The Palm Oil Dilemma

Home , Duta Palma, GreenPalm, IOI Group, Malaysian Palm Oil Board, Neste

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08/2014-5904

This case was written by Renato J. Orsato, Professor at the São Paulo School of Business (EAESP), Academic Director of the Centre for Sustainability Studies (GVces) at Fundação Getúlio Vargas (FGV), São Paulo, Brazil, and Visiting Scholar at INSEAD Social Innovation Centre with the help of Renata Loew Weiss, Research Associate at INSEAD Social Innovation Centre, Mona Parikh McNicholas, Case Writer, INSEAD, and Giovanna Sanches, Research Associate, Centre for Sustainability Studies, Fundação Getúlio Vargas (FGV), São Paulo, Brazil. The case was developed under the supervision of Horacio Falcão, Affiliate Professor of Decision Sciences, and Luk Van Wassenhove, the Henry Ford Chaired Professor of Manufacturing and Academic Director of INSEAD Humanitarian Research Group, both at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at cases.insead.edu. Copyright © 2014 INSEAD

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On 30th September, 2011, Indonesia withdrew from the Roundtable on Sustainable Palm Oil (RSPO) to form its own government agency, Indonesia Sustainable Palm Oil (ISPO). This had serious implications given that Indonesia and Malaysia together produced almost 90%1 of the world’s palm oil and encompass the world’s most diverse tropical rainforests.

Not only was global demand for palm oil as an edible oil continuing to grow,2 but in recent years it was considered ideal for biofuels. From a lucrative business that boosted local economies, it now began attracting negative public and media attention. The impact of accelerating deforestation and forest fires promoted an outcry from global NGOs and consumers, putting the big companies under increasing pressure to move to sustainable production in the Far East.

However, despite the availability of 1.4 million tonnes of sustainable palm oil on the market in 2009, only 343,857 tonnes (around 25%) was actually purchased. Production rose to 4.8 million tonnes in 2011, with sales of 2.5 million tonnes (around 50%).3 Though this was a significant increase, half the sustainable palm oil available in 2011 was not bought.

Were the product manufacturing companies not willing to pay the premium cost for sustainable raw materials? Where along the supply chain could the extra cost be pushed? Would consumers be willing to pay more for products that were clearly certified? Was there a way of negotiating the premium for sustainable palm oil between stakeholders? How were the companies who controlled the supply chain going to respond to this challenge?

In the words of David Lubin and Dan Esty:4

“Executives know that how they respond to the sustainability challenge will profoundly affect the competitiveness of their organisations – and perhaps even their survival. Yet most are struggling with how to integrate environmental efforts into their core business strategies. Many had a hodgepodge of green initiatives but no overarching vision or plan. The problem was not that they don't see sustainability as a strategic issue. Rather it's that they think they're facing an unprecedented challenge. But there is a roadmap…”

The authors of ‘The Sustainability Imperative’ argued that sustainability was a 'megatrend' – a transformative change in the competitive landscape – like the rise of the quality movement in the 1970s, and IT in the 1980s and 1990s, whose course could be predicted. By understanding how firms succeeded in prior megatrends, executives could craft the strategies and systems needed to gain a competitive advantage in this one.

Deforestation in Indonesia and Malaysia had exhausted the land supply, and large plantation companies were considering leveraging their influence as experienced growers by expanding into West Africa and South America, where palm oil production had so far been largely

1 Asian Agri and the future of palm oil: Harvard Business School case study, 2010; “The Other Oil Spill”, www.economist.com; June 24, 2010 2 Palm oil production grew from 430,000 metric tonnes in 1970 to 45 million tonnes in 2009. (Source: Asian Agri and the future of palm oil: Harvard Business School case study, 2010.) 3 http://news.mongabay.com/2012/0308-rspo_production.html#ixzz1osadSv9A; Accessed March 2012. 4 ‘The Sustainability Imperative’ by David A. Lubin and Daniel C. Esty. This article originally appeared in Harvard Business Review 2010. Article Reprint No. R1005A

sustainable, and on a smallholder level, without resorting to a diversity-damaging monoculture.5 Where land was more abundant, pressure from NGOs was less intense.

Were there lessons to be learnt from the Far East or was history likely to repeat itself in other continents? And how could voluntary initiatives or ‘green clubs’ like the RSPO resolve the conflicts between the industry and all its stakeholders along the complex supply chain?

Background

In 2011, palm oil was a leading agricultural crop used in a wide variety of food and non-food applications around the world. The oil palm (Elaeis guineensis) which grows best within 10 degrees of the equator, originated in West Africa, and yields two types of oil – palm kernel oil from the seed and palm oil derived from the fruits’ fibrous orange flesh. It boasts the highest yield per hectare of any oilseed crop (producing harvestable fruit within three years of planting). It is a cholesterol-free vegetable oil and is considered a good replacement for partially hydrogenated oils because it is free from trans-fats and rich in antioxidants. Advantages from a commercial point of view include its odourless and tasteless nature and the fact that it facilitates a long shelf life. In the United States, palm oil benefitted from a 2006 Food and Drug Administration regulation that required food products to label their trans-fat content, as a result of which many food processors had switched to palm oil.

Roughly 80% of palm oil was used in food for human consumption. The remainder was used in personal care products, animal feed and biofuel.6 Worldwide production of palm oil was expected to reach 48.98 million tonnes (Mt) in 2011, according to Oil and World, covering an area of 13.41 million hectares. From several million tonnes in the 1960s, palm oil production had grown exponentially, doubling every 10 years.7 (See Exhibit 1)

Indonesia and Malaysia, with 23.9 Mt and 18 Mt respectively, contributed to 85% of worldwide palm oil production, and were likely to continue to be the main producers. However, the expansion of production in Malaysia was likely to be held up by the availability of land. Indonesia was looking to produce 40 Mt by 2020, of which 50% would be set aside for biofuel.8 Alongside these two South-East Asian giants, about 40 developing countries produced palm oil. Amongst the most important are Nigeria, Papua New Guinea, Ivory Coast, Colombia, Thailand and Ecuador.

Palm oil is the most traded oil in the world: 90% of global production is traded. Although in terms of production volume it is almost level-pegging with soybean, trade volume is almost three times higher. Trade increased from 3.78 Mt in 1980 to 36.5 Mt in 2010. Malaysia and Indonesia represented more than 90% of exports in 2010.9

The leading consumers of palm oil (in descending order) were China, India, the European Union (EU), Malaysia, Indonesia and Pakistan. Though rarely sold as cooking oil in the West, palm oil was used in many CPG (cosmetics and personal care goods) made by companies

5 UN Report on Human Development 2007-2008 6 “The IOI Group: Creating a Malaysian Palm Oil Multinational”; Ivey case study, 2010 7 http://www.unctad.info/en/Infocomm/AACP-Products/Palm-oil/ Accessed September 2012 8 Ibid. 9 Ibid.

such as General Mills, Kraft, Nestlé, Proctor & Gamble and Unilever.10 A Directive of the European Parliament and Council 2003/30/EC promoted the use of biofuels for transport, requiring member states to ensure a minimum proportion of biofuels usage for transportation.11

The Palm Oil Conflict

The palm oil industry in Malaysia and Indonesia had seen fundamental changes. Given its steep growth in recent years, one of the main issues was the availability of land for plantations. In Malaysia, where land was scarce, most players focused on increasing yield per hectare, whereas in Indonesia the number of hectares converted into plantations continued to rise, and it was catching up with Malaysia in increasing yields.

Both countries faced conflict on many fronts, with increasing pressure from environmental and social action groups who claimed that palm oil cultivation was the cause of deforestation, increased carbon emissions and social problems – notably conflicts between indigenous populations and growers over land as it became more scarce.

Palm Oil and Development

Palm oil had been a powerful tool for poverty alleviation. Smallholders and those employed in large plantations had seen incomes rise significantly, improved living conditions and access to healthcare. Indeed, many environmental groups demanded sustainable production rather than halting production completely.

Malaysia

Palm oil production first started in Malaysia to supply European markets in the late 19th and early 20th century. The expansion of production took off only in the 1960s as a response to the government’s diversification policy to reduce its dependence on rubber in the face of declining prices and competition from synthetic substitutes. In the 1970s, plantations started to expand into more remote areas, such as the Borneo states of Sabah and Sarawak (see Exhibit 9). By 2009, the Sabah and Sarawak area accounted for 42% of total crude palm oil production, while Peninsular Malaysia contributed 58%.12

Agriculture was seen as a means of reducing rural poverty, and a Federal Land Development Agency (FELDA) was created in 1956. The development process consisted of clearing forests, planting palm trees, settling unemployed people, ex-soldiers and ethnic Malaysians, as well as installing processing mills and commercialising the oil. By 2007, the industry employed about 1.5 million people. Of the 4.3 million hectares of planted oil palm, 60% was

10 Unilever bought 4% of all palm oil and was its biggest buyer.(“The campaign against Palm Oil”, The Economist, June 24, 2010) 11 DIRECTIVE 2003/30/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL. Retrieved from http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:123:0042:0042:EN:PDF 12 Malaysian Palm Oil Board (‘The IOI Group: Creating a Malaysian Palm Oil Multinational’ – Ivey case study 2010)

owned by private companies, 29% by government schemes, and 11% by smallholders.13 Oil palm plantations accounted for 10% of the total area of Malaysia and 65% of agricultural land use. Between 2011 and 2012, Malaysia exported 16.6 Mt of palm oil, representing 43% of total world exports that year.14 About 85% of its palm production was exported, but the government aimed to foster internal consumption. Palm oil for biofuels were another new chapter in the Malaysian palm oil saga. Since 2010, the Malaysian government had imposed the blending of diesel fuel with 5% palm oil biofuel, with 500,000 tonnes of palm oil expected to be utilised this way annually.15

In terms of foreign ownership, only a few palm oil companies operating in Malaysia were controlled by foreigner shareholders, and many were publicly listed on the Malaysian Stock Market, integrating the FTSE Bursa Malaysia Palm Oil Plantation Index, launched in 2006 to measure the segment’s performance. This underlined the economic importance of the industry and the restriction of control to Malay hands, making it less transparent to independent ‘outside’ supervision.

