestic product, create job opportunities and improve local economies. The Indonesian Government aims to increase plantation areas to 9 million hectares by 202016. The industry employs 800,000 people directly or indirectly in Malaysia17.

14 A company’s landbank is the total area that it owns or manages, including all the land for oil palm cultivation, seeded land and areas reserved for conservation under its concessions (source: www.sustainablepalmoil. org date) 15 http://www.indonesia-investments.com/projects/government-development-plans/masterplan-for- acceleration-and-expansion-of-indonesias-economic-development-mp3ei/item306 2016 16 https://www.researchgate.net/publication/265388592_The_Economic_and_Environmental_Analysis_ of_Palm_Oil_Expansion_in_Indonesia_Export_Demand_Approach_and_EIRSAM_Model 2012 17 http://www.sustainablepalmoil.org/impacts/economic/ 2016

Amundi Discussion Papers Series - DP-23-2017 17 The vast majority of palm oil production is exported, mainly to China, India, Malaysia, Singapore and the Netherlands. MALAYSIA Geography and general presentation

Malaysia

Malaysia, a former British colony, independent since 1957, is a federal state and a parliamentary monarchy made up of 13 states. The country has two distinct regions: the peninsula, where the economic capital Kuala Lumpur is located, and the Sarawak and Sabah regions, in the northern part of the island of Borneo. Like in Indonesia, the climate is equatorial, hot and very humid. The agricultural sector employs more than 12% of Malaysians18. The world’s second-largest producer of palm oil, Malaysia is also among the world’s leading producers of cocoa and rubber. It also has significant reserves of commodities (tin, copper, bauxite) and oil and gas. The industrial contributes about 40% of GDP and employs 27% of the population. Finally, the service industry employs the majority of Malaysians and represents about 50% of GDP through tourism19.

18 http://www.lemoci.com/fiche-pays/malaisie/ 2016 19 http://www.lemoci.com/fiche-pays/malaisie/ 2016

18 Amundi Discussion Papers Series - DP-23-2017 Palm oil activities According to the Malaysian Palm Oil Council (MPOC), oil palm cultivation has contributed significantly to the country’s economic growth, providing a regular income for half a million people (of a total active population of 13.3 million20). Palm oil cultivation has also helped towards the construction of road networks and infrastructure (schools, hospitals, etc.). Planted areas are managed mainly by companies, on private property. Nevertheless, a number of government agencies such as the Federal Land Development Authority (FELDA), FELCRA Berhad and the Rubber Industry Smallholders Development Authority (RISDA) play a significant role in Malaysia. Since 2010, they have been grouped within the Sinergi Perdana consortium. Breakdown of area planted with oil palms in Malaysia by category in December 2015

Independant Smallholders 16% State Agencies 6% Risda 1% 3% Private Estates Felcra 61% 13% Felda

Source: Malaysian Palm Oil Board, 2015

The industry employs 800,000 people directly or indirectly in Malaysia21. The palm oil sector is one of Malaysia’s main exporting sectors. Palm oil is a strategic sector for the country. In 2012, palm oil accounted for 11% of the country’s GDP according to the Minister of Plantation Industries and Commodities (MPIC)22.

20 http://donnees.banquemondiale.org/indicateur/SL.TLF.TOTL.IN , 2014 21 http://www.sustainablepalmoil.org/impacts/economic/ 2016 22 http://www.lemonde.fr/planete/article/2013/10/11/comment-la-malaisie-vante-son-huile-de- palme_3494089_3244.html 2013

Amundi Discussion Papers Series - DP-23-2017 19 Total exports Jan - June 2016 (bn ringgit)

Other Products

Manufactures of Metal

Palm Oil

Machinery, equipment & parts Other Products Petroleum Products Manufactures of Metal Chemicals & Chemical Products Palm Oil Electrical & Electronic Products Machinery, equipment & parts 0 20 40 60 80 100 120 140 160 Petroleum Products Source: Malaysia External Trade Development Corporation, Amundi Research Chemicals & Chemical Products

1.3.5 ElectricalImporting & Electronic countries Products

12000The countries or regions consuming0 20the greatest 40 60 amount 80 of 100 palm 120 oil 140are India, 160 10000Indonesia, the European Union and China23. Source: Malaysia External Trade Development Corporation, Amundi Research 8000 Top 10 importing countries 6000 (in thousand of tonnes) 4000 12000 2000 10000 0 8000 6000 4000 2000 0 Source:Oil Word Watch 2014 database, Amundi Research

Source:Oil Word Watch 2014 database, Amundi Research

23 http://www.simedarby.com/upload/Palm_Oil_Facts_and_Figures.pdf, Oil World 2013

20 Amundi Discussion Papers Series - DP-23-2017 Plantation maps, a sensitive topic The location of oil palm plantations is a sensitive issue and it is difficult to obtain reliable and up-to-date maps of the concessions. However, the lack of transparency on the part of producer countries and governments seems to be decreasing. At the end of 2015, the Roundtable on Sustainable Palm Oil (RSPO) announced the publication of a digital mapping of all its members’ concessions by mid-2016, except for Malaysia, where this remains illegal. The maps of RSPO members’ concessions are available on a website managed by US think-tank American World Resources Institute, but are not yet available for downloading to make an accurate analysis. However, more approximate or older data sets are available. We have strived to use the best data available in our analytical model. Focus on smallholders More than three million smallholders produce 40% of palm oil in the world every year. Their yields are often lower than those of large plantations. Smallholders cultivate oil palm in addition to subsistence crops on areas of less than 50 hectares. The RSPO has set itself the objective of certifying more smallholders so as to produce more oil while consuming fewer resources, gain access to new markets, raise wages and reduce the risk of land conversion that threatens forests and biodiversity. There are basically two types of smallholders: • Independent smallholders: They are free to choose how they use their land, the type of planted crops and the management of these crops. They are not contractually bound to a mill or an association and receive subsidies from government agencies. • Partner smallholders: They are bound to companies under a contract or credit agreement, or supply a specific mill. They do not choose the crops, and their plantations and agricultural techniques are supervised. They are often organised, supervised and managed by the mill they supply. One of the challenges for the companies reviewed is to encourage their independent smallholder suppliers to have their plantations certified by the RSPO so as to increase their offer of certified palm oil. Nevertheless, several hurdles came to light in our discussions with the companies: the cost for smallholders and the practical constraints for meeting certification specifications. Some companies help towards the costs or offer financial incentives to assist them in the procedure. Supporting the certification of these independent smallholders requires an educational approach. The situation is different for smallholders working in cooperatives grouped under the Indonesian Plasma Scheme, to the extent that certification is imposed. The

Amundi Discussion Papers Series - DP-23-2017 21 Plasma Scheme is an initiative of the Indonesian Government to encourage owners of oil palm plantations to support and provide social and economic assistance to smallholders, notably in order to increase their revenues. The companies buy fruit from smallholders at a price set by the Indonesian government. Smallholders also follow training programmes to learn how to increase potential yields.24 The Indonesian Plantations Act dates from September 2014, and requires that plantation companies allocate 20% of concessions to local residents. Companies have five years to implement this law.25

