The palm oil industry is said to be worth over USD$50 billion annually and is the world’s largest vegetable oil export. Palm oil is a key ingredient in around half of the items sold in supermarkets across the world and features heavily in the products we use and the food we consume in our daily lives. These include soaps, detergents, snacks and even lipsticks. The palm oil supply chain spans geographic, political, and cultural borders, connecting individual employees in farms and mills to a slew of major multinational businesses (“MNC“s).
The palm oil market has experienced rapid expansion in recent years, resulting in a significant increase in demand and supply. This rapid expansion is forecasted to continue over the foreseeable future, and for good reason. Palm oil is a very productive crop as it offers a far greater yield on a per square meter basis, at a lower cost of production than any other types of vegetable oil.
Unfortunately, this rapid expansion has also contributed to adverse practices which have a negative impact on the environment. Many plantations engage in unsustainable agricultural methods such as illegal de-forestation and the ‘slash-and-burn’ approach to clear forests and peatlands quickly for extra farming area, inflicting catastrophic environmental impact to the region and beyond.
Being a major contributor to environmental degradation, it is worth looking at how ESG principles are reflected in the legal and non-legal frameworks that apply to the palm oil industry. A lacuna in the enforcement against errant actors has been identified in this article. The key touchstone of this article would be to see how the combination of laws, guiding principles, and on the ground initiatives of stakeholders collectively address this lacuna. In other words, this article aims to describe how ESG principles are applied and enforced via “hard” and “soft” rules to govern an industry that has been recognised as not being ESG compliant.
Plantations in Indonesia and Malaysia produce 84 percent of the world’s palm oil, and the palm oil business employs up to 4.5 million people in Indonesia alone. Unsustainable agricultural methods have had far-reaching consequences in Indonesia, affecting not just the immediate environment but also the well-being of people in the surrounding regions and beyond. These unsustainable agricultural techniques have resulted in a decrease in flora and fauna biodiversity. As more of their forests are destroyed, many species, such as the Sumatran orangutan, have experienced challenges such as habitat loss and poaching. Additionally, deforestation due to unsustainable palm oil farming practices has also contributed significantly to soil erosion.
Unsustainable farming practices such as the slash-and-burn approach produce a haze, infamously known as the ‘haze season’, that has far-reaching implications for neighbouring countries in the South-East Asia region. During the haze season, the air quality in the regions near the burning forests is at a hazardous level, with the Pollutant Standards Index (“PSI”) reaching 1801 in 2013. Several states in Indonesia have previously declared states of emergency during the haze season, when a vast number of their citizens were ill with major respiratory conditions.
Many MNCs contribute to this environmental degradation by either directly owning or purchasing from plantations that participate in such activities, forgetting that Milton Friedman’s theory does not apply with as much force as before, as it is now recognized that MNCs have a duty to protect human and environmental rights across their supply chain.
By defining and elevating the societal norm to respect and safeguard human rights to a state-endorsed agreement, the United Nations Guiding Principles on Business and Human Rights (“UNGP“) highlighted the responsibilities of both corporations and states. States should take steps to safeguard their citizens from possible human rights violations by third parties, such as enacting and enforcing laws, and companies should aim to prevent causing harm to human rights and remedy these consequences if they do occur, in order to comply with the guiding principles.
On the flipside, businesses have a responsibility to protect human rights across their supply network. Former United Nations (“UN”) Secretary-General, Kofi Annan stated during the 2013 UN Forum on Business and Human Rights that firms should include environmental impact assessments while implementing the UNGP. Furthermore, everyone should have the right to a standard of living that ensures their well-being, in accordance with Article 25 of the Universal Declaration of Human Rights. In a direct contravention of Article 25, pollution generated by unsustainable farming techniques have a serious impact on the health of both locals and people from other countries – a clear violation of human rights.
In 2002, ASEAN passed the ASEAN Agreement on Transboundary Haze Pollution (“ASEAN Agreement“), acknowledging the necessity of enhanced transboundary cooperation. Article 9 of the ASEAN Agreement requires ASEAN countries to adopt strategies to prevent land or forest fires. As required by Article 3, signatories must collaborate with and include all stakeholders, including private businesses.
The ASEAN Agreement enshrines a regional focus on reducing activities that cause transboundary haze, such as destroying forests for palm oil. MNCs in the region have a comparable duty to cooperate with the appropriate authorities to ensure that their palm oil suppliers do not use the slash-and-burn method of palm oil growing, which is unsustainable.