Despite its contribution to the country’s development, the Malaysian palm oil industry was at a crossroads. Unless it found a way to grow and remain competitive, its contribution to the national economy would stagnate and eventually decline, but its expansion was limited by the increasing scarcity of land and labour.

Indonesia

The bulk of the land area in Indonesia, an archipelago of over 10,000 islands, is in Sumatra, Java, Borneo, Sulawesi and Western New Guinea. Sumatra, where palm oil was first planted in 1911, was the largest producer, followed by Borneo. Indonesia shares the island of Borneo (called Kalimantan) with Malaysia and Brunei. Sumatra accounted for 70-80% of oil palm plantations in Indonesia, with Kalimantan seeing rapid development in recent years. These two areas are the only habitat of the orangutan in the world, making them a focus for conflict. From the mid-1990s, a surge in planting activity in Kalimantan resulted in it becoming a major palm oil supplier by 2010.16

In the late 1960s, the Indonesian government partnered with the World Bank to develop the country’s rural regions by offering low-priced land for palm oil cultivation to attract investors. Palm oil is considered a strategic commodity because it is the main cooking oil consumed in

13 TEOH, C. H. (2002). THE PALM OIL INDUSTRY IN MALAYSIA From Seed to Frying Pan. WWF Switzerland. Selangor, Malaysia. 14 USDA. (2012). Palm Oil: World Supply and Distribution. Palm Oil: World Supply and Distribution. Retrieved September 5, 2012, from http://www.fas.usda.gov/psdonline/psdreport.aspx?hidReportRetrievalName=BVS&hidReportRetrievalID= 710&hidReportRetrievalTemplateID=8 15 Kongsager, R., & Reenberg, A. (2012). Contemporary land-use transitions: The global oil palm expansion. GLP Report No. 4. Copenhagen. Retrieved from http://www.globallandproject.org/Documents/Kongsager,_R_and_Reenberg_A_(2012)_Contemporary_lan d_use_transitions_The_global_oil_palm.pdf 16 Of Orangutans and Chainsaws: Cargill, Inc. Confronts the Rainforest Action Network’s Palm Oil Advocacy, 2011.

Indonesia. It was also seen as the ‘saving grace’ that rescued Indonesia during the Asian Economic Crisis in 1998, when the price of palm oil shot up to US$600 per barrel.17

Agriculture, the main source of employment, absorbed 42% of the workforce and generated 15% of Indonesia’s GDP of US$521 billion in 2009. After 2005, Indonesia overtook Malaysia with the largest total planted area of palm oil; a consequence of its abundant land and human resources.18 More than 3.7 million Indonesians worked in the palm oil industry.19 In 2011, Indonesia produced more than 25 Mt of palm oil, of which 18 Mt were exported.20

According to a 2011 report, in the past decade, an average of 40,000 hectares per year had been converted to palm oil production.21 Oil palm cultivation had expanded at an exponential rate in Indonesia, from 600,000 hectares in 1985 to more than 6 million hectares in 2007, and was expected to reach 10 million hectares by 2010.22 Land ownership was heavily restricted. Foreign companies were licenced to use – never own – land for a period of time. Smallholder integration was often a precondition to granting new land concessions.23

In 2011, about 50% of the oil palm plantations were owned by private companies, 17% by the state, and 33% by smallholders.24 Smallholders were farmers who owned a few acres in a section of a large company’s plantation and depended on the company for both inputs (fertilizers, pesticides) and for the sale of their output. According to a case study on Asian Agri (Indonesia’s third-largest palm oil exporter), smallholder incomes were excellent relative to the local economy, with average earnings of US$500 per month compared to the country’s minimum wage of US$80.25

A different perspective is provided by Dr Lisa Curran, a well-known environmental anthropologist, according to whom oil palm often seems to be the best alternative for communities that are seeking out a living from rubber cultivation, subsistence rice farming, and fruit gardens. When a large agricultural firm enters an area, some community members are eager to become part of an oil palm plantation. Lacking legal title to their land, deals are often structured so that members of the community acquire 2-3 hectares of land for oil palm cultivation. They typically borrow some US$3,000-6,000 (at 30% interest per year) from the parent firm for seedlings, fertilizers and other supplies. Because oil palms take three to four years to bear fruit, they work as labourers at US$2.50 per day on the mature plantations. In the meantime their plot generates no income but requires fertilizers and pesticides, which are purchased from the oil palm company. Once their plantation becomes productive, the average

17 Wakker, E. (1998) “Palm Oil, Crisis and Forest Loss in Indonesia” World Wildlife Fund Germany 18 Thoenes, P. (2007): Biofuels and Commodity Markets հ Palm Oil Focus. Rome, FAO, Commodities and Trade Division. 19 Asian Agri and the Future of Palm Oil, HBS case study, 2010. 20 USDA. (2012). Palm Oil: World Supply and Distribution. Palm Oil: World Supply and Distribution. Retrieved September 5, 2012, from http://www.fas.usda.gov/psdonline/psdreport.aspx?hidReportRetrievalName=BVS&hidReportRetrievalID= 710&hidReportRetrievalTemplateID=8 21 World Watch Institute. (2011). Global Palm Oil Demand Fueling Deforestation. Retrieved in December 22, 2011 from http://www.worldwatch.org/node/6059 (Cargill case study) 22 http://www.mongabay.com/borneo/borneo_oil_palm.html accessed January 2012. 23 Plasma Programme 24 www.cspinet.org/palm/PalmOilReport.pdf , accessed October 11, 2011 25 Ibid.

income for a two hectare allotment is US$682-900 per month. The low level of income combined with large start-up costs and relatively high interest payments virtually ensures that smallholders are perpetually indebted to the oil palm company. According to Curran, this debt, combined with almost total dependence on entities they barely trust, has a deep negative psychological impact on communities. Meanwhile the firms are making a fortune. By Curran's calculations, some firms in West Kalimantan are seeing a 26% annual internal rate of return over a 25-year period – an astonishing rate – and with booming demand for biofuels, they have little downside risk. 26

Palm Oil vs. Indigenous People: Human Rights Losing Ground?27

“The government official asked me if I have a land ownership certificate and I said that every single durian tree, every single tengkawang tree and every single rubber tree that we or our ancestors have planted are my certificates. I am an indigenous person born here. My ancestors have already defended this land for generations. I do not want outsiders to disturb us. We will not allow any companies to establish plantations on our land.”

Indigenous leader, Sekadau District28

After Indonesia’s independence from the Dutch in 1945, a series of laws were enacted making the government a major landowner. As result, it is estimated that 60 to 90 million people derive their livelihood from land classified as ‘State Forest Areas’, which cover 70% of Indonesia’s territory.29 Many of its rural lands consist of primary and secondary forests, agro- forestry systems with rotations of 30 years or more, including community-planted rubber forests or other cash crops, fruit groves, and community-protected sites of cultural significance, such as burial sites in forest groves and homesteads.

The clearing of forests for the production of palm oil has increased conflicts with indigenous communities because land is scarce. The rapid expansion of plantations, government policies and company practices are the main culprits, and unfulfilled promises around smallholdings, historical grievances, the impact of transmigration and environmental degradation aggravate the situation. A problem often begins when the government grants territory occupied by local communities to palm oil companies, contrary to Indonesian law, whereby the company should negotiate access to the land directly with local communities.

26 http://www.mongabay.com/borneo/borneo_oil_palm.html Accessed Jan 2012. Dr Curran’s research investigations are in both Asia and the Brazilian Amazon on: the extent of natural and anthropogenic processes and disturbance, including the effects of land use change, on carbon dynamics and biodiversity; plant-animal interactions and the impacts of hunting; and effects of multisectoral governmental policies and logging practices on ecosystem management and rural livelihoods in tropical frontiers. http://leopoldleadership.stanford.edu/fellows/curran 27 The title of this section borrows from the report “Losing Ground: the human rights impacts of oil palm plantation expansion in Indonesia”. 28 Serge Marti (Ed.). Losing Ground: the human rights impacts of oil palm plantation expansion in Indonesia. Rep. Friends of the Earth, LifeMosaic and Sawit Watch, 2008: 25. 29 FPP and SW. (2006). Promised Land: Palm Oil and Land Acquisition in Indonesia - Implications for Local Communities and Indigenous Peoples. Bahasa: Forest Peoples Programme and Perkumpulan Sawit Watch.