1.4. eSG issues 1.4.1. environmental issues Deforestation Many NGO campaigns establish a link between consumer products that use palm oil in their composition and deforestation, with its consequences on iconic animal species such as the orangutan and the Sumatran tiger. The extent of deforestation is a complex topic to grasp, as there are different definitions of what a forest is. Definitions vary depending on the stakeholders. In order to qualify deforestation, academics focus on forest density loss rates, while NGOs base their estimates on the value or benefit, in particular ecological, of preserving the forest. There are two main methods to calculate this type of benefit: HCV (High Conservation Value) and HCS (High Carbon Stock). Malaysia and Indonesia lost 9% to 13% of their forests between 2000 and 201126, but the losses are even greater when looking at longer periods. Princeton University and the Swiss Federal Institute of Technology estimated that between 1990 and 2005, 55%-60% of the expansion of palm oil crops in Malaysia and Indonesia was carried out at the expense of primary forests. A 2007 report of the United Nations Environment Programme highlighted that palm oil plantations were the main cause of the destruction of tropical forests in these two countries.27 The High Conservation Values or HCV methodology An HCV is a biological, ecological, social or cultural value of outstanding significance or critical importance. This methodology was developed in 1999 and integrated into forestry certification. Today, this classification is used in nine areas of certification, including palm oil.

24 http://www.kencanaagri.com/plasmaprogramme.html 18/09/2016 25 http://www.indonesia-investments.com/news/todays-headlines/plantations-bill-indonesia-no-further- limit-to-foreign-ownership/item2467 2016 26 Source: Deforestation rates in insular Southeast Asia over 2000-10 paper in Global Change Biology 2011 27 http://wwf.panda.org/what_we_do/footprint/agriculture/palm_oil/environmental_impacts/forest_ conversion/ 2016

22 Amundi Discussion Papers Series - DP-23-2017 There are six categories of HCVs:

HCV 1 Concentrations of biological diversity including endemic species, and rare, threatened or endangered species, that are significant at global, regional or national levels. HCV 2 Intact forest landscapes and large landscape-level ecosystems and ecosystem mosaics that are significant at global, regional or national levels, and that contain viable populations of the great majority of the naturally occurring species in natural patterns of distribution and abundance. HCV 3 Rare, threatened, or endangered ecosystems, habitats or refugia. HCV 4 Basic ecosystem services in critical situations, including protection of water catchments and control of erosion of vulnerable soils and slopes. HCV 5 Sites and resources fundamental for satisfying the basic necessities of local communities or indigenous peoples (for livelihoods, health, nutrition, water, etc.), identified through engagement with these communities or indigenous peoples. HCV 6 Sites, resources, habitats and landscapes of global or national cultural, archaeological or historical significance, and/or of critical cultural, ecological, economic or religious/sacred importance for the traditional cultures of local communities or indigenous peoples, identified through engagement with these local communities or indigenous peoples. Source: https://www.hcvnetwork.org/about-hcvf 2016 The notion of carbon content of vegetation is not taken into account in HCVs. The High Carbon Stock (HCS) methodology Natural tropical forests hold large reserves of carbon and biodiversity and are vital to millions of people who depend on the forest to survive. When forests are cleared, the carbon is released and biodiversity is threatened. The HCS approach is a methodology that distinguishes forests to be protected from degraded forests with a low carbon content. It is used to implement the “zero deforestation” principle. This methodology is aimed at limiting greenhouse gas emissions, respecting biodiversity conservation plans and contributing to the preservation of natural forests with areas rich in biomass28 and biodiversity. The HCS tool complements the HCVs. Even if a vegetated surface is not recognised as belonging to one of the HCV categories, it can nevertheless represent an important carbon storage area. Mature palm oil plantations can therefore be considered as significant carbon storage areas, even if they have a low value in terms of biodiversity.

28 Biomass: The total mass of living organisms in a given area or volume. Based on this definition, a forest’s biomass comprises trees and the birds and insects they host as well as undergrowth and microscopic soil fauna. (Source: Oxford Dictionaries)

Amundi Discussion Papers Series - DP-23-2017 23 Strati cationHigh d’une carbon forêt stock HCS (HCS) (à haut in stock forests de carbone)

250 tonnes C/ha

S

C

70 tonnes C/ha H

l i

u

e

S

25 tonnes C/ha

15 tonnes C/ha

Forêt primaire Forêt de forte Forêt jeune Broussaille – arbustes/buissons Prairies à faible densité en régénération et jeunes arbres et terrains ouverts

A préserver Potentiel de développement

Source: Greenpeace

Fires In Indonesia, forest fires have become a recurring phenomenon of great magnitude. They affect a large part of the territory and all palm oil producing regions are facing this problem. On the map below, areas affected by a fire between 2013 and 2016 are shown in red:

Fires accumulation in Indonesia & Malaysia

Source: Amundi, WRI / Global Forest Watch2016

24 Amundi Discussion Papers Series - DP-23-2017 Palm oil farmers are regularly singled out by NGOs for their contribution to this phenomenon. What is the actual case? On top of natural causes and cyclical weather phenomena, fires in Indonesia result partly from slash and burn practices, which are cheaper and faster alternatives to mechanical clearing to clear land before planting crops. Admittedly, these techniques are not used only by oil palm planters, but they are more widespread in the agricultural sector, especially by smallholders who do not have access to modern alternatives. Large palm oil companies deny using fires to clear land, but some of the areas affected by high fire occurrences are located in their concessions. NGOs also denounce the behaviour of large sector companies, which reportedly let the smallholders who work for them engage in this illegal practice and benefit from it indirectly. Apart from the previous map, which shows that fires are a national phenomenon, this raises the question whether certain areas with a concentration of oil palm plantations are particularly affected by the fires. The map that we have calculated below shows the accumulation of forest fires in a single area and highlights the fact that the islands of Kalimantan and Sumatra, which are major palm oil cultivation areas, are also the most affected by forest fires.

Heat map or hot spots showing the accumulation of fires over the period 2013-2016

Source: Amundi, WRI / Global Forest Watch, NASA 2016

A second useful approximation would be to study the type of terrain on which fires occur. If they declared themselves randomly, regardless of the type of cultivation, the areas affected by the fires should break down proportionately to the different types of soils. However, one observes that areas used for palm oil cultivation burn disproportionately (as do pulpwood plantations), unlike timber operating areas that are relatively less affected by fires.