Similarly, the Transboundary Haze Pollution Act (“Act”) was also passed in Singapore, allowing the National Environment Agency to punish firms that contribute to the haze. In keeping with the UNGP, this legal framework demonstrates a regional understanding of the necessity in ensuring that the industry does not contribute to environmental harm.
It is worthwhile to note that the Act, has extraterritorial application to enterprises that contribute to the haze in Singapore. While the Act’s extraterritorial reach is lawful, there are substantial political obstacles to regulating business activities for sustainable palm oil, since Singapore would need Indonesian authorities’ cooperation (or Malaysian authorities’ cooperation as the case may be) and intelligence to successfully prosecute errant firms.
At the domestic level, Indonesia has a number of regulations in place that regulate sustainable agricultural methods and protect the environment. Companies must apply for permission before they start farming or clearing land. Certain forest regions are designated as protected territory by the government, and corporations must obtain many additional licenses from the government in order to convert these areas for palm oil plantations.
Furthermore, Indonesia’s Conservation Law prohibits the trapping or killing of any protected species, and the Environmental Protection Law prohibits all organisations from engaging in actions that harm the environment or produce pollution. Despite the fact that such laws exist, they have frequently been criticised as being inconsistent and weakly enforced, resulting in the law having little bite and the haze season featuring as an annual event.
The Roundtable on Sustainable Palm Oil (“RSPO“) is a partnership between several firms and organisations active in the palm oil sector, ranging from established NGOs like the World Wildlife Fund (“WWF“) to palm oil growers and major consumers like Unilever. The RSPO’s goal is to involve all stakeholders and encourage more environmentally friendly palm oil production.
In addition, the RSPO certifies companies based on a number of factors, including their commitment to openness, adherence to regulations, adoption of best practices, and environmental responsibility. Other NGOs, such as Greenpeace, have attacked the RSPO certification process as being too lenient, claiming that it does not ban forest conversion, fails to prevent peatland and forest fires, and is unwilling to take action against firms that violate its criteria.
Due to increased pressure from stakeholders such as NGOs and growing consumer awareness, many Singapore firms have teamed up with WWF to create the Singapore Alliance for Sustainable Palm Oil (“SASPO”) in an effort to collaborate and promote responsible farming practices.
Unilever is a founding member of SASPO and has implemented a Sustainable Palm Oil Sourcing Policy to achieve transformative change in its own palm oil supply chains, based on current RSPO criteria. Unilever has also established an internal complaints procedure to handle supply chain flaws.
As previously stated, governments, corporations, and non-governmental organisations are working to enforce sustainable agricultural standards in the palm oil sector. However, these stakeholders confront several challenges in adopting stronger enforcement methods.
To begin with, the laws in force are frequently insufficient and inconsistent. The Indonesian government has not been able to completely establish rules related to spatial planning and license issuing, and enforcement and punishment of firms that violate current laws have been lacking.
Second, the issue of traceability is at the root of the failure to prosecute corporations. It’s difficult to determine responsibility in the palm oil supply chain because of its complexity. Plantations that participate in unsustainable methods of farming may be wholly controlled by a major corporation, or they may be held by independent smallholders who supply a large number of firms, as is the situation for about 44 percent of plantations in Indonesia. Due to the difficulties in tracing and lack of transparency in the supply chain, corporations have been obtaining palm oil from unsustainable plantations. Only 10% of palm oil products were RSPO-certified in 2015.
Existing technologies, such as Global Forest Watch and The Forest Trust, have attempted to develop a complete real-time mapping and monitoring system that can give information on active fires, property ownership, and risk assessment reports. Many businesses are unwilling to reveal information about their suppliers and plantation borders, and the Indonesian government is reluctant to release information on forestry concessions, land usage, and zone changes, thus such efforts have been thwarted. A tech-based solution based on these existing technologies has been presented as a way to close the current traceability gap.
A proposed solution is to develop a software in collaboration with multiple stakeholders, with the idea that combining all expertise on a single platform can produce remarkable results in promoting greater supply chain transparency and assisting regulatory authorities in achieving their objectives and identifying perpetrators.