In Malaysia, there is an ongoing struggle by two indigenous peoples – the Batek and the Penan. Typically, logging and palm oil companies obtain concessions from state governments with little or no resistance from indigenous peoples, who have limited land rights and can rarely read or write Malay. The indigenous peoples live communally and the concept of land ownership is alien. Their hunting grounds have never been recognized by the government as private property, or even the property of an individual community. In the past, many communities were unaware that a logging concession had been filed until the heavy equipment turned up and began felling the forest on their ancestral lands. Once the loggers were gone, the oil palm plantations moved in.

According to American photojournalist James Whitlow Delano, who began documenting the impact of bio-fuels and deforestation in Malaysia 17 years ago:

“Because bio-fuel has become viewed as a viable alternative to petroleum and is perceived as adding less carbon to the atmosphere, corporations view the land too valuable to ‘leave alone’ after logging, and it encourages them to open up more and more land for oil palm plantations, in a similar way that selling confiscated ivory creates a market and actually encourages more poaching of elephants. In this way, indigenous communities have been losing their ancestral land for the past 50 years.”30

Palm Oil vs. Environment

Why save the Orangutan?

“The release of more than 600 orangutans into the rainforest of Borneo has been postponed once again. Efforts to introduce them into the wild have failed largely because of a lack of safe forests for them to return to. An estimated 80% of their habitat has been destroyed in the past 30 years. On the island of Borneo at least four palm oil company employees are alleged to have killed the endangered animals. Orangutan experts say the increasing conflict between the animals and companies operating in the forest can only be solved if the government is more serious about conservation. Around 75% of the remaining orangutan population is currently being trapped in plantations.”

Step Vaessen reporting from Kalimantan; Al Jazeera Network, March 12, 2012.31

In March 2012, the first court case over the killing of orangutans was filed in Indonesia, with employees of the companies involved facing trial. However, there are many people in the region, both the desperately poor as well as the rich palm growers, who consider the orangutan a dangerous pest and reject the man vs. animal debate, questioning the expense of

30 American photojournalist James Whitlow Delano began documenting the impact of bio-fuels and deforestation in Malaysia 17 years ago when he moved permanently to Asia. The Pulitzer Center grant winner talked of the struggle of two indigenous Malaysian peoples — the Batek and the Penan. http://pulitzercenter.org/reporting/malaysia-palm-oil-deforestation-bio-fuels-batek-penan-borneo-forest- james-whitlow-delano-interview Published February 2, 2012. Accessed March 12, 2012 31 http://www.aljazeera.com/video/asia-pacific/2012/03/201231241012616397.html; Accessed 12 March, 2012.; http://www.aljazeera.com/news/asia-pacific/2011/12/2011122292544214725.html

saving this critically endangered species. Those that negotiate on behalf of the orangutans respond with the following argument:

“Along with the other great apes, orangutans are our closest living relatives, sharing up to 99% of human DNA. Given their human-like qualities, it can be argued that we have a moral obligation to save orangutans. But, there are also solid environmental reasons to make this a priority. Orangutans play a critical role in the forests they inhabit. Their fruit-dominated diet and large ranges mean they are excellent seed dispersers. Orangutans are thus critical for maintaining the health of their forest ecosystems, which in turn provide important environmental services to humanity. For example, studies indicate that one of the most efficient ways to limit global CO2 emissions is to conserve remaining peat land forests, such as the ones orangutans inhabit, because they harbour vast amounts of carbon. Orangutans are also an ‘umbrella species’- they require large tracts of forest to survive; thus, by protecting orangutan habitat, numerous other plant and animal species living in their forests are protected as well. Like all great apes, orangutans have long lifespans (including an extended period of ‘childhood’) and a very low reproductive rate, which make it difficult for them to recover from population crashes. Hence, they are particularly susceptible to extinction.”

Deforestation Negotiations

To develop a new palm oil plantation, a company needed to produce a land survey, clear vegetation, establish roads and drainage systems, and put in place soil conservation measures such as terracing, conservation bunds and silt pits, and the sowing of leguminous cover crops. Before starting any activity, however, it first had to obtain legal permission after undergoing an environment impact assessment (EIA). In Malaysia and Indonesia, large-scale plantations had to complete an EIA, conducted by a third party, to identify environmental and social adverse effects and eventually mitigate them. In Indonesia, EIAs had been criticised by communities and local NGOs for not being undertaken properly, providing misleading or inaccurate information, and not taking waste management seriously. The entire process involved negotiations with different segments of the government and local communities.

Besides obtaining credit from banks, the primary means used for the expansion of plantations was through the sale of timber (legal and illegal). As the production of palm oil was expected to increase, the remaining high-conservation-value forests were threatened. A Greenpeace report revealed that large farms were expanding into orangutan habitat and peat lands in Kalimantan.32 A February 2007 report by the United Nations Environmental Program (UNEP)33 stated that its former scenario for Indonesian forests was actually too optimistic – loss of orangutan habitat had increased by 30% and, if continued unchecked, by 2022 the

32 Greenpeace (2007). How Unilever Suppliers are Burning up Borneo. Retrieved on December 23rd , 2011 from http://www.greenpeace.org/international/Global/international/planet-2/report/2009/10/how-unilever- palm-oil-supplier.pdf 33 UNEP (1997). The Last Stand of the Orangutan - State of Emergency: Illegal Logging, Fire and Palm Oil in Indonesia’s National Parks”

forests in Malaysia and Indonesia would be nearly gone. According to Achin Steiner, UNEP Executive Director and United Nations Under-Secretary General:34

“In the past five years [2002-2007] more than 90% of over 40 parks [in Indonesia] have now been impacted putting at risk national and regional attempts to meet the 2010 biodiversity target. The driving forces are not impoverished farmers, but what appears to be well-organized companies with heavy machinery and strong international links to the global markets.”

According to the World Watch Institute, between 2000 and 2009, Indonesia’s exports increased by an average of 27% per annum, at the expense of 340,000 hectares of tropical lowland forest. The Indonesian Palm Oil Commission estimated that by 2012, a total of 7 million hectares of plantation would have already been established in the country.35 Since the late 1990s the rate of deforestation had increased in Asia in tandem with the scarcity of timber and illegal logging in national parks.

The World Wildlife Fund (WWF), among other organisations, had a number of initiatives to change this course. WWF had worked with the three Borneo nations to conserve a total of 22 million hectares of rainforest – almost one third of the Island – by promoting the sustainable management of the forests.36

Water Pollution

Among the environmental consequences caused by palm oil production, the most significant was water pollution. Plantations were intensively sprayed with pesticides and herbicides, creating toxic runoff, while effluent from the milling process needed to be stored in special ponds. The NGO Sawit Watch commonly received reports of effluent being discharged into rivers:

“In the past, when there was no oil palm plantation here, water in the river was very deep, but now it’s very shallow. We run out of water; it is difficult for people to find clean water in the dry season; not everyone has a drilled well. In the past in the forest, after a month and a half of dry season we would still find many small rivers. Nowadays, after a month or so of dry season, they have all dried up.”

37 Smallholder, West Kalimantan

Large palm oil plantations require a substantial amount of water, but the main issue relating to water in this case was the processing of waste from the plantation. Although these plantations were in areas of relatively high rainfall, communities reported that local rivers now contained

34 Nellemann, C., Miles, L., Kaltenborn, B. P., Virtue, M., and Ahlenius, H. (Eds). The last stand of the orangutan – State of emergency: Illegal logging, fire and palm oil in Indonesia’s national parks. Rep. United Nations Environment Programme, 2007: 5. 35 Worldwatch Institute. (2012). Global Palm Oil Demand Fueling Deforestation. Global Palm Oil Demand Fueling Deforestation. Retrieved September 5, 2012, from http://www.worldwatch.org/node/6059/ 36 WWF Global. Heart of Borneo Forests. Retrieved September 13, 2012, from http://wwf.panda.org/what_we_do/where_we_work/borneo_forests/ 37 Serge Marti (Ed.). Losing Ground: the human rights impacts of oil palm plantation expansion in Indonesia. Rep. Friends of the Earth, LifeMosaic and Sawit Watch, 2008: 12.

serious levels of pollution. Community reports also mentioned increasing levels of flooding in the rainy season, with plantations affecting the natural drainage patterns. Recurrent flooding had increased in the region in tandem with the growth of oil palm plantations. Another detrimental effect is their end-of-life cycle; due to soil exhaustion after a 25-year cycle (the average time the trees are productive), plantations are often abandoned.

The Hidden Carbon Liability in Indonesian Palm Oil 38

After China and the USA, Indonesia was the third largest emitter of greenhouse gasses (GHG) in the world, accounting for 4% of total global emissions. The emissions from peat land drained to plant oil palm represented 1% of total global emissions. According to Greenpeace, around half of Indonesia’s 22 million hectares of peat had already been cleared. The open- burning used to clear land also contributed to regional air pollution problems.

“Business-as-usual growth is creating a substantial carbon liability that is incompatible with building climate security and maintaining economic stability, or protecting biodiversity. It is the investments made today that will determine whether we curb the increase in global temperatures.”

Greenpeace International39

According to the IPCC, land use and forestry were the third-largest source of GHG emissions between 1970 and 2004.40 In 2007, it was estimated that 4% of global GHG emissions were derived from deforestation and peat land degradation or drainage. Emissions had increased almost 50% since the early 1990s, largely as a direct result of the expansion of oil palm and pulpwood plantations into Indonesia’s peat lands (see Exhibit 10).41 Palm oil produced on peat land with a depth of three metres carried a carbon burden more than 20 times the emissions linked to crude oil.