Amundi Discussion Papers Series - DP-23-2017 25 Other Products

Manufactures of Metal

Palm Oil 5 Machinery, equipment & parts

Petroleum Products

Chemicals & Chemical Products

Electrical & Electronic Products

0 20 40 60 80 100 120 140 160

Source: Malaysia External Trade Development Corporation, Amundi Research

12000 10000 8000 6 6000 4000 2000 0

Source:Oil Word Watch 2014 database, Amundi Research

Land area and fire hotspots repartition in Indonesia

33 Other 38.1

30 Moratorium 33.4

5.5 Logging 14.4

7 p 26 12.6 Palm Oil 7.9

18.7 Pulpwood 6.2

0 10 20 30 40 50 % of fire hotspots detected on that land % of total land area Source: The Guardian 2015 We can therefore reasonably assume that the palm oil industry, given its exposure to the phenomenon and the extent of the surfaces concerned, has a major responsibility and a key role to play in stemming this phenomenon. Nevertheless, castigating the palm oil tycoons alone would be a mistake. According to WWF Indonesia, fires are primarily the result of “collective negligence” by companies, governments and smallholders, each party blaming the others. If there is to be a solution to this problem, it involves marshalling all of these stakeholders with often divergent interests.

Occurrence of forest fires in different Indonesian areas

140

120 2006 100

80 2014 2004 2009 60 2015 Other years 40

20

0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Month Source: globalfiredata.org 2015

26 Amundi Discussion Papers Series - DP-23-2017 In addition to their local impact on plantation workers and local communities, because of their spectacular magnitude, Indonesian fires also have effects at national and regional level. In 2015, a long dry season and exceptional weather conditions resulting from the El Niño phenomenon caused fires which formed a toxic haze, leading to 500,000 reported cases of respiratory diseases or problems, even in neighbouring countries.

A World Bank study estimated the costs of this air pollution at $16 billion in Indonesia in 201529. Costs apply in many areas: plantations (notably palm oil), forests, agriculture, tourism, health and industry. And yet there are solutions. Some projects have a promising impact. The province of Riau (Indonesia) was the scene of major fires in 2013 and 2014. These fires decreased substantially in 2015, while regions around this province continue to suffer fires. Efforts by the police and governors have made this progress possible, as well as the programmes implemented in villages. Some companies have started “fire-free village” programmes. These programmes are based on incentives not to clear forests by fires, setting up community officials in charge of firefighting, sustainable agricultural alternatives, implementing systems to monitor air quality, and awareness campaigns. Peatlands A peatland is an ecosystem in which large amounts of organic material have accumulated. Depending on local conditions, plants grow and decompose slowly and incompletely to form peat, an organic fossil matter in a water-saturated environment. When the peatlands function naturally, they form massive carbon sinks as the vegetation associated with the peat stores carbon. When their

29 http://www.worldbank.org/en/news/press-release/2015/12/15/indonesia-improved-government-spen- ding-can-spur-higher-growth-in-2016 2015

Amundi Discussion Papers Series - DP-23-2017 27 functioning is disturbed, they release carbon. At global scale, peatlands store 1.4Gt of carbon (¾ of atmospheric carbon)30.

In 2015, half of forest fires occurred in peatland areas. Peatland areas in Malaysia, Kalimantan and Sumatra cover 15.5m ha (or 11.5% of the territory). A February 2016 study31 of the Center for Remote Imaging, Sensing and Processing (University of Singapore) showed that only 29% of land in the study area (Malaysia, Sumatra and Borneo) was still covered by peatlands, down from 41% in 2007 and 76% in 1990. This study highlights the role played by the expansion of palm oil plantations in the degradation of peatland areas. Industrial plantations and smallholders’ lands represent 50% of peatland areas. Industrial plantations have almost doubled their surface since 2007, and most of this land is devoted to palm oil cultivation (73%). Water is an important constituent of a peatland as its presence limits the degradation of organic matter. Peatland degradation starts with deforestation and wetland drainage. A network of canals is used to drain the land. The wood is sold and the remaining vegetation is often burned. When trees are felled, peatlands are exposed to direct light that further dries them up, making them very vulnerable to fire. Peatland fires burn deep into the soil for months or even years32, making them almost impossible to control.

30 https://hal.archives-ouvertes.fr/insu-00321655/document 2008 31 Centre for Remote Imaging, Sensing and Processing (CRISP), National University of Singapore (NUS), Jukka Miettinen, Chenghua Shi, Soo Chin Liew, Land cover distribution in the peatlands of Peninsular Malaysia, Sumatra and Borneo in 2015 with changes since 1990 32 CLSA, Sustainable Path, who is leading palm-oil reform 2016

28 Amundi Discussion Papers Series - DP-23-2017 Biodiversity Indonesia and Malaysia have a rich biodiversity. Deforestation and cultivation have very significant consequences on local biodiversity, as many endemic species live in these areas. Plantation activities break up animals’ natural habitat. The destruction of biodiversity corridors can also constrain local wildlife to change its habits or move to new territories when its natural habitat is deteriorated or destroyed. Another threat looms over biodiversity: the opening up of previously inaccessible areas, increasing the risk of hunting or poaching. As a consequence, according to the WWF, 85% of biodiversity disappears when forests are converted to plantations. Finally, water pollution, resulting from mill effluents, is also a threat to biodiversity. Soil and water pollution The repeated use of fertilizers and pesticides pollutes soil and groundwater. According to the WWF33, for every tonne of palm oil produced, 2.5 tonnes of effluents are generated by the manufacturing processes used in the mills. Direct discharges can lead to polluting freshwater and affect biodiversity and local populations. The main pesticide used in plantations is intended to fight rats. Pesticide use subsequently decreases as the palm tree canopy34 protects the soil. Some herbicides are also used to prepare the soil before planting. Even if fertilizer requirements are less intensive than for other oilseed crops, standard nutrients (nitrogen, phosphorus, potassium) are regularly applied in plantations. Soil erosion Soil erosion occurs when the land is cleared and once cultivation has started, especially on sloping land. The rows of trees create channels in which water flows quickly, washing away the soil. Degraded soils require more fertilizer treatments, which in turn adds to pollution. Erosion also changes the aquatic ecosystems downstream.

33 http://wwf.panda.org/what_we_do/footprint/agriculture/palm_oil/environmental_impacts/soil_water_pollu- tion/ 2016 34 Definition: The uppermost branches of the trees in a forest, forming a more or less continuous layer of foliage. (Source: Oxford Dictionaries)

Amundi Discussion Papers Series - DP-23-2017 29 1.4.2. Social issues Industrial conflict Industrial conflict arises between the various stakeholders: between local populations and businesses concerning land rights, between local communities and non-native workers, or between different groups within a single community. Palm oil plantations may cause population displacements and the loss of customary land rights. This is especially the case in Indonesia. The customary land rights of indigenous peoples are seldom recognised by the state – as a result, Indonesia hands over land to companies without the consent of the populations concerned. This can lead to them being pushed out of their traditional cultivation areas and even being accused of stealing wood or land resources, even though they are the lawful owners within the meaning of customary law. Moreover, this accentuates the risk that farmers use new land that will require deforesting in order to develop new agricultural activities. Labour rights and human rights Labour rights are also a major social issue as working conditions on the plantations can be very difficult. Some plantations rely on foreign labour. Cases of trafficking have been identified in Malaysia and Indonesia, with passport confiscations and the absence of work contracts. Child labour is also a risk for the sector, even though cases are less publicised than in other agricultural activities such as cocoa and tobacco plantations.

