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Brunei
Monday, February 6, 2023
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Brunei
Monday, February 6, 2023
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    Sustainability in palm oil industry

    Hakim Hayat

    Since its inception for commercial purpose in the early 1900s, palm oil has been promoted as a major agro-based industry in Southeast Asian economies like Indonesia, Malaysia, and Thailand.

    As the world market for multiple uses of palm oil expanded, a new-era of plantation growth started in Indonesia and Malaysia from the 1990s. Currently, Indonesia and Malaysia are the biggest Crude Palm Oil (CPO) producers with about 75 per cent of their combined annual production, estimated to be 60 million tonnes, going to international markets. Palm oil production in Indonesia, the world’s top producer of the commodity, is expected to rise 4.5 per cent to 53.9 million tonnes in 2021.

    The palm oil industry was responsible for at least 39 per cent of forest loss on the biodiversity-rich island of Borneo between 2000 and 2018, data from a research firm based in Indonesia shows.

    The data comes as forest clearance fires in Borneo and parts of Indonesia spread smog across Southeast Asia, causing air quality to drop to unhealthy levels in neighbouring Singapore and Malaysia.

    Some palm oil farmers have been accused of using slash-and-burn methods to clear land for planting. The palm oil industry has long been blamed for encroaching on rain forests in Borneo, endangering wildlife such as orangutans and pygmy elephants.

    Director of Research Strategy and Innovation at the Economic Research Institute for ASEAN and East Asia Venkatachalam Anbumozhi. PHOTO: ERIA

    Borneo, shared by Brunei and top palm oil producers Indonesia and Malaysia, lost 6.3 million hectares of forest cover between 2000 and 2018, the data from the Centre for International Forestry Research (CIFOR) shows.

    CIFOR determined the amount of deforestation caused by companies by calculating the area of forest cleared and converted to industrial plantations within the same year.

    The reported negative impacts of aggressive palm oil plantation expansion comprise deforestation, bio-diversity loss, reduced capacity of carbon sinks, forest fire incidents and community conflict.

    According to Director of Research Strategy and Innovation at the Economic Research Institute for ASEAN and East Asia (ERIA) Venkatachalam Anbumozhi, as the plethora of palm oil expands and becomes an alternate source of energy in international markets, there is a necessity to map factors that either hinder or boost sustainable palm oil production and trade.

    He added that there are several unknowns regarding the sustainability debates surrounding palm oil production and trade.

    “For example, what are the key tradeoffs and their net impact on increased use of biofuel and food security as well as other socio-economic impacts that are core values of the Sustainable Development Goals.”

    He said it is also uncertain how energy security and low-carbon benefits could be maximised through sustainable palm oil production. They need complementary action by public, private, as well as international actors in a coordinated way.

    Venkatachalam shared that despite widespread enthusiasm, most policy makers, private sector leaders and academia struggle to understand the best investment strategies to improve the current sustainability approaches to deliver long-term socio-economic-environmental value for people and the planet.

    He gave a three-point pathway that can enhance sustainability performance of palm oil production and trade.

    First is innovation through harmonised sustainability certification programmes. In response to internal motivation to conserve natural capital and market demand for fair trade, voluntary sustainability standards such as the Roundtable on Sustainable Palm Oil (RSPO) and country specific mandatory standards such as Indonesia Sustainable Palm Oil (ISPO) and Malaysian Sustainable Palm Oil (MSPO) are being implemented.

    Several measures to safeguard environment sustainability include: zero-open-burning for new palm oil development, reducing rainforest clearance for new plantations, restricting pesticide usage, and fighting against human-rights violations are incorporated in these voluntary certification programmes.

    However, the scope, aspirations and implementation procedures of these programmes vary across national jurisdictions and consequently send mixed signals to international market players.

    Furthermore, these certification programmes are often treated as voluntary systems and not equivalent to that of national regulatory standards and international laws.

    In the long run, harmonisation of multiple certification programmes and upgrading them to a regulatory status will foster productivity related innovations at the plantation level, improve transparency along the value chain, and build international consumer trust.

    The second point is efficiency through adoptions of digital technologies. By digitalising palm oil value chains and collecting large amounts of data and then translating these data into efficient production practices, the sustainable plantation industry can support climate-resilient, low-carbon growth. As such, applying information and communication technologies through devices, networks, services, and applications can also boost farm productivity through improved production and resource allocative efficiency.

    Evidence-based site-specific decision-making on environmental pressures and continuous monitoring of carbon emission reduction targets along the supply chain, with the aid of digital dashboards, means a genuine revolution in the sustainable management of palm oil plantations.

    The economic divide resulting from the systemic difference between large and small plantations can also be narrowed by increasing digitally enabled production methods as well as improved access to consumers, labour markets and financial services.

    Advances in digital technologies were found to enhance transparency and effective social inclusion within migrant labours as observed in Malaysia during the pandemic.

    Third is inclusion through green financing. Commercial banks and institutional investors are reluctant to finance the green technologies that are capable of preventing pollution and reducing carbon emissions from palm oil plantations. But those niche technologies have high upfront costs.

    As a result, risks that small scale plantations that have not yet adopted sustainable practices are increasing, because these actions often reduce their sales turnover, increase their production costs, and contain their business growth.

    For banks financing the new palm oil plantations, the risk to their customers means decline in the value of collateral, making loans in general under-priced.

    Governments could reduce the lending risks of banks by formulating new risk guarantee mechanisms while mainstreaming them by establishing risk bearing entities like the Green Investment Bank.

    Capacity building of the banking sector is also needed to have a clear understanding on common but differentiated potentials of integrating sustainability standards, green technology adoption and financial innovations.

    Venkatachalam concluded by saying that everyone agrees the palm oil industry should

    be sustainable. “The challenge is not to gain and support agreement on sustainability, but to act on goals and outcomes that call for economically productive, environmentally sustainable, and socially coherent palm oil plantations,” he said. “To serve this purpose, indicators that measure the performance of new pathways regarding certification, digitalisation, and financial inclusion are to be established and promoted more efficiently.”

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