Many significant shareholders of product manufacturers that use palm oil were signatories to the Carbon Disclosure Project (CDP) – the initiative with the largest database of corporate climate change information in the world. The CDP had been hailed by investors and risk management experts alike as the beginning of a proper audit of corporate ‘contributions’ to climate change. A CDP report estimated that Unilever’s annual carbon footprint for raw material supplies, distribution, consumption and disposal of its products was around 120-240 42 metric tonnes of CO2 (a similar level to the entire country of The Netherlands). However, it is unclear if these calculations included emissions from deforestation and peat land degradation.

38 The title of this section borrows from the Greenpeace’s report “The Hidden Carbon Liability in Indonesian Palm Oil”, which extensively raises the problematic. 39 The Hidden Carbon Liability of Indonesian Palm Oil. Greenpeace International, 2008: 10. 40 IPCC. (2007). Greenhouse gas emission trends - AR4 WGIII Summary for Policymakers. Climate Change 2007: Working Group III: Mitigation of Climate Change. Retrieved September 5, 2012, from http://www.ipcc.ch/publications_and_data/ar4/wg3/en/spmsspm-b.html#footnote5 41 Greenpeace. (2008). SECTOR REVIEW THE HIDDEN CARBON LIABILITY OF INDONESIAN PALM OIL (pp. 1–84). 42 Ibid.

Biofuels: Environmental Solution or Additional Problem?

“As the limits to crude oil production become clearer, we need to find cleaner, bio-based liquid fuels and be able to produce them in large quantities. People and products need to move and be moved, and those living in developing countries are also entitled to mobility.”

Neste Oil43

The positive view of Neste, the largest Scandinavian bio-fuel producer, is not shared by eco- activist organisations. In May 2007, Greenpeace campaigned in Europe along with WWF and other NGOs, warning the government about the risks of biofuels as an alternative to petrol and diesel. Unilever seemed to agree. The company declared its concern about biofuels, saying that they were neither environmentally efficient nor cost-effective in reducing GHG emissions. According to Unilever’s Global Director of Sustainable Sourcing Development, Jan Kees Vis, a price increase had direct consequences on their purchasing power since palm oil was used as cooking oil by two billion of the poorest people in the world.44

“The surging tide of food prices, such as corn, wheat and palm oil, continues to add to the already worsening global inflationary pressure…The record high crude oil prices further added pressure on the global economy, and heighten the fuel- food debacle.”

Tan Sri Dato’ Lee Shin Cheng, Executive Chairman at IOI45

Eco-Activism

It was not until the fires in 1997 and 1998 that public attention began to focus on palm oil for its environmental impacts. Not only did the economies of Indonesia, Malaysia, Singapore, Brunei and Thailand suffer, people suffered health problems from the haze resulting from fires in Borneo. The event received substantial media coverage, catching the attention of people in the Australasian region and, over time, the world as a whole. Since the fires were lit to convert forests into palm oil plantations, the link between palm oil and the smoke pollution was clearly established for the first time. This was an important moment for the NGOs that had been campaigning against deforestation and logging in Malaysia and Indonesia.

“The Malaysian palm oil industry has been somewhat caught in the crossfire, being seen on the one hand as one of the perpetrators of deforestation, while it is also seen by many foreign governments as the key to injecting much needed economic growth and rural development.”

Dato’ Sabri Ahmad and M. R. Chandran, Malaysian Palm Oil Association46

43 Neste Oil. "Questions & Answers." Press release. www.nesteoil.com. 08 July 2009. 44 Taylor, M. (2010). Reuters. Greener palm oil needs more Asia support: Unilever. Retrieved September 5, 2012, from http://www.reuters.com/article/2010/10/19/us-unilever-palm-oil-idUSTRE69I4DN20101019 45 Giving Back: annual report 2008. Rep. Putrajaya: IOI Corporation Berhad, 2009: 74. 46 Sabri Ahmad, Dato’, and M. R. Chandran. "The Challenge of Sustainability for the Malaysian Palm Oil Industry." .

At the time, the palm oil industry had little experience with NGO campaigns against deforestation and carbon was not even an issue for them. The dialogue between industry representatives and NGOs was not an easy one:

“Some of these detractors [from anyone’s success] are in the form of NGOs who want to relate us [the palm oil industry] to forest destruction and habitat loss, and things like that. If you look at the Malaysian palm oil statistics, whatever we have done is all about switching from rubber, coconut or rice to palm oil. It’s got nothing to do with habitat loss or destruction, and that’s how ignorant these people are. These NGOs are very short-sighted and focused on trying to destroy a good economy like what we have developed out of palm oil.”

Tan Sri Datuk Dr Yusof Basiron, CEO of MPOC47

Acting as mediator in the conflict, in 2002, WWF initiated an engagement process between the stakeholders in the palm oil value chain. In 2004, this was formalised as the ‘Roundtable on Sustainable Palm Oil’ (RSPO), with the objective of opening a dialogue between stakeholders to promote the production of sustainable palm oil throughout the supply chain.

The Stakeholders: From Seed to Frying Pan48

Based on the value chain, the upstream producers consisted of plantation companies, government-supported producers and smallholders. The downstream producers included refiners, palm kernel crushers, oleo-chemical producers, palm-based product manufacturers, speciality fats producers and biodiesel producers. The other industry players included exporters and importers, customers, NGOs and government agencies that represented the environment and indigenous communities.

There were economies of scale in growing, supply chain efficiency, research and development and procuring freight space. Over the years, the industry had seen increasing concentration, and the emergence of a few major players who were already vertically integrated or moving towards downstream operations.

Upstream and Downstream Producers

After cutting the fruit from the trees, the grower has no more than 24 hours to process them in the mills to generate the crude palm oil. Large scale palm oil plantations have their own mills, typically within the vicinity of the plantation area; smallholders likewise have to be relatively close to such mills to be economically viable. The size of a large plantation can vary from a few hundred hectares to more than 100,000 hectares.

Due to increasing scarcity of land and labour, Malaysian companies had expanded plantations offshore, particularly in Indonesia. They had also invested in downstream processes in consuming countries, such as India, Bangladesh, Pakistan, China, Egypt, and in Europe. Large oil corporations had emerged, including exporters and importers, refiners, palm and kernel

47 Technology Park Malaysia. October 2006. 48 This section is based on the WWF report written by Mr Teoh Cheng Hai, “The Palm Oil Industry in Malaysia: From Seed to Frying Pan”

crushers and manufacturers of palm-based edible products, in particular oils, fats, and biofuels.

In 2007, the merger between Golden Hope Plantations Berhad, Kumpulan Guthrie Berhad and Sime Darby Berhad in Malaysia resulted in the foundation of Sime Darby, the largest palm oil plantation in the world with 531,832 hectares of planted palm oil. Among the largest groups in the industry are Sinar Mas (Indonesia), United Plantations (the Netherlands) and Wilmar (Singapore).49 (Exhibit 7 ranks these companies according to planted areas).

Transport and Shipping

Because palm oil is a commodity, it changes owners as soon as a batch is loaded aboard ship. Indeed in the futures market, it may change hands even before it is produced. The crude palm oil is transported from the mill in Malaysia and Indonesia to the refinery and blenders in the EU, US, China and India, where the largest consumer markets are located. However, this shipping may occur at a further stage of the value chain.

Despite the use of traditional and biofuel-intense methods of transportation (mainly via rail and water), little attention was given to this section of the oil’s value chain. In terms of environmental impact, the transport of raw material and the final product accounted for only 9% of the total CO2 emissions of the production chain, and was thus less of a priority in the eyes of the players in this industry.50

Refiners and Blenders

The aim of refining is to convert the crude palm oil into quality edible oil by removing impurities. Besides selling the crude palm oil and its by-products to ingredient or product manufacturers, refineries may produce and sell biodiesel. The majority of refineries were directly linked with the palm plantation and milling sectors. Some of the refineries had also tied up with manufacturers of specialty products and oleo chemicals.

Traditional petroleum companies, such as the Finish Neste Oil, were entering the palm oil business. Although Neste was the market leader in hydrocarbons in Finland, its goal was to become the world’s leading producer of renewable diesel – its fastest growing business area. In November 2010, the company inaugurated the largest biodiesel plant in the world, in Singapore, with a production capacity of 800,000 metric tonnes per year. The plant produced premium-quality NExBTL renewable diesel, which was considered to be the most advanced and cleanest diesel fuel on the market today.51

49 Sime Darby. (2011). Sime Darby: Our Business. Plantation. Retrieved September 5, 2012, from http://www.simedarby.com/Plantation.aspx 50 Panapanaan et al. (2009). Sustainability of Palm Oil Production for Finnish Technology and Know-how transfer. Retrieved on December, 22 2012 from http://www.doria.fi/bitstream/handle/10024/45293/isbn9789522147585.pdf 51 Neste Oil. (2011). Neste Oil celebrates the grand opening of its ISCC-certified renewable diesel plant in Singapore [Press release]. Retrieved on December 22, 2011 from http://www.nesteoil.com/default.asp?path=1,41,540,1259,1260,16746,17030

Product and Ingredient Manufacturers

Traditionally, palm oil is used as raw material for food production. Its resistance to oxidation (which confers a longer shelf life on products containing it) is one of the main factors that contributed to its use in food production (see Exhibit 8). It is also used in the cosmetics industry for the production of shampoo and lotions of different types.