II. Standards Several standards or initiatives, mandatory or voluntary, have been developed to regulate and improve sector practices.

2.1. Roundtable on Sustainable Palm Oil (RSPO) 2.1.1. Presentation of the RSPO The Roundtable on Sustainable Palm oil (RSPO) is a non-profit association created in 2004 whose objective is to develop and implement global standards for sustainable palm oil. It groups seven stakeholders, namely: 1. palm oil producers, 2. agri-food companies and distributors, 3. consumer goods manufacturers, 4. retailers, 5. banks and investors, 6. NGOs active in environmental protection, 7. and NGOs for development.

30 Amundi Discussion Papers Series - DP-23-2017 The RSPO uses a consensus system to develop standards and criteria. The RSPO is the predominant certification mechanism for palm oil in food products and consumer goods. 2.1.2. RSPO principles and criteria The Principles and Criteria (P&C) are the foundation of RSPO certification. Introduced in 2007, and reviewed in 2013, the P&C cover eight basic principles: 1. Commitment to transparency, 2. Compliance with applicable laws and regulations, 3. Commitment to long-term economic and financial viability, 4. Use of appropriate best practices by growers and millers, 5. Environmental responsibility and conservation of natural resources and biodiversity, 6. Responsible consideration of employees and of individuals and communities affected by growers and mills, 7. Responsible development of new plantings, 8. Commitment to continuous improvement in key areas of activity. In order to be recognised as P&C compliant and obtain RSPO certification, producers must be evaluated every five years by an accredited third-party RSPO certification body, with an annual audit. RSPO members must communicate annually on the progress made in terms of production and supply of sustainable palm oil. Action plans implemented by the company are a key point in the process of progress because the companies commit to have 100% of their production or supply certified on a date of their choice. The RSPO also presents good practices in terms of deadlines: •• within a three-year period after joining the RSPO: certification of a first plantation and 100% within a period of five years, •• within a three-year period after joining the RSPO: certification of first smallholders and 100% within a period of five years, •• within a six-year period: certification of the first FFB (Fresh Fruit Bunches) suppliers and 100% within nine years. 2.1.3. RSPO certification models 17% of the palm oil produced worldwide was RSPO-certified in 201635. There are four models of RSPO palm oil certification: • Identity Preserved: Sustainable palm oil from a single identifiable certified source is kept separately from ordinary palm oil throughout supply chain Palm oil and its derivatives supplied to the end user can be traced back to one mill and one unique, identifiable source. They remain segregated from

35 http://www.rspo.org/about/impacts 2016

Amundi Discussion Papers Series - DP-23-2017 31 other sources of palm oil, including certified. This means a batch of palm oil can be traced from plantation to mill to retailer.

Identity Preserved Supply Chain Model THIRD PARTY CERTIFICATION RSPO CERTIFIED ID CONTROL

IT REPORTING SYSTEM

Palm oil be traced to one certi ed supply base

MILL & SUPPLY BASE TRANSPORTER REFINER END USER

CONVENTIONAL PALM OIL

NO THIRD PARTY NO THIRD PARTY NO THIRD PARTY CERTIFICATION CERTIFICATION CERTIFICATION Source: RSPO 2017 •• Segregated: Sustainable palm oil from different certified sources is kept separate from ordinary palm oil throughout supply chain. It is mixed with other certified oil and cannot be traced back to the plantation.

Segregated Supply Chain Model THIRD PARTY CERTIFICATION RSPO CERTIFIED ID CONTROL

IT REPORTING SYSTEM

Palm oil be traced to one certi ed supply base

MILL & SUPPLY BASE TRANSPORTER REFINER END USER

CONVENTIONAL PALM OIL

NO THIRD PARTY NO THIRD PARTY NO THIRD PARTY CERTIFICATION CERTIFICATION CERTIFICATION Source: RSPO 2017

32 Amundi Discussion Papers Series - DP-23-2017 • Mass Balance: Sustainable palm oil from certified sources is mixed with ordinary palm oil throughout the supply chain, but the initial proportions are maintained. The mass balance supply chain model mixes certified and non-certified oil while ultimately selling only the quantity of RSPO- certified palm oil that is actually used in the mixture.

Mass Balance Supply Chain Model THIRD PARTY CERTIFICATION

ID CONTROL

IT REPORTING SYSTEM

RSPO CERTIFIED

MIXED

CONVENTIONAL PALM OIL

MILL & SUPPLY BASE TRANSPORTER REFINER END USER

Source: RSPO 2017

• Book and Claim: No physical traceability. The manufacturers and retailers that incorporate palm oil in their products can buy Greenpalm certificates and pay a premium to producers (via the RSPO). This premium is notably intended to encourage sustainable production. The certificates do not attest that the end product contains sustainably produced raw materials, but that their production supports sustainable production.

Book & Claim Supply Chain RSPO CREDITS

MANUFACTURER

RSPO IT SYSTEM

RSPO CERTIFIED

MILL & SUPPLY BASE END USER

Source: RSPO 2017

Amundi Discussion Papers Series - DP-23-2017 33 The RSPO certification process has faced criticism for its lack of transparency, linked notably to the selection of certifying companies. In order to address this issue, the RSPO certification body has been regulated since 2012 by Accreditation Services International (ASI), an international organisation that acts as an independent third party to protect the integrity of certification systems like the Forest Stewardship Council. Each certifier must obtain an accreditation from the ASI, which limits risks of collusion and conflict of interest. 2.1.4. Complaints system The RSPO’s complaints system handles complaints concerning RSPO members and the RSPO itself. RSPO members and non-members can file complaints, which are examined first by the RSPO’s secretariat, then submitted to the Complaint Panel to settle disputes and define actions to be implemented. These can involve bilateral negotiations, mediation actions or remedial measures such as compensation. The RSPO’s Complaint Panel can ask RSPO members to stop their activities or to issue a recommendation to suspend or terminate membership of the parties concerned. Complaints are published on the RSPO website following deliberation. At the end of 2016, the majority of complaints concerned disregard for free and informed consent (40% of cases) and HCV-related issues (23%) among which the non-implementation of HCV assessment, the development of plantations on sites harbouring orangutans, or non-respect for sacred sites. 75% of complaints related to plantations in Indonesia and Malaysia. 2.1.5. Free, prior and informed consent The right to free, prior and informed consent (FPIC) under the Principles and Criteria of the Roundtable for Sustainable Palm Oil (RSPO), defines how fair agreements can be set up between local communities and companies (and governments) in order to ensure respect for the legal and customary rights of indigenous peoples and other local rights holders36. Free, prior and informed consent (FPIC) is the principle according to which “a community has the right to give or refuse to give its consent to proposed projects likely to have an impact on land it owns, occupies or traditionally uses.”

