Are companies underestimating the regulatory risks around palm oil?
Indonesians went to the polls this month in what is one of the tightest presidential elections in its modern history. While economic and domestic issues have featured heavily in the campaign, companies far removed from the politics in South-East Asia may need to pay closer attention to how these elections could impact the region’s hottest commodity, palm oil.
Palm oil
Indonesia is the world’s largest palm oil producer and, together with Malaysia, dominates around 90% of the palm oil production industry. As an important Indonesian export, palm oil reaches all corners of the world: It is found as an invisible ingredient in shampoos, chocolate, cosmetics and many other consumer products. As the cheapest edible oil on the market, it has fast become a favourite of the food, household and personal products industries.
Palm oil’s success as a commodity comes at a price, however. The increasing demand and resulting expansion of oil palm plantations has been heavily linked to the deforestation of Indonesia’s tropical forests. In fact, for the first time in 2012, primary forest loss in Indonesia was even greater than that of Brazil.
Indonesian political context
Indonesia’s current administration recognized the global interest in protecting Indonesia’s forests for their role in mitigating climate change. It established Indonesia’s own agency for Reducing Emissions from Deforestation and Degradation (REDD+), an international mechanism designed to compensate developing countries for conserving their forests. However, there was also recognition that palm oil, when grown sustainably, may play an increasingly important role in the market as it is less land intensive than other oil crops. The administration therefore oversaw the introduction of the Indonesian Sustainable Palm Oil (ISPO) certification scheme, mandatory for all Indonesian palm oil producers.
However, the future policy direction for the country is unclear as the new presidential candidates have prioritized issues of development and growth. Agriculture employs 40% of the Indonesian population and oil palm is seen as important for poverty reduction in a country where 15% of the population live beneath the poverty line. As such, both candidates have made commitments to make more land available for agriculture and there will be pressure on the incoming presidency to drive the palm oil biodiesel market.
Regulatory risks
Companies that use palm oil are heavily reliant on a few political economies. Wilmar International, a company that is estimated to control 45% of all palm oil trade, reported that an Indonesian regulation passed in 2013, limiting ownership of land for new plantations, threatened its ability to meet its growth targets. Any change in Indonesian political attitudes towards land allocation, climate change policy or trade tariffs, could have a significant bearing on the production and trade of palm oil with implications that could travel along the supply chain.
However, CDP’s forests data from 2013 reveals that few companies (less than 15% of companies that responded to questions on palm oil), especially those further up the supply chain, recognize any material regulatory risk from palm oil to their business.
Yet the regulatory risks associated with sourcing palm oil are not only likely to change but are likely to increase. In a landmark case this year, palm oil producer PT Kallista Alam was fined around US$30 million by the Indonesian Ministry of Environment for illegally burning protected forest, the first major ruling of its kind. Attention on illegal trade in palm oil is also increasing, for example in relation to the theft of oil palm fruit bunches from plantations. Reputational risk from association with companies acting illegally on palm oil has already hit European banks and has the potential to affect companies that don’t directly work in Indonesia.
Foreign investors are paying close attention to Indonesia’s election outcomes and with palm oil production so concentrated in South East Asia, companies too should start assessing the regulatory environment. Addressing these risks may pale in comparison to sourcing palm oil from other parts of the world. With industrial oil palm plantations expanding rapidly in the troubled Congo Basin, companies should be aware of knowingly or unknowingly sourcing from politically sensitive regions.