Amongst companies, Unilever was the largest buyer of palm oil – purchasing an equivalent amount of 1.3 million tonnes of palm oil and its derivatives per year, accounting for approximately 3% of the world’s supply. In 2005 alone, the firm bought 1 of every 20 tonnes of palm oil produced in Indonesia.52 Its history with palm oil goes back centuries, when much of the oil bought was used in the manufacture of soaps like Lux®. In an attempt to address environmental issues caused by its operations, Unilever became a founder member of the RSPO, and had committed to having 100% of its palm oil supplies certified sustainable by 2015. By the end of 2011, 64% of its palm oil was from sustainable sources, compared to 37% in 2010.53

Retailers

These players made up a large share of downstream producers – palm oil refiners, palm kernel crushers, manufacturers of palm-based edible products and specialty oils and fats. A wide range of food and non-food items were produced from three main outputs from refineries – crude palm oil (CPO), crude palm kernel oil (CPKO) and palm kernel (PK) olein (the main feedstock for the production of oleo chemicals). Although retailers were numerous, in September 2012 there were only 46 members approved by the RSPO representing the sector – more than half of them since 2010. The list included big brands such as Marks and Spencer, McDonald's Corporation and Carrefour. Three of them had been members since 2004: The Body Shop International, Federation of Migros Cooperatives, and Coop Switzerland. After the Migros, Coop was the second largest retailer in Switzerland. Both are cooperatives.54

Founded in 1925, Migros had attained the status of Switzerland’s most reputable company. A RSPO co-founder, it had implemented strategies to develop a sustainable supply chain in the procurement of palm oil. One of its most interesting strategies was to minimize the costs for purchasing sustainable palm oil by raising the price of margarine and developing new products in which palm oil is replaced by sunflower oil. By 2006 it had reduced its purchase of palm oil by one third.55 Migros was the most committed retailer, but no longer sat on the executive board. Its seat was taken by a representative from Carrefour.

52 Greenpeace. (2008). SECTOR REVIEW THE HIDDEN CARBON LIABILITY OF INDONESIAN PALM OIL (pp. 1–84). 53 Unilever. (2012).Sustainable sourcing Unilever. Retrieved September 7, 2012, from http://www.unilever.com.sg/sustainable-living/sustainablesourcing/ 54 http://www.rspo.org/index.php?lang=en&pagename=members_search&member- category[]=Retailers&member-approved-year=All&member-status=All&member-name=&member-search- submit=Search&page=2 Accessed September 2012 55 http://linkingsustainability.com/2012/02/02/migros-palm-oil-sustainability-case-study/ Accessed September 2012 Also look at reference http://www.rspo.org/en/history ; http://www.oikos-international.org/fileadmin/oikos- international/international/Case_competition/winner2_2006.pdf Accessed September 2012

Consumers

As the market developed, environmental concerns factored into the buying decisions and habits of the consumer, particularly the sourcing strategies of suppliers of palm oil. The sourcing decision depended on investors and fund managers who exerted a significant influence on the supply chain through their shareholding in plantation companies.

For example, an estimated US$10 billion was invested to develop three million hectares of oil palm plantations in Indonesia between 1988 and 2003.56 This was financed by commercial and investment banks, which provided around 80% of the total investment in palm oil production. Indeed the fast expansion of the palm oil sector would not have been possible without the financial support of many national and international financial institutions. On average, developing a new plantation cost between US$2,500 and US$3,500 per hectare, and a mill for crude palm oil was estimated to cost US$5 million.57

Other Stakeholders

A number of industry associations played an important role representing the diverse interests of upstream and downstream producers of palm oil and palm-based products and their derivatives. The main one, the Malaysian Palm Oil Association (MPOA), represented the interests of plantation owners, for a total of 1.4 million hectares of palm oil – the equivalent of 70% of the area under private ownership in Malaysia. MPOA’s mission was to ensure the long-term profitability and growth of the Malaysian palm oil industry. The Indonesian equivalent, GAPKI, was established in 1981. From only 23 plantation companies, it now boasted hundreds of members.58 However, GAPKI resigned from the RSPO in September 2011.

Roundtable on Sustainable Palm Oil (RSPO): Solution to all Evils?

“The destruction of the rainforest can only be prevented by exploiting its resources in a sustainable manner. The cultivation of palm oil must be allowed. Nevertheless, we also require more sustainable cultivation methods.”59

Dr Robert Keller, senior R&D manager, Migros 1999

After the first exploration of sustainable palm oil production in Ghana in 2001,60 an informal co-operation among Aarhus United UK Ltd, Golden Hope Plantations Berhad, Migros, Malaysian Palm Oil Association, Sainsbury's and Unilever was initiated with WWF in 2002. These constituted the Organising Committee for the first Roundtable meeting, and prepared the foundation for the organisational and governance structure of the formation of the RSPO.

56 Wakker, E., & Gelder, J. W. V. (2003). Risking the forests: Identification and management of Indonesian oil palm plantation risks by financial institutions. Amsterdam. 57 Ibid. 58 http://www.gapki.or.id/page/about Accessed September 2012 59 Keller R. 1999. Nicht Palmoexport gefahrdet Tropenholz. Tages Anzeiger. Nov 22, 1999. (Migros – Sustainable Supply Chain Strategy; London Business School, 2006) 60 The parties involved were: GOPDC in Ghana, Migros in Switzerland, WWF Proforest. (http://en.wikipedia.org/wiki/Roundtable_on_Sustainable_Palm_Oil; accessed 12/3/12)

The inaugural meeting of the Roundtable took place in Kuala Lumpur on 21–22 August 2003, and was attended by 200 participants from 16 countries. In the early stages, the Malaysian Palm Oil Association (MPOA) was fundamental to convince large manufacturers to join the RSPO. GAPKI61 joined a year later. The key output from this meeting was the adoption of a Statement of Intent (SOI), a non-legally-binding expression of support for the Roundtable process.62

On 8 April 2004, the Roundtable on Sustainable Palm Oil (RSPO) was formally established under Article 60 of the Swiss Civil Code with a governance structure that ensured fair representation of all stakeholders throughout the entire supply chain. The seat of the association was in Zurich, the secretariat based in Kuala Lumpur, and it had an RSPO liaison office in Jakarta.63 Fundamentally, the RSPO was designed to be a common platform for stakeholders with differing views and positions. Members met at an annual conference to dialogue and make relevant decisions. They could be divided into banks and investors, environmental NGOs, social NGOs, producers, processors and traders, and manufacturers and retailers. The Executive Board had two representatives from each category, with the exception of producers who have four– for Malaysia, Indonesia, smallholders and ‘the rest of the world’. (See Exhibit 11)

RSPO defined sustainable palm oil production as one that is: ‘legal, economically viable, with environmentally appropriate and socially beneficial management and operations’.64 In November 2007, members accepted the RSPO's Principles & Criteria (P&Cs), which then were available to plantation companies for implementation. (See Exhibit 12).

As of 2011-12, it was possible to be a full member of the RSPO without ever actually producing any RSPO-certified sustainable palm oil. However, membership depended on approval based on firm and specific aspirations towards sustainable palm oil.65

Complexity of Commodity Certification

Palm oil is considered a commodity, so most of the time a buyer will be trading with an intermediary that combines production from multiple farms. Some of those farms may be ‘sustainable’, others not. In fact, the buyer has no clue where the oil actually came from. It could have been traded multiple times before it gets to their manufacturing facility. This creates a big problem if the goal is to make the commodity ‘green’ or more ‘sustainable: how can a buyer differentiate between a batch of sustainable palm oil and one that is not? One option is to secure a sustainable supply chain from the farm to the plant, but it’s hard (and expensive) work.

61 Gabungan Pengusaha Kelapa Sawit Indonesia. 62 "Malaysian Palm Oil Association". Mpoa.org.my. http://www.mpoa.org.my/index.php?id=202. Retrieved 2011-07-25. (http://en.wikipedia.org/wiki/Roundtable_on_Sustainable_Palm_Oil; accessed 12/3/12) 63 Roundtable on Sustainable Palm Oil (RSPO). "History | Roundtable on Sustainable Palm Oil". RSPO. http://www.rspo.org/?q=page/10. Retrieved 2011-07-25. (http://en.wikipedia.org/wiki/Roundtable_on_Sustainable_Palm_Oil; accessed 12/3/12) 64 Roundtable on Sustainable Palm Oil (RSPO). 07 July 2009 . 65 Roundtable on Sustainable Palm Oil (RSPO). "How to Apply | Roundtable on Sustainable Palm Oil". RSPO. http://www.rspo.org/?q=page/13. Retrieved 2011-07-25.

The sustainable palm oil movement and RSPO identified different supply chain methods to ensure the product meets the requirements (see Exhibit 14). In the ‘identity preserved’ method, RSPO-certified palm oil could be traced to a particular mill and a specific supply base. It is physically isolated from other products. The ‘segregation’ method made the same initial claim but other RSPO-certified palm oils could be mixed in. The ‘mass balance’ method mixed RSPO-certified and conventional oils as long as the amounts were tracked. The ‘book and claim’ method used certificates to say the product “supports the production of RSPO-certified sustainable palm oil”. Each system had its own management process, resulting in considerable administrative complexity.66

RSPO Certification

Two types of Certification process were carried out via the RSPO. The first was the ‘Producers’ Certification’, that checked compliance with RSPO’s Principles & Criteria via accredited certifying agencies. The second was a dual system comprising a supply chain certification (SCC) drawn up by the RSPO, and a traceability process monitored by UTZ Kapeh (UTZ), a non-profit certification programme. The SCC required that all actors in the supply chain respect a set of technical and administrative requirements, while UTZ traceability followed the flows of individual batches of sustainable palm oil from one actor to the next, through the supply chain, with three different levels of traceability. The lower level allowed mixing RSPO and non-RSPO certified palm oil; the intermediate level only permitted usage of certified oil even if its source was not identifiable; the highest level certified traceability of oil from identified sources.