36 Colchester M 2010 Free, Prior and Informed Consent: Making FPIC work for forests and people. The Forests Dialogue, School of Forestry and Environmental Studies, Yale Univer- sity.http://environment.yale.edu/tfd/uploads/TFD_FPIC_ResearchPaper_Colchester_lo-res.pdf 2011

34 Amundi Discussion Papers Series - DP-23-2017 RSPO principles related to FPIC

RSPO Principle One: Commitment Principles to transparency relating to FPIC

Principle Two: Compliance with applicable laws and reglations

Principle Six: Responsible consideration Principle Seven: of employees and of Responsible individuals and development communities of new plantings affected by growers and milliers

Source: Musim Mas 2015

Free, prior and informed consent assumes non-coercive negotiations between investors, businesses and governments and indigenous peoples before the development and establishment of oil palm plantations. It is therefore local communities that have the right to decide whether or not to accept a project once they have fully grasped its consequences for their land. FPIC allows local communities to reach a consensus and make decisions in accordance with their traditional decision-making systems. Compliance with FPIC allows companies to limit some of the social risks. 2.1.6. RSPO Next RSPO Next was developed to recognise and value members’ efforts that go beyond the P&C. It incorporates stricter standards, codes of conduct on deforestation, fire, peatlands, the reduction of greenhouse gas emissions, human rights and greater transparency requirements.

Amundi Discussion Papers Series - DP-23-2017 35 2.2. Indonesian Sustainable palm oil standard (ISPO) 2.2.1 Objectives Implemented in 2011 by the Department of Agriculture, the Indonesian Sustainable Palm Oil (ISPO) aims at enforcing Indonesian laws and the president’s commitments in terms of carbon reduction, applying the highest Indonesian agricultural standards. Unlike the RSPO, the ISPO is mandatory for palm oil plantations and palm oil plants and mills, but voluntary for independent smallholders. However, the government plans to make the certification mandatory for smallholders in 2022. Following an update in March 2015, the ISPO was renamed Indonesian Sustainable Palm Oil Certification System. 2.2.2. Comparison between RSPO and ISPO In February 2016, the RSPO and ISPO published a report stating the main similarities and differences between the two systems. The major differences include the following points: •• According to Indonesian regulations, the government decides on which areas to harness and which areas to preserve. A licence holder can therefore decide to dedicate 25% of his land to conservation. According to the RSPO, an external evaluator determines which areas must be preserved when determining HCV (High Conservation Values) areas. This can cause problems if the company wants to obtain RSPO certification in Indonesia, as the government can force it to exploit HCV areas by threatening to withdraw its operating licence. •• The principle of free, prior and informed consent is also handled differently. Under the RSPO, activities are interrupted as long as consent is not obtained. This requires participatory mapping exercises. Indonesian regulation places more emphasis on local authorities to handle conflicts, with a consultation, mediation and discussion process that occurs during development or after. •• The two systems also have different planting procedures. The RSPO has prohibited conversion of primary forests since late 2005, and companies must comply with all of the new planting procedures (NPP). Indonesian regulation does not a priori prohibit the conversion of primary forests because conversion depends on the zoning determined by the government.

2.3. Malaysian Sustainable Palm Oil (MSPO) 2.3.1. Objectives The Malaysian Sustainable Palm Oil (MSPO) standard is a national certification created by the Malaysian government and developed with several players in the palm oil industry. Launched in 2013, it really entered into force on 1st January 2015.

36 Amundi Discussion Papers Series - DP-23-2017 The MSPO is in line with several existing national regulations. Unlike the ISPO, it is not mandatory. 2.3.2. ISPO MSPO merger In 2015, the Malaysian and Indonesian governments announced their intention of merging the two national standards to create the Council of Palm Oil Producing Countries, or CPOPC, aimed at coordinating control of the palm oil market, but also at promoting responsible industry practices and improving smallholders’ practices. This merger could ultimately lead to offering standard practices that could compete with the RSPO37. The CPOPC aims to promote palm oil around the world, including in Europe, one of the most critical regions.38

2.4. Other certification systems and initiatives There are a multitude of initiatives and standards, voluntary or mandatory, with different objectives, scopes and methodologies. These standards, specific or not to palm oil, are not exhaustive. They include International Sustainability and Carbon Certification (ISCC), the Sustainable Palm Oil Manifesto, and Palm Oil Innovation Group.

2.5. Whistleblowers and transparency tools 2.5.1. Sustainable Palm Oil Transparency Toolkit (SPOTT) The Sustainable Palm Oil Transparency Toolkit is a project of the Zoological Society of London aiming to provide information and resources to palm oil players in order to reduce the negative impacts of palm oil production on the environment. SPOTT evaluates 50 referenced criteria for 50 palm oil producing companies (representing about 50% of land reserves) selected on the basis of their market capitalisation, their land reserve and the suggestions of SPOTT stakeholders. SPOTT aims to provide a measure of a company’s overall transparency on palm oil. The questionnaires are filled in with public data exclusively.T he Zoological Society of London is also an active member of the RSPO. 2.5.2 Global Forest Watch Global Forest Watch is a monitoring and warning system aiming to spread information widely so as to better manage and conserve forest resources. It seeks to provide information in near real time, highlighting areas of forest cover loss or the presence of fires. This initiative of the World Resource Institute and its partners notably makes it possible to visualise companies’ concessions and their exposure to environmental risks.

37 http://palmoiltoday.net/council-of-palm-oil-producing-countries-opportunities-ahead/ 2016 38 http://www.indonesia-investments.com/news/todays-headlines/indonesia-malaysia-set-criteria-for- the-council-of-palm-oil-producer-countries/item6697? 2016

Amundi Discussion Papers Series - DP-23-2017 37 III. Study and analysis

3.1. Methodology The purpose of this study is to provide a clearer view of palm oil-related issues and to define which companies in this controversial sector have the best practices.We worked on a balanced sample of 11 companies, taking into account: •• Diversity of activities •• Revenue linked to palm oil •• Controversies We started by assessing these companies’ level of exposure to palm oil issues, then we evaluated their practices on the basis of specific criteria. We used data from several sources: •• Information provided by companies •• World Resources Institute / Global Forest Watch •• SPOTT •• RSPO •• Bloomberg 3.1.1 Exposure The companies in our sample do not all have the same type of activity. Some are pure players generating their entire revenues in palm oil, other are larger-sized conglomerates whose business is more diversified. In addition, the location of these companies’ concessions gives them a different profile. Several criteria are taken into account when assessing their exposure to palm oil: •• Type of activity (growing and/or refining palm oil) •• Location: concessions are mainly in Malaysia, Indonesia and Liberia, countries that have different levels of regulation and infrastructure development •• Size of concessions and use of smallholders •• Presence in protected areas (primary forest, peatlands, etc.) The level of exposure of these companies to palm oil-related issues varies widely, both within the sector and within the sample we have used for this study. For example, two pure players, are the most vulnerable in our sample: The first company generates almost all its revenues in oil palm cultivation, the activity most exposed to environmental risks. In addition, 100% of its activity is located in Indonesia, a country far less well-structured in terms of regulation and infrastructure than Malaysia. Local authorities therefore have the power

