The road to a more sustainable palm oil industry will continue to be bumpy, as evidenced by recent strained efforts by the European Commission to roll out new deforestation-free rules on the import and export of forest-risk commodities1. A balance is needed that reduces the impact of palm oil production on climate change and protects local ecosystems, while at the same time safeguarding the livelihoods of local producers and communities and preserving global food security.
Palm oil is the most used edible oil source in the world, found in around 50% of packaged products2; while an estimated 70% of cosmetics and skincare products are believed to contain a palm oil derivative3.
Indonesia and Malaysia are the world’s biggest producers, accounting for around 85% of global production4. Moreover, demand for palm oil globally is projected to rise dramatically, from 76 million metric tonnes in 2021 to an estimated 264-447 million by 20505.
A controversial industry
But the industry is controversial. Despite the many uses and benefits of palm oil, growth in demand has come at a considerable cost for our climate. Now the industry is coming under mounting pressure to become more sustainable.
Palm oil has been the main driver of deforestation in Southeast Asia for decades – 45% of oil palm plantations in Southeast Asia are on land that was still covered with forest as recently as 19896. The replacement of rainforests with palm oil plantations has also been a major cause of biodiversity loss and emissions, with carbon stored in rainforest soil released as a greenhouse gas into the atmosphere7.
Despite the many uses and benefits of palm oil, growth in demand has come at a considerable cost for our climate
Critics of the proposed European Union Deforestation Regulation (EUDR), which will require proof that supply chains are deforestation-free, argue that the size and complexity of today’s supply chains will make the new rules unworkable.
Today’s food and agriculture supply chains form a complicated network that spreads across millions of small farms and involves multiple intermediaries, making sustainability-related data hard to verify8.
Meanwhile, various countries, including Brazil and Malaysia, say the law is protectionist and could end up excluding millions of poor, small-scale farmers from the EU market, while pushing up prices9. This could also end up being harmful to local communities. In Indonesia, over 20 million people, or 7% of the population, depend indirectly on palm oil production for their livelihoods10.
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Certification is important, but not a standalone solution
Although there are many challenges at play, the industry must persevere in its shift to becoming more sustainable. At Lombard Odier, we believe the world must move from an extractive economy to a regenerative, nature-positive economy – the mammoth palm oil industry must be at the centre of this transition. Instead of exhausting our planet’s finite resources we must harness nature’s ability to create self-sustaining value.
At Lombard Odier, we believe the world must move from an extractive economy to a regenerative, nature-positive economy – the mammoth palm oil industry must be at the centre of this transition
By some accounts, only 20% of the palm oil industry is certified as sustainable11. This presents room for improvement. In the palm oil industry, certification schemes often include requirements that can help mitigate climate change and build climate resilience into supply chains. Some examples include integrated pest management on farms and plantations, the use of renewable energy, and the prohibition of new oil palm plantations in primary forests, peatlands, and high conservation value areas12.
Legislation and certification can work in tandem
Certification can provide guidance on the drafting of legal standards, giving governments a yardstick with which to build on existing rules. Governments in producing and exporting countries can provide subsidies and funds to help palm oil producers access certifications, and offer incentives to those adopting more sustainable practices.
These incentives, such as preferential taxes or tariffs, can encourage the consumption of more sustainable palm oil, while offering strong economic incentives to producers.
Indonesia and Malaysia launched the Council of Palm Oil Producing Countries, an intergovernmental palm oil council aimed at overseeing the global supply of palm oil, stabilising prices, promoting sustainable practices in the industry, and harmonising the two countries’ certification systems13.
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A multi-pronged approach is needed
However, focussing on certification is not enough. The reality is that the industry needs a solid bedrock on which to build practices that last, rather than surface-level efforts merely to tick the boxes needed to win accreditation or gain good PR.
Creating meaningful supply chain transparency benefits all stakeholders. Some global buyers have already begun to demand transparency when it comes to sourcing – responsibly sourced and deforestation-free palm oil is supported by global brands such as Unilever and L’Oreal14.
Creating meaningful supply chain transparency benefits all stakeholders
But the proposed EUDR would go much further, requiring companies to demonstrate that their supply chains are deforestation-free from start to finish by digitally mapping them down to the plot level, and demonstrating definitively that palm oil and other listed products have not come from areas that have been deforested since December 202015,
Multinationals can play their part by deepening their ties on the ground, such as with local producers and communities, to manage landscapes sustainably, map land use, reduce deforestation, restore degraded forests, protect local ecosystems, and implement practices that allow producers to gain sustainable certification.
This has worked in China, where brands have taken the lead in driving Chinese suppliers toward sustainable palm oil practices. Now a growing number of manufacturers, traders, and distributors are aligning with their clients’ global policies and targets16.
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Investment opportunities
As the palm oil industry transitions towards greater sustainability, the journey is the key. At Lombard Odier, our conviction is that all agricultural processes globally need to move towards regenerative farming methods whilst restoring land to nature17.
At Lombard Odier, our conviction is that all agricultural processes globally need to move towards regenerative farming methods whilst restoring land to nature
For investors, this shift is creating potential to tap into outsized returns. The global palm oil market is huge, with its value projected to reach USD 99.41 billion by 2030, growing at a CAGR of 5.21% between 2022 and 203018. As a capital-intensive sector, investments and funding can play a pivotal role in enabling companies to transition away from environmentally destructive practices and towards improved sustainability standards.
As a multitude of innovative new opportunities for nature-based investment arise, the thread common to all will be that healthy ecosystems are worth far more than degraded ones, and that we will maximise economic value not by exploitation, but by cooperation with nature19.