In 2010, RSPO appointed a Chain of Custody (CoC) certification body – BM Trada – which allowed supply chain companies to trace sustainable product beyond the refinery to achieve RSPO certification and to make claims about their use of RSPO-certified palm oil.67 According to RSPO’s website, they now had 13 different RSPO Approved Certification Bodies for Supply Chain Certification.68 These labels were intended to help consumers make responsible purchasing decisions. The ultimate aim of RSPO, enacted via the set of norms, standards, measures and signs described above, was “To transform markets to make sustainable palm oil the norm.”69

GreenPalm Certificates70

Endorsed by RSPO, GreenPalm was a ‘book and claim’ system to show support for certification. Certified mills gained a GreenPalm certificate for every tonne of sustainable palm oil they produced. These tradable certificates were then sold on to manufacturers and retailers through a web-based trading platform restricted to RSPO members only. These

66 Read more: http://www.livestrong.com/article/180491-what-is-sustainable-palm-oil/#ixzz25yr7AJDR Accessed September 2012 67 Forest Footprint Disclosure (FDD), UK www.forestdisclosure.com (accessed September 2012) http://www.forestdisclosure.com/docs/FFD_annual_review_2012.pdf 68 http://www.rspo.org/en/certification_bodies (accessed September 2012) 69 RSPO (2012), RSPO commits to new vision of transforming markets, March, 21. Available at: http://www.rspo.org/news_details.php?nid=91 (accessed 15.04.2012). 70 GreenPalm and GreenPalm Brokerage are trading names of Book&Claim Limited, which is a wholly owned subsidiary of AarhusKarlshamn UK Ltd. King George Dock Hull HU9 5PX UK

certificates could be sold to manufacturers and retailers who then claimed to have supported the sustainable production of palm oil, even if they didn’t directly buy RSPO-certified oil.71

This system was very similar to carbon offsetting or green energy, whereby the buyer of a credit had no direct link to the underlying physical material: the two elements of the sustainable product were traded in quite distinct marketplaces. GreenPalm Certificates offered an interesting solution – they decoupled the physical flow of palm oil from the sustainability of the farms.

Here is how it works. A company like Unilever keeps buying its palm oil the same old way: sometimes without a clue where it came from. Unilever then buys a certificate from the GreenPalm Programme for every ton of palm oil they purchase. Each certificate is associated (and verified) with specific farms and they are guaranteed to have delivered to the market a tonne of sustainable palm oil. Everybody wins. The farmer gets the ‘certificate’ money to recover the investment made to be certified, even if the oil was paid for based on “commodity” prices. Unilever is happy since they can guarantee that for every tonne bought, a tonne was produced sustainably somewhere in the world, even if they did not receive that particular sustainable oil. They can even label their products down the road to encourage customers to buy.

By separating the “physical flow” of the sustainable palm oil supply chain from the “information flow” of the sustainability certificates, they were able to get the “monetary flow” to reach the growers. A neutral company oversaw the key certification mechanisms, and a trader enabled the transaction.

There has been criticism of the GreenPalm system since it did not, of itself, increase the volume of labelled and visible CSPO (certified sustainable palm oil) in the food and biofuel supply chains, or increase market pressure on companies continuing to use unsustainable sources. It also failed to generate any incentive for other parties in the supply chain beyond the growers to become RSPO certified.

National Certification Schemes

Forging ahead with its own national certification scheme for responsible ‘green’ palm oil, Indonesia aimed to provide a level playing-field for all companies operating in the country and promised to punish firms that do not adhere to environmental standards. The creation of a national Indonesian standard (ISPO), which was anticipated to be less rigorous than the RSPO’s criteria, was welcomed by the latter as offering companies an initial stepping stone before progressing to the more internationally acceptable RSPO certification scheme. In response to the formation of ISPO on September 30, 2011, Fadhil Hassan, chairman of the Indonesian Palm Oil Association (GAPKI), said:

“We want to be neutral and accommodate all interests, as some of our members participate in the RSPO while the rest do not. Since membership in the RSPO was voluntary, such withdrawals were normal and did not imply that GAPKI was not

71 RSPO (2012), RSPO commits to new vision of transforming markets, March, 21. Available at: http://www.rspo.org/news_details.php?nid=91 (accessed 15.04.2012).

committed to sustainability. Indonesian firms will continue to produce sustainable palm oil, which at present reaches around 1.95 million tonnes per year.”72

However, it is worth noting that of the total of 21 Mt of palm oil produced in 2010, this amount of 1.95 Mt of sustainable palm oil equated to less than 10%!73

There were rumours that Malaysia, the world’s No.2 palm oil producer, would also develop a national certification scheme to ensure that tropical oil is grown without clearing forests and destroying wildlife, further increasing the range of certification available to international buyers.

WWF Scorecard

A voluntary certification scheme aimed at genuine supply chain transformation, it involved targeting the focal actors and involving them in the certification process. Thus WWF gained influence over a major market share and was then able to influence the chain both upstream and downstream, encouraging companies to use certified palm oil by the publication of the Palm Oil Buyers Scorecard. Based on four main principles – essentially related to being a member of the RSPO network, and the usage of certified palm oil – national evaluations of companies were published annually on the WWF website and re-broadcast via the mass media. The same criteria were applied transversally by all the national sections of WWF.

RSPO Trademark

The RSPO trademark was introduced into the market in 2011. As of July 2012, 61 RSPO trademark licenses across 13 countries had been issued. RSPO certification at the plantation level and the trademark on the end product completed the loop from upstream to downstream within the supply chain, and guaranteed that sustainable oil palm cultivation did not contribute to the sustained destruction of valuable tropical forests or damage the interests of people in the regions where the palms are grown. The trademark bridged the gap between the upstream and downstream sustainable palm oil production and distribution system. This marked the entry of the RSPO trademark into the daily lives of consumers around the globe as for the first time they were able to consciously choose products which contained CSPO.74

Four Reasons Companies don’t Buy RSPO Certified Palm Oil 75

The purchase of RSPO-certified oil continued to stay below the volume produced for a number of reasons:

1. Downstream buyers were not buying the oil as it could be significantly more expensive than conventional oil.

72 http://www.thejakartapost.com/news/2011/10/05/gapki-withdraws-rspo-support-ispo.html , accessed Oct 6, 2011 (Cargill case) 73 Ibid. 74 http://www.rspo.org/news_details.php?nid=111 Accessed September 2012 75 http://www.slideshare.net/Tobiaswebb/ethical-corp-june-2012-palm-oil-article-and-cover-contents Accessed September 2012. Ethical Corporation June 2012 www.ethicalcorp.com

2. The crude palm oil was not necessarily much more expensive (sometimes $20/tonne). But because companies mostly used refined oil, or fractions, and the premium weighs on those fractions, this amplified the premium, up to $300/tonne. 3. Segregating the RSPO oil from the plantation to the final user was extremely costly. As a commodity, palm oil works on a critical mass basis. Trying to segregate and create artificial flows is like swimming against the stream, and the added costs were prohibitive. This applied particularly in China and India. 4. Businesses such as Cargill, Nestlé and Unilever had committed to sourcing RSPO- certified sustainable palm oil by 2015. As a result, a change to the status quo was unlikely until 2014. For the time being, businesses were snapping up GreenPalm certificates, which did not require them to pay the full cost of certified oil or change their supply chain to buy the physical trade of RSPO-certified oils.

Critics of RSPO said that to deliver sustainable palm oil it must adopt a policy that excluded deforestation from its standards. Currently it did not. On top of that, a number of producer members seemed intent on continuing “business as usual”, according to Greenpeace, meaning they will carry on chopping down native forest.76

Watchdogs

The participation of international NGOs in the RSPO was divisive. While WWF, Oxfam Novib, Rainforest Alliance and Conservation International have become members, Friends of the Earth, Wetlands International and Greenpeace had opted out and were leading the criticism:

“At present, the RSPO scheme does not prohibit palm oil producers from being involved in forest conversion and has no assessment of, or limits on, GHG emissions from the development of oil palm plantations. Furthermore, it has no system to segregate palm oil that meets RSPO criteria from palm oil coming from deforestation including peat land clearance.”

Greenpeace77

Greenpeace was in the difficult position of being both a supporter and a critic of the RPSO. According to the Unilever website,78 Executive Director of Greenpeace John Sauven is quoted as saying,

“Unilever's decision could represent a defining moment for the palm oil industry. What we're seeing here is the world's largest buyer of palm oil using its financial muscle to sanction suppliers who are destroying rainforests and clearing peat lands. This has set a new standard for others to follow.”

76 Ibid. 77 How the Palm Oil Industry is Cooking the Climate. Rep. Greenpeace International, 2007: 38. 78 Unilever & palm oil | News | Unilever Global". Unilever.com. http://unilever.com/mediacentre/news/unileverandpalmoil.aspx. Retrieved 2011-07-25.