38 Amundi Discussion Papers Series - DP-23-2017 of decision for concessions in their territory and agreements are often made in conflict with the national government’s law. Furthermore, it is impossible to obtain an official map of Indonesian concessions, notably because there is no such thing as title deeds. The case of the second one is similar, although it has a more significant processing activity. Moreover, the size of their farms is in the high range of our sample (300,000 ha for the first one and 485,000 ha for the second one) and both companies use a large number of smallholders (20% of smallholders). Finally, we note that both companies have plantations in protected areas. Conversely, the companies least exposed to risk are those with the most diversified activities, with a smaller proportion of their revenues in palm oil. 3.1.2. Assessment Criteria We identified several criteria to evaluate and compare the practices of the companies in our sample. As controversies affecting this sector are largely environmental and social, we therefore decided to focus more particularly on the criteria related to these dimensions: - Quality of environmental policy: Quality of objectives: Our model measures the quality of the objectives that companies set themselves on the basis of their completeness and relevance. They can be either qualitative or quantitative, but the company must report on their progress. Existence of a Three-Noes policy The RSPO has introduced three criteria as a voluntary add-on to its existing Principles & Criteria: NO Deforestation, NO Peatlands, NO Fires. This initiative aims to further the fight against disastrous environmental practices: deforestation of primary forests or forests with a high level of biodiversity, oil palm plantations in peatlands and use of fire to clear forests. These stricter standards are included in RSPO Next. Existence of a water policy and greenhouse gas emissions reduction policy Oil palm cultivation is highly dependent on water resources and it is important to manage them properly to limit waste, protect local reserves and treat effluents. Oil mills emit greenhouse gases and the most advanced companies put in place measures to reduce these emissions (mainly methane and carbon dioxide). The measures taken to limit plantations in peatlands can also be taken into account by companies in their emissions management policy.

Amundi Discussion Papers Series - DP-23-2017 39 Water and emissions management is taken into account in RSPO certifications but the level of implementation is relatively low, which means this is a discriminant criterion. Company’s transparency This criterion refers to the completeness of the information contained in the environmental reports of the companies we evaluated, their websites, the quality of the exchanges we had with them and their willingness to communicate about any controversies they face. Traceability of supplier chain As we mentioned above, there are several traceability processes. We consider that the identity-preserved model is one that provides the most transparency and assurance on the source’s level of sustainability. However, this model is complex and costly to implement and few companies use it (none in our sample). The least transparent model is book and claim. This system enables palm oil users to buy certificates so as to offset their use of palm oil by funding an equivalent production of RSPO-certified palm oil. The underlying idea is to improve the industry by giving the certified producer a premium on production and thus encourage it to increase its production capacity.39 - Assessment of means implemented Quality of company’s certification policy We took several factors into account for this assessment, the main ones being: •• RSPO membership •• Membership of other initiatives (ISPO, MSPO, IPOP, ISCC, Manifesto, etc.) •• The date of obtaining RSPO certification for all the plantations and the percentage of currently certified plantations • SPOTT rating relative to the quality of the RSPO certification (based notably on the quality of the Annual Communication Of Progress (ACOP) published by companies, the level of certification, the policy on smallholders, the number of current controversies, etc.), and changes in this score over the rating period. Quality of environmental and social practices, over and above RSPO In addition to the quality of these companies’ RSPO certification policy, it is important to assess the measures they have implemented, over and above this certification, to improve the social and environmental impact of their activity and thus reduce the risk of controversy. From data published by companies and those collected during our interviews, we evaluated the following policies:

39 “All trademarks and logos of the companies mentioned are used solely for illustration purposes and are the property of their respective owners”

40 Amundi Discussion Papers Series - DP-23-2017 # Respect for human rights Free, prior and informed consent is fundamental to preserve resources and the rights of local communities. This criterion is also present in RSPO certification, but we wanted to give it greater weight in our model. Environmental issues are widely taken into consideration, while social issues are less addressed in our sample’s corporate communications. # Fire prevention Some operators use fire to clear the concessions they want to develop. This is a quick and inexpensive method (unlike mechanical clearing), but very costly from an environmental and health perspective, with far-reaching and even international effects. It is therefore important to prevent these fires through fire management programmes and alert systems. # No deforestation in protected areas Two of the major consequences of deforestation are loss of biodiversity and impact on many endemic species. In order to combat this massive deforestation, which affects notably areas that have high ecological value (HCV, HCS), half of the companies in our sample have defined appropriate policies. # No plantations on peatlands Most of the companies in our sample have defined a peatlands management policy, ranging from the simple management of plantations located on peatlands (water level management) to a more elaborate system, with a ban on developing plantations in this type of area and the implementation of rehabilitation programmes. # Water and emissions management: As noted above, companies are not very active in implementing water and emissions management, which means this is a discriminant criterion. Currently, water management involves monitoring consumption and controlling effluent quality. Emissions management focuses on monitoring emissions (for refiners) and implementing methane capture facilities in mills (methane can then be used) and using biomass from plantations in mills (waste from fruit bunches, tree leaves, hulls, etc.). # Deforestation trend in protected areas WRI/Global Forest Watch provide data on the location of plantations (and therefore of the companies owning them) in protected areas (peatlands, forests) with a ten- year track record.

Amundi Discussion Papers Series - DP-23-2017 41 The following charts40 based on data from Global Forest Watch show how deforestation has progressed and the trend over the last 15 years for some emblematic players.