Given their involvement with groups such as the RSPO and SASPO, the ASEAN CSR Network and WWF have taken a proactive stance in relation to the promotion of sustainable palm oil cultivation. The WWF has expressed particular concern about the rapidly dwindling populations of orangutans in Southeast Asian forests, which, as previously mentioned, have been severely impacted by unsustainable palm oil practices. It has been proposed that such NGOs would be in a great position to help refine and integrate the proposed technology into the solutions that are currently available, given their position as leading NGOs in this field and their work with many large consumers of palm oil.
Software companies (especially cloud-based service providers) should come on board as key stakeholders so that the solution can be scaled up based on cloud computing and geo-location tracking. The scalability of this software may assist companies in achieving their corporate social responsibility goals.
Enforcement agencies can adopt technology presently available, such as an ‘eye-in-the-sky’ by the usage of drones to capture slash-and-burn activities and other illegal deforestation activities.
Before the final product reaches the consumer, the palm oil supply chain involves a number of steps. Many entities are involved, and certified products may be mixed with uncertified products at some point during the supply chain line, making it difficult for companies to track the exact source of their palm oil and ensure that it comes from sustainable plantations. As a result, companies may genuinely believe they are buying finished and refined palm oil from certified sustainable producers, but they may be unaware of entities in their supply chain that are breaking RSPO standards.
This is especially important at the very beginning of palm oil production, when it comes to the plantations and mills. It’s difficult to keep track of the origin of fresh fruit bunches (“FFB“s) once they enter the mill because plantations may supply a number of mills and mills may receive supply from a number of plantations, ranging from small independent plantations to larger conglomerate owned plantations.
As a result, it is proposed that all RSPO-certified plantations use a specific QR code or colour to label their FFBs or FFB truckloads. The final volume of FFBs travelling to a specific mill should be recorded in the blockchain ledger at the plantation. The FFBs will be counted again via QR code or colour upon arrival at an RSPO-certified mill and entered into the blockchain ledger before being processed. The mill’s approximate output will be calculated and compared to the mill’s actual output.
The goal is to combine the use of blockchain technology with cloud computing platform to create a transparent, detailed, and easily accessible ledger of FFB movement from plantation to mill.
While not all information about mill and plantation output can or should be made public, it is proposed that an updated, publicly accessible map containing general information about the supply chain be created using existing mapping technologies to increase transparency and traceability. Companies should have access to information about mill output so that they can track their sources.
There will be three distinct advantages to this solution. For starters, it gives a more accurate picture of the supply chain because it starts at the plantation level and works its way up. This data can be combined with existing mapping technologies, such as the Global Forest Watch, to create more accurate maps that will aid regulatory authorities in determining liability and allow businesses to keep track of where their palm oil sources comes from.
Second, because this system can approximate mill output based on the number of RSPO-certified FFBs received, mills with outputs that are significantly higher than calculated may be investigated to ensure that they are not receiving supplies from non-certified plantations. Third, implementing this system will encourage more plantations and mills to seek RSPO certification, as finding buyers for their products will be more difficult without it.
The palm oil industry is currently operating in the context of a growing set of legal and non-legal obligations, and the expanding scope of these obligations reflect a more proactive approach to the protection of human rights, and preservation of flora and fauna. However, because of the challenges of traceability, the perennial problem of enforcing these obligations persists.
As a result, a tech-based solution would assist in achieving the goal of improving traceability and transparency for businesses, governments, non-governmental organisations, and consumers in complex palm oil supply chains. With the palm oil industry expected to track its impressive growth rates over the next few years, it is timely that a tech-based solution be implemented by all stakeholders so as to address and reduce the negative impact palm oil has on the environment.
Zachary Scully
Partner
zachary.scully@rhtlawasia.com
+65 6381 6858
Zachary is a Partner at RHTLaw Asia. He focuses on corporate and debt restructuring, attending to cross-border insolvency situations especially in Singapore and Malaysia as well as in managing individual bankruptcies, the protection of guarantors and asset recovery.
Saravanan Rathakrishnan
Associate
saravanan.r@rhtlawasia.com
+65 6381 6836
Saravanan is an associate of RHTLaw Asia’s Corporate and Capital Markets Practice. Funds, capital markets, mergers and acquisitions are among his areas of expertise. In 2018, he earned a Bachelor of Laws and a Bachelors in Business Management (Double Degree) from Singapore Management University. Saravanan is engaged in the start-up community, consulting a variety of start-ups in relation to contract terms, regulatory obligations, legal commitments, and corporate structure. He maintains a keen interest in finance, economics, and law and has published a host of legal, economic, and finance articles in a number of journals.
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