But Greenpeace UK's website now stated:79

“Industry efforts to bring this deforestation under control have come through the RSPO. It was set up in 2004 to establish clear ethical and ecological standards for producing palm oil, and its members include high-street names like Unilever, Cadbury's, Nestlé and Tesco, as well as palm oil traders such as Cargill and ADM. Together, these companies represent 40% of global palm oil trade.”(…)

“But since then, forest destruction has continued. Many RSPO members are taking no steps to avoid the worst practices associated with the industry, such as large-scale forest clearance and taking land from local people without their consent. On top of this, the RSPO actually risks creating the illusion of sustainable palm oil, justifying the expansion of the palm oil industry.”

Unilever was purchasing GreenPalm certificates, with the aim of purchasing 100% of their palm oil from certified sources by 2020. Although Unilever used approximately 1.3 million tonnes of palm oil per year, this represented only 3% of the total production of palm oil.80 Unilever responded to Greenpeace and the general public by saying that it shared the same concerns about the expansion of palm oil production. Regarding Greenpeace’s demands, Unilever said that it: (i) wanted to support the moratorium once “there is ample un-forested land available to meet even the most optimistic estimate of demand”81, but admitted that there is also work to be done, and the company does not have the expertise; (ii) preferred to work with suppliers and help them to stop using unsustainable agricultural methods, as it did in the fishing and tea industries, and; (iii) intended to have all palm oil certified sustainable by 2015. Unilever’s Director at the time tried to convince other stakeholders to engage in the moratorium, but simply managed to infuriate palm oil producers:

“We had to face a large opposition that felt completely damaged. Growers come from very far and the moratorium sounded like RSPO certification was not enough. Our suppliers were already asking for time to get used to the certification and the support for the moratorium was extra work. Some of them said ‘You are basically saying that we can’t grow’.”

Lettemieke Mulder, Director of Global External Affairs, Unilever82

Rainforest Action Network (RAN) also had a position of qualified support for the RSPO system. Blogs by David Gilbert,83 a Research Fellow at RAN, who attended the 2009 RSPO annual meeting in Kuala Lumpur, revealed some of the intense dissatisfaction with the process:

79 Palm oil | Greenpeace UK". Greenpeace.org.uk. http://www.greenpeace.org.uk/forests/palm-oil. Retrieved 2011-07-25. 80 Greenpeace. (2008). SECTOR REVIEW THE HIDDEN CARBON LIABILITY OF INDONESIAN PALM OIL (pp. 1–84). 81 “Sustainable Palm Oil”. Unilever Global. 08 July 2009. http://www.unilever.com/sustainability/environment/agriculture/sustainablepalmoil/ 82 Lettemieke Mulder. Telephone Interview with Renato Orsato and Renata Loew. 08 Apr. 2009. 83 "RSPO Dispatch: Oil palm is not development » Rainforest Action Network Blog". Understory.ran.org. http://understory.ran.org/2009/11/02/rspo-dispatch-oil-palm-is-not-development/. Retrieved 2011-07-25.

“The RSPO is the world’s largest annual meeting of oil palm industry, environmentalists, human rights advocates, and, most importantly, community members. Today, I watched as a community member from Borneo stood up in front of oil palm producers, NGOs, and technocrats, identified himself as a victim of oil palm expansion, and tore apart the falsity that some of the world’s richest businessmen desperately want us to believe; the falsity that oil palm helps the world’s poor. Oil palm does not lead to the development of a country. Wealth, contained in the natural resources of the our forests and controlled by us, is flattened and burned, and then collected by the world’s rich, from companies like Sinar Mas, Cargill, IOI, and Duta Palma. Oil palm does not bring wealth to the poor, it takes it away. Oil palm development, like so many neo-colonial trading systems, makes the poor poorer and the rich richer.”

WWF released the WWF Palm Oil Buyer's Scorecard.84 The website stated:

"WWF’s Palm Oil Buyers’ Scorecard, released today, scored the performance of 59 of the most prominent retailers and manufacturers in Europe that buy and use palm oil in their products. The Scorecard comes as the world’s largest producers, buyers and traders of palm oil gather for the 7th Roundtable on Sustainable Palm Oil, held in November in Malaysia. The Scorecard reveals that 10 of those 59 companies have scored 20 or more points, and thus are considered by WWF to be showing real progress on their commitments to buy and use sustainable palm oil. They have joined the RSPO; properly monitored their palm oil purchases; and have put in place and started to take action on commitments to buy certified sustainable palm oil. ‘WWF welcomes the action of those companies that have moved toward buying certified palm oil,’ said Rod Taylor, Director of the Forests Programme at WWF International. ‘Although many companies have a long way to go, the performances of the top companies in the Scorecard signal to the rest of the industry that it is possible to turn commitment into action and transform the market.’

Friends of the Earth International (FOEI) were extremely critical of the RSPO. Its website stated:85

“Essentially, RSPO companies are subjected to technical principles and criteria, but social and environmental issues of oil palm cultivation are largely framed within flawed political processes, poor governance and unsustainable market demand. Understood within this context, the RSPO is a voluntary certification process for a market premium and membership that may be able to add a much sought after and totally misleading 'green tag' to the industry. Moreover, it provides certification without having to actually address some of the most very basic, structural issues that gave rise to the adverse impacts of oil palm cultivation. FOEI therefore does not regard the RSPO as a credible certification

84 "WWF - Scoring palm oil buyers in Europe". Panda.org. http://www.panda.org/what_we_do/footprint/agriculture/palm_oil/forest_conversion_palmoil/sustainablepa lmoilscorecard/. Retrieved 2011-07-25. 85 'CERTIFIED' PALM OIL NOT A SOLUTION — Friends of the Earth International". Foei.org. 2009-11- 03. http://www.foei.org/en/media/archive/2009/certified-palm-oil-not-a-solution. Retrieved 2011-07-25.

process as it is only a limited tool of technicality which is not able to adequately address the horrendous impacts of oil palm cultivation on forests, land and communities.”

The Future

The next decade would be critical for the RSPO. While the organisation needed to legitimise its certification scheme and eco-labelling, it needed to respond not only to the demands of its members but, more significantly, to environmental and social NGOs. How would RSPO balance the needs of all its members and stakeholders in palm oil production? What was the future of the forests of Borneo? Seeing that Indonesia was such an important player in the palm oil debate in Southeast Asia, what might be the consequences of its exit from the RSPO?

Exhibit 1 World Palm Oil Production (Million Tonnes – Mt)

Source: Oil World www.oilworld.biz

Exhibit 2 World Palm Oil Production (Mt)

35 Thousands 30

25 Indonesia 20 Malaysia 15 World

Source: Adapted from USDA Foreign Agricultural Service (FAS). PSD Online - Custom Query. 22 June 2009 .

Exhibit 3 Malaysia and Indonesia Country Profiles

Malaysia Indonesia

Federal constitutional elective Government monarchy and Parliamentary Presidential republic democracy

In 1957, from the United In 1945, from the Independence Kingdom Netherlands

329,845 km2 1,919,440 km2 Total area

62.3%, equivalent to 204,560.0 48.9%, of which 55% Forested area km2 classified as primary forest

239,870,937 – 2010 Population 28,401,017 (in 2010) updated estimate updated

Total $237,803,850,459 Total $706,558,240,892 GDP (PPP) Per capita $7,760 – 2010 Per capita $2,500 updated estimate updated – 2010 estimate updated

Corruption Perception Index* 4.4/10 – 2010 estimates 2.8/10- 2010 estimates

* The score is between 0 (for high corruption) and 10 (for no corruption)

Sources: World Bank Database, 201086 Transparency International, 201087.

86 http://Data.Worldbank.Org/Country/Malaysia 87 http://Www.Transparency.Org/Policy_Research/Surveys_Indices/Cpi/2010/Results

Exhibit 4 Southeast Asia

Source: “Southeast Asia political map cia 2003 | Maps of Philippines.” Maps of the World. 22 June 2009 .

Exhibit 5 Deforestation in Borneo

Forest cover in Borneo: deforestation 1950–2020

Forest loss projections are placed around the existing road network. WWF estimates that over the period 2000–2020 about 17,280,000 ha of forest cover will have been lost.

Orangutan distribution in Borneo: population loss 1930–2020

Source: The Hidden Carbon Liability of Indonesian Palm Oil. Rep. Greenpeace, 2008.