Annual Tree Cover Loss (in hectares)

400

300

200

100

0

Astra AgroLestari Genting Kuala Lumpur Kepong Berhad United Plantations Bhd Cargill Incorporated IOI Group Sime Darby Plantation Sdn Bhd Wilmar International Limited

Annual Tree Cover Loss (in hectares) on Peatlands

750

500

250

0 2005 2010

Astra AgroLestari Genting Kuala Lumpur Kepong Berhad United Plantations Bhd Cargill Incorporated IOI Group Sime Darby Plantation Sdn Bhd Wilmar International Limited Source: WRI/GFW, Amundi 2016

40 The companies referred to are not those used in our study sample.

42 Amundi Discussion Papers Series - DP-23-2017 Annual Tree Cover Loss (in hectares) on Indonesia Moratorium

300

200

100

Astra AgroLestari Genting Kuala Lumpur Kepong Berhad United Plantations Bhd Cargill Incorporated IOI Group Sime Darby Plantation Sdn Bhd Wilmar International Limited

Annual Tree Cover Loss (in hectares) on Protected Area

1000

750

500

250

0 2005 2010 Astra AgroLestari Genting Kuala Lumpur Kepong Berhad United Plantations Bhd Cargill Incorporated IOI Group Sime Darby Plantation Sdn Bhd Wilmar International Limited Source: WRI/GFW, Amundi 2016

Amundi Discussion Papers Series - DP-23-2017 43 As there is no map of concessions available in open source, we based ourselves on Global Forest Watch’s commodities tool, which can be used to assess changes in vegetation cover on different types of terrain in the mills’ supply area. This gives us a first approximation of actual changes in the impact of the companies reviewed. Trend in overall SPOTT rating The SPOTT rating is a comprehensive rating that includes most of the criteria we have discussed so far. Looking at this rating over five years, we get an idea of improvements in the policies of the companies reviewed and their commitment to more sustainable palm oil. Generally speaking, it highlights the fact that the companies which currently have the best practices are those who improved most in recent years and are the most proactive. The chart below shows the comparative trend in the overall SPOTT rating of 12 companies:

Compared evolution of SPOTT rating

60

40 Score

20

01−01−2015 01−04−2015 01−05−2016 01−06−2014 01−07−2015 01−10−2014 01−10−2015 Date

Astra Agro Lestari Tbk PT Genting Plantations Bhd IOI Corporation Bhd Sime Darby Plantation Sdn Bhd Issuers: Bumitama Agri Ltd Golden Agri Resources Ltd Kuala Lumpur Kepong Bhd Wilmar International Ltd Daewoo International Corporation IJM Plantations Bhd Noble Group Ltd

Source: SPOTT, Amundi 2016

44 Amundi Discussion Papers Series - DP-23-2017 # Controversy management The palm oil sector is a very controversial area concerning both social and environmental issues. Our indicator on companies’ management of controversies is based on several aspects: •• Called into question by NGOs •• RepRisk indicators41 •• Type of relevant criteria (environmental, social, ethics, etc.) •• Existence of RPSO complaints •• Quality of company’s response Fairly logically, we identified more controversies for companies with significant concession areas. We therefore elected to standardise our controversy score on the basis of each player’s palm oil concession areas.

3.2. Ratings summary The following table helps understand how our sample responds to palm oil-related issues.

Low quality Average quality Good quality Quality of environmental policy Quality of objectives 27% 36% 36% 3 No policy 27% 9% 64% GHG and water policy 36% 45% 18% Company’s transparency 27% 18% 55% Traceability of supplier chain 36% 55% 9% Means put in place Certification policy 36% 36% 27% Respect for human rights 27% 9% 64% Fire prevention 18% 36% 45% No deforestation in protected areas 27% 27% 45% No plantations on peatlands 27% 18% 55% HCS and HCV assessments 73% 18% 9% Deforestation trend 45% 18% 36% Water issues 82% 18% 0% Emissions issues 64% 36% 0% SPOTT rating 18% 55% 27% Controversy management 45% 36% 18% Source: Amundi 2016

41 https://www.reprisk.com/ is a database monitoring ESG information by analysing data provided by the media, stakeholders and other public sources external to companies.

Amundi Discussion Papers Series - DP-23-2017 45 It is interesting to remember that only one third of the companies reviewed have implemented a formalised environmental policy with clearly defined objectives. In addition, while most companies highlight good practices such as fire prevention, lack of deforestation in protected areas and banning plantations in peatlands, only half of them actually implement these practices effectively. This finding should be put in relation with the “deforestation trend” indicator, which shows that in recent years, almost half of the sample has continued to develop in protected areas. Finally, barely 20% of the companies reviewed are capable of properly managing their reputation risk associated with palm oil production. In other words, 20% of companies have a proactive environmental strategy, and therefore a low level of controversy and/or very good management of existing controversies (communication, rapid implementation of effective solutions).

46 Amundi Discussion Papers Series - DP-23-2017 Conclusion This study on palm oil, covering a sample of companies, enabled us to draw up a situational analysis of key environmental and social issues related to oil palm plantations in Indonesia and Malaysia, and of the initiatives and certifications and regulatory frameworks aimed at making the palm oil production sector more responsible. Despite a significant amount of data and information provided by the various stakeholders, it is very difficult at this point to draw up a clear mapping of the responsibilities of companies, national and local governments and other stakeholders given the lack of transparency on these data, notably the precise location of concessions. We also found during our readings and interviews that the various players often pass the buck concerning non-compliance with commitments, notably with regard to fire origins. Topics such as human rights, greenhouse gas emissions or effluents are still too little developed by companies. Practices are also very inconsistent from one sector player to another. That said, the sector is evolving, challenging itself and gradually making progress. Traceability processes are becoming more refined, policies, actions and resources implemented are gradually developing. Companies are also doing better in terms of transparency. Under these conditions, the Best in Class approach is to be preferred, as there are few substitutes for palm oil given its attractive properties for client industries and its benefits in terms of yield.

Amundi Discussion Papers Series - DP-23-2017 47 48 Amundi Discussion Papers Series - DP-23-2017 Bibliography

– Reports

OECD, Food and Agriculture Organization of the United Nations, OECD and FAO 2014 Agricultural Outlook

– Websites http://www.ocl-journal.org/articles/ocl/pdf/2005/02/ocl2005122p98.pdf, http:// www.alterasia.org/201310054053/le-business-de-lhuile-de-palme-en-indonesie/ http://www.rspo.org/files/resource_centre/keydoc/8%20fr_RSPO%20Fact%20sheet.pdf, consulted on 20/05/16. http://www.alterasia.org/201601095903/huile-de-palme-la-rspo-rendra-publiques-les- cartes-des-plantations-sauf-celles-de-malaisie/ http://www.sustainablepalmoil.org/standards/ http://www.iscc-system.org/en/search/ http://poig.org/ http://www.wwf.fr/nos_priorites/conserver_les_ecosystemes/preserver_les_forets_ tropicales/huile_de_palme_durable_/

Palm oil characteristics http://alimentation-sante.org/wp-content/uploads/2012/11/Presentation_Hd-P_1112.pdf http://www.theguardian.com/sustainable-business/2015/nov/11/indonesia-forest-fires- explained-haze-palm-oil-timber-burning http://www.futura-sciences.com/magazines/nature/infos/dico/d/botanique-tourbiere-13727/ http://www.pole-tourbieres.org/a-la-decouverte-des-tourbieres/article/qu-est-ce-qu-une- tourbiere

Standards http://www.sustainablepalmoil.org/wp-content/uploads/sites/2/2015/09/Efeca_PO- Standards-Comparison.pdf

Peatlands https://hal.archives-ouvertes.fr/insu-00321655/document

Amundi Discussion Papers Series - DP-23-2017 49 – Broker reports

CROZAT (C.), Palm Oil: the growing concern, Société Générale SRI Report, February 2012

CHUANYA (L.) and MCCARRON (B.), Sustainable path Who is leading palm-oil reform?, Blue Books, CLSA, March 2016

– NGO reports

RAINFOREST ACTION NETWORK. Conflict palm oil in practice. (2015).