Exhibit 6 Palm Oil Flow chart

Source: Adapted from Roundtable on Sustainable Palm Oil (RSPO). 22 June 2009

Exhibit 7 Major Oil Palm Plantations Companies

Company Planted area (ha) Sime Darby 531.832 Wilmar 223.000 Kuala Lumpur Kepong 170.000 Sinar Mas 170.000 Raja Garuda Mas (Asian Agri) 160.000 IOI Corporation 149.445 Kulim Malaysia 105.000 United Plantations 36.787 Hap Seng 33.379 Astra Agro 4.032 Source: Developed from various sources by the authors

Exhibit 8 Main Products Using Palm Oil

Company Country of Origin Products Major Brands Beiersdorf Germany Shampoo, cosmetics Labello, Atrix, Nivea Shampoo, cosmetics, Colgate-Palmolive United States Colgate, Palmolive, Ajax detergents Heinz United States Soup, Sauces Heinz Shampoo, cosmetics, Schwarzkopf, Fa, Gliss, Henkel Germany detergents Taft, Dizan, Persil

Côte d'Or, Toblerone, Kraft Foods United States Confectionery, biscuits Milka, Kraft, LU, Jacob's

Mars, Twix, Snickers, Confectionery, ice cream, Mars United States Bounty, Suzi Wan, Uncle soup, sauces Ben's McCain Canada Potato Chips McCain Nestlé, Buitoni, Maggi, Confectionery, ice cream, Nestlé Switzerland KitKat, Lion, Mövenpick, pasta, soup, sauces Schöler Detergents, cosmetics, PepsiCo United States Lay's, Walkers snacks Detergents, cosmetics, Pringles, Head & Shoulders, Procter & Gamble United States snacks Ariel, Dash, Dreft Shampoo, cosmetics, Sanex, Badedas, Zwuitsal, Sara Lee United States detergents Prodent, Biotex

Ola, Magnum, Ben & Margarine, sauces, snacks, Netherlands/ United Jerry's, Mora, Blue Band, Unilever soup, ice-cream, cosmetics, Kingdom Becel, Bertolli, Andrélon, soap, shampoo, detergents Luz, Dove, Clif, Omo, Sun

McVities, Go-Ahead!, United Biscuits United Kingdom Biscuits, snacks Declare, Verkade, Hula Hoops, McCoys, KP Nuts Pastry, margarine, cooking Vandermoortele Belgium oil

Source: adapted from Van Gelder, et al. Breaking the Commodity Course. Handbook for Indonesian NGOs. Rep. Aidenvironment and Profundo, 2004.

Exhibit 9 Palm Oil Growth in Malaysian Borneo (Sabah & Sarawak)

Oil Palm Planted Area (Ha) in Malaysia88

Source: Cheng Hai, Teoh.The Palm Oil Industry in Malaysia: From Seed to Frying Pan. Rep. WWF Switzerland, 2002.

88 P. Malaysia is the equivalent to Peninsular Malaysia.

Exhibit 10 Annual Growth of GHG Emissions by Source (Gt CO2)

0.01 Eletricity plants 0.009 Deforestation and peat 0.008 degradation Road transport 0.007 Industry (excluding 0.006 cement) 0.005 Residential and service sectors 0.004 Refiners etc.

0.003 Others 0.002 International Shipping and Marine Transport 0.001 Forestry 0 1970 1980 1990 2000 2004 Source: Adapted from The Hidden Carbon Liability of Indonesian Palm Oil. Rep. Greenpeace, 2008

Exhibit 11 RSPO Executive Board

President

Unilever (Netherlands) – Consumer Goods Manufacturers representative

Vice-President I

WWF Malaysia - Environmental NGOs representative

Vice-President II

Indonesian Palm Oil Producers Association (GAPKI) – Producers representative

Vice-President III

Malaysian Palm Oil Association (MPOA) – Producers representative

Vice-President IV

Agropalma (Brazil) – Producers representative

Treasurer

Aarhus Karlshamn UK – Processors and/or traders representative

Other Members

IOI Group (Malaysia/Netherlands) - Processors and/or traders representative

Cadbury plc (UK) - Consumer Goods Manufacturers representative

Sawit Watch (Indonesia) - Developmental/ Social NGOs representative

Oxfam International (Netherlands) - Developmental/ Social NGOs representative

FELDA (Malaysia) - Producers representative

HSBC Bank Malaysia Berhad - Banks and Investors representative

Conservation International (USA) - Environmental NGOs representative

Rabobank International (Netherlands) – Banks and Investors representative

Intertek Sustainability Solutions (USA) – certification provider

Source: Roundtable on Sustainable Palm Oil (RSPO). 07 July 2009 http://www.rspo.org

Exhibit 12 RSPO’s Principles and Practical Criteria (P&C)89

1. Commitment to transparency x Adequate information to other stakeholders on environmental, social and legal issues x Management documents are publicly available (if possible)

2. Compliance with applicable laws and regulations x Compliance with all applicable local, national and ratified international laws and regulations x The right to use the land can be demonstrated, and is not legitimately contested by local communities with demonstrable rights x Use of the land for oil palm does not diminish the legal rights, or customary rights, of other users, without their free, prior and informed consent

3. Commitment to long-term economic and financial viability x There is an implemented management plan that aims to achieve long-term economic and financial viability

4. Use of appropriate best practices by growers and millers x Operating procedures are appropriately documented and consistently implemented and monitored x Maintain or improve soil fertility ensures an optimal and sustained yield x Minimize and control erosion and degradation of soils x Maintain the quality and availability of surface and ground water x Use of appropriate Integrated Pest Management (IPM) techniques x Agrochemicals are used in a way that does not endanger health or the environment. x An occupational health and safety plan is documented, effectively communicated and implemented. x All staff, workers, smallholders and contractors are appropriately trained

5. Environmental responsibility and conservation of natural resources and biodiversity x Environmental impacts are identified and continuous improvement is implemented x High conservation value habitats shall be identified and conserved x Waste is reduced, recycled, reused and disposed of in an environmentally and socially responsible manner x Efficiency of energy use and use of renewable energy is maximized x Use of fire for waste disposal and for preparing land for replanting is avoided except in specific situations, as identified in the ASEAN guidelines or other regional best practice x Pollution and emissions are reduced

6. Responsible consideration of employees and of individuals and communities affected by growers and mills x Social negative impacts are mitigated and positive ones are promoted x Open and transparent methods for communication and consultation between growers and/or millers, local communities and other affected or interested parties x Documented system for dealing with complaints and grievances is mutually agreed

89 Some Criteria are summarized

x Any negotiations concerning compensation for loss of legal or customary rights are dealt with through a documented system that enables indigenous peoples, local communities and other stakeholders to express their views through their own representative institutions x Pay and conditions for employees and for employees of contractors always meet at least legal or industry minimum standards and are sufficient to provide decent living wages x The employer respects the right of all personnel to form and join trade unions of their choice and to bargain collectively x Children are not employed or exploited x Children are not exposed to hazardous working conditions x Any form of discrimination based on race, caste, national origin, religion, disability, gender, sexual orientation, union membership, political affiliation, or age, is prohibited x A policy to prevent sexual harassment and all other forms of violence against women and to protect their reproductive rights is developed and applied x Growers and mills deal fairly and transparently with smallholders and other local businesses

7. Responsible development of new plantings x A comprehensive and participatory independent social and environmental impact assessment is undertaken prior to establishing new plantings or operations, or expanding existing ones, and the results incorporated into planning, management and operations x Soil surveys and topographic information are used for site planning in the establishment of new plantings, and the results are incorporated into plans and operations x New plantings since November 2005, have not replaced primary forest or any area required to maintain or enhance one or more High Conservation Values x Extensive planting on steep terrain, and/or on marginal and fragile soils, is avoided x No new plantings are established on local peoples’ land without their free, prior and informed consent, dealt with through a documented system that enables indigenous peoples, local communities and other stakeholders to express their views through their own representative institutions x Local people are compensated for any agreed land acquisitions and relinquishment of rights x Use of fire in the preparation of new plantings is avoided other than in specific situations, as identified in the ASEAN guidelines or other regional best practice

8. Commitment to continuous improvement in key areas of activity x Growers and millers regularly monitor and review their activities and develop and implement action plans that allow demonstrable continuous improvement in key operations

Source: Roundtable on Sustainable Palm Oil (RSPO). 07 July 2009 .

Exhibit 13 Supply Chain Certification Systems

‘Identity Preserved’

‘Segregation’

‘Book and Claim’

Source: Roundtable on Sustainable Palm Oil (RSPO). 07 July 2009 .

Exhibit 14 RSPO Membership

Number of RSPO members

Distribution of RSPO members by category

Series1, Retailers, 21, 12%

Series1, Manufacturers, Series1, Processores & 30, 16% Traders, 71, 39%

Series1, Social NGOs, 5, 3% Series1, Environmental NGOs, 7, 4% Series1, Banks & Investors, 8, 4% Series1, Producers, 41, 22%

Source: Roundtable on Sustainable Palm Oil (RSPO). 07 July 2009 .

Exhibit 15 RSPO Annual Production Capacity of Certified Crude Palm Oil and Palm Kernel Oil (in Mt)

Source: "One third of European palm oil could now be labelled ‘sustainable’." RSPO News Flash (25 June 2009).

Case Research

Besides secondary data, the development of this case also involved the collection of extensive primary data. We interviewed key players involved in the RSPO (listed below) and spent four days visiting palm oil plantations in the island of Borneo, in May 2009. Renata Weiss also collected inputs about the industry during the Workshop on the Oil Palm Controversy in Transnational Perspective in Singapore in late 2009. Special thanks to contributions from: Jeremy Goon (head of CSR at Wilmar and the team from Sabahmas plantation); Puvan J. Selvanathan (Group Chief Sustainability Officer at Sime Darby); M. R. Chandran (RSPO executive board advisor); Cheng Hai (First Secretary, RSPO); Lettemieke Mulder (Director of Global External Affairs, Corporate Responsibility and NGO Stakeholder Management at Unilever; Uwe Schulte (former Global Supply Chain Director at Unilever); Kaisa Hietala (Commercial Director at Neste Oil Singapore); Norman Jiwan (head of Social and Environmental Risk Mitigation at Sawit Watch); Dato'Mamat Salleh (CEO at MPOA) and Darrel Webber from WWF. We would like also to thank the research office of INSEAD for funding the research.