ENVIRONMENTAL INVESTIGATION AGENCY. Who watches the watchmen? Auditors a,d the breakdown of oversight in the RSPO. (2015).

ENVIRONMENTAL INVESTIGATION AGENCY. PERMITTING CRIME: How palm oil expansion drives illegal logging in Indonesia. (2014).

WWF. Palm Oil Buyers Scorecard Measuring the Progress of Palm Oil Buyers. (2016).

WWF. Huile de palme de la déforestation à la nécessaire durabilité. (2011).

50 Amundi Discussion Papers Series - DP-23-2017 Discussion Papers list

For more information on our publications, find out more on research-center.amundi.com

DP-23-2017 Palm Oil The environmental dilemma Blotière Elsa, Grouillet Julien, Renard Aurélie, 2017-06

DP-22-2017 The Global Trade Slowdown: Structural or Cyclical? ITHURBIDE Philippe, 2017-05

DP-21-2017 Cycles and Asset Allocation: Key Investment Decisions MIJOT Éric, 2017-02

DP-20-2017 human rights and businesses: How can one assess the corporate responsibility to protect human rights? Navarre Marie, Peythieu Arnaud, 2017-01

DP-19-2016 Coal extraction and mining: sector exclusion or greater selectivity? CROZAT Catherine, 2016-10

DP-18-2016 The emergence of the Renminbi as an international currency: where do we stand now? DRUT Bastien, ITHURBIDE Philippe, JI Mo, TAZÉ-BERNARD Éric, 2016-09

DP-17-2016 e ndocrine disruptors in ESG Analysis Navarre Marie, Renard Aurélie, 2016-09

DP-16-2016 iORP2: A New Regulatory Framework for Pensions BOON Ling-Ni, BRIÈRE Marie, 2016-07

DP-15-2016 low/negative interest rate environment, secular stagnation… implications for asset management ITHURBIDE Philippe, 2016-04

DP-14-2016 Forex markets: the nuts and bolts of the Carry factor Lezmi Edmond, 04-2016

DP-13-2016 The financial markets today: how to cope with low / negative interest rates ITHURBIDE Philippe, 2016-04

Amundi Discussion Papers Series - DP-23-2017 51 DP-12-2015 Central Banks: the First Pillar of the Investment Cycle Mijot Éric, 2015-11

DP-11-2015 e quity factor investing according to the macroeconomic environment RUSSO Alessandro, 2015-11

DP-10-2015 l ong cycles and the asset markets MIJOT Éric, 2015-05

DP-09-2015 reallocating savings to investment: the new role of asset managers PERRIER Yves, 2015-02

DP-08-2014 allocating alternative assets: why, how and how much? De LAGUICHE Sylvie, TAZÉ-BERNARD Éric, 2014-11

DP-07-2014 The short investment cycle: our roadmap MIJOT Éric, 2014-10

DP-06-2014 m anaging uncertainty with DAMS: from asset segmentation to portfolio management FACCHINATO Simone, POLA Gianni, 2014-10

DP-05-2014 Physical real estate in long-term asset allocation: The case of France BLANCHARD Cécile, De LAGUICHE Sylvie, RUSSO Alessandro, 2014-05

DP-04-2014 Understanding Smart Beta: beyond diversification and low risk investing RUSSO Alessandro, 2014-05

DP-03-2014 S RI and performance: impact of ESG criteria in equity and bond management processes BERG Florian, De LAGUICHE Sylvie, LE BERTHE Tegwen, RUSSO Alessandro, SORANGE Antoine, 2014-03

DP-02-2014 “ Risk-Free” Assets: What Long-Term Normalized Return? De LAGUICHE Sylvie, 2014-03

DP-01-2014 Will the Real Janet Yellen Stand Up? ITHURBIDE Philippe, 2014-03

52 Amundi Discussion Papers Series - DP-23-2017 Chief Editors Pascal BLANQUÉ Deputy Chief Executive Officer Head of Institutional Investors and Third Party Distributors Group Chief Investment Office Philippe ITHURBIDE Global Head of Research, Strategy and Analysis

Conception & production

Pia BERGER, Research, Strategy and Analysis Benoit PONCET, Research, Strategy and Analysis Amundi Discussion Papers Series June 2017

In the European Union, this document is only for the attention of “Professional” investors as defined in Directive 2004/39/EC dated 21 April 2004 on markets in financial instruments (“MIFID”), to investment services providers and any other professional of the financial industry, and as the case may be in each local regulations and, as far as the offering in Switzerland is concerned, a “Qualified Investor” within the meaning of the provisions of the Swiss Collective Investment Schemes Act of 23 June 2006 (CISA), the Swiss Collective Investment Schemes Ordinance of 22 November 2006 (CISO) and the FINMA’s Circular 08/8 on Public Advertising under the Collective Investment Schemes legislation of 20 November 2008. Under no circumstances may this material be distributed in the European Union to non “Professional” investors as defined in the MIFID or in each local regulation, or in Switzerland to investors who do not comply with the definition of “qualified investors” as defined in the applicable legislation and regulation. This document neither constitutes an offer to buy nor a solicitation to sell a product, and shall not be considered as an unlawful solicitation or an investment advice. The portfolios mentioned in this document, Amundi Diversification, Amundi Risk Parity and Amundi Minimum Variance, are back test portfolios given for illustrative purposes only. Past performance and simulations shown in this document do not guarantee future results, nor are they reliable indicators of future performance. Amundi accepts no liability whatsoever, whether direct or indirect, that may arise from the use of information contained in this material. Amundi can in no way be held responsible for any decision or investment made on the basis of information contained in this material. The information contained in this document is disclosed to you on a confidential basis and shall not be copied, reproduced, modified, translated or distributed without the prior written approval of Amundi, to any third person or entity in any country or jurisdiction which would subject Amundi or any of “the Funds”, to any registration requirements within these jurisdictions or where it might be considered as unlawful. Accordingly, this material is for distribution solely in jurisdictions where permitted and to persons who may receive it without breaching applicable legal or regulatory requirements. The information contained in this document is deemed accurate as at the date of publication set out on the first page of this document. Data, opinions and estimates may be changed without notice. Document issued by Amundi, a société anonyme with a share capital of €746,262,615 - Portfolio manager regulated by the AMF under number GP04000036 – Head office: 90 boulevard Pasteur – 75015 Paris – France – 437 574 452 RCS Paris www.amundi.com Photo credit: iStock by Getty Images - slpu9945_sk8lovers_clarbondioxyde_ ThamKC

research-center.amundi.com