By The Corporate Governance and Responsible Investment Team, RBC Global Asset Management
Whether you realize it or not, there is a high probability that you have consumed or used palm oil in some form in the past 24 hours.
Palm oil is used in a wide variety of food, cosmetic and personal-care products. It is also used as biofuel. Palm oil has rapidly become a widely used product over the past 25 years, and now touches us at many points in our everyday lives. Unfortunately, the industry’s rapid expansion has negatively impacted both the environment and the vulnerable communities where it is produced.
What is palm oil?
- It’s extracted from a plant native to West Africa.
- Trade in palm oil has carried on for centuries. There has been a rapid expansion in the industry over the past 25 years due to a sharp rise in global demand.
- It is harvested year-round, making palm oil more profitable than any other plant- based oil.
- More than 85 percent of all palm oil comes from Indonesia and Malaysia. The remainder comes from Latin America and Africa.
- The palm oil fruit has the highest yield-per-hectare of all oilseed crops.
- It is highly versatile, with applications ranging from lipstick and soaps to biofuel and ice cream.
Environmental impact and social challenges
The industry has brought economic benefits to many countries in Southeast Asia. It has contributed to the expansion of infrastructure and a rise in household incomes in rural areas. These benefits, however, have also come with significant environmental and social issues.
- Loss of tropical forests: The deforestation is to make room for large-scale palm oil plantations and the additional infrastructure required to process and transport the oil. This has led to:
- Loss of critical habitat for rare and endangered species.1
- Imbalances in global carbon levels through the removal of peat forests, which store large amounts of carbon.1
- Significantly increased soil erosion.1
- Increased conflict over land ownership: Locals have raised concerns about a lack of consultation and informed consent of local communities, particularly indigenous communities. An increasing number of lawsuits indicates that local communities are fighting for restoration of their land rights and/or fair compensation.2
- Human and labour rights issues: Workers often experience poor and/or dangerous working conditions, while working long hours at low wages. Several palm oil firms have also been linked to child labour and human-rights violations in rural areas in Indonesia and Malaysia.3
The industry’s response
To address these controversies, in 2004 the palm oil industry founded the Roundtable on Sustainable Palm Oil (RSPO). The RSPO has developed a set of global standards to certify palm oil producers that are working in a sustainable manner. To date, some good progress has been made in promoting better practices within the industry. But many non‑governmental organizations (NGOs) have slammed the RSPO standards. On the whole, current practices still fall short of what would be considered sustainable.3
To drive change, many NGOs began targeting the end users of palm oil further down the supply chain. For example, in Nov. 2016, an Amnesty International report claimed that large multinational corporations such as Colgate, Nestlé and Unilever had used palm oil products from a refiner in Indonesia whose suppliers were involved in human rights violations.4 The report sparked such public outrage that it compelled Wilmar International, the world’s largest processor of palm oil, to address the child labour issue directly.5
The perception is growing that certified-sustainable palm oil does not adequately address deep-rooted environmental and social issues. This has prompted NGOs to demand more transparency from those in the supply chain. As a result, many large palm oil producers now have traceability programs publicly available online.6,7 Similarly, key players in the palm oil supply chain also have increased transparency with respect to palm oil sources.8
What this means for investors
Companies involved in the palm oil industry are exposed to significant environmental and social risks. Large multinational companies using palm oil as an ingredient are ignoring a significant risk by not engaging with their suppliers on the issues. Poor management of these risks can manifest in the form of regulatory and reputational harm for companies that may result in financial risks for investors.
Controversies concerning palm oil across the supply chain have become a material issue for investors. Studies have found that environmental, social and governance (ESG) controversies can have a negative impact on performance. The research further shows that companies with high ESG ratings outperform the market in the medium (three to five years) and long term (five to 10 years).9
1. World Wildlife Fund, “Palm Oil,” 2019.
2. Thomson Reuters, “In a first, Malaysia sues state over indigenous peoples’ rights,” 2019.
3. Changing Markets Foundation, “The false promise of certification,” 2018.
4. Amnesty International, “The Great Palm Oil Scandal: Labour Abuses Behind Big Brand Names,” 2016.
5. Thomson Reuters, “Palm oil giant vows to reform after Indonesian child labor probe,” 2017.
6. Mongabay, “In pursuit of traceability, palm oil giant tests GPS-based solution,” 2018.
7. Golden Agri-Resources Ltd., “GAR Announces 100% Traceability to the Plantation for Owned Mills,” 2018.
8. Unilever, “Breakthrough on palm oil transparency to stop deforestation,” 2018.
9. RBC Global Asset Management, “Does socially responsible investing hurt investment returns?” 2019
RBC Global Asset Management Inc. (RBC GAM) and its Corporate Governance and Responsible Investment (CGRI) team are committed to understanding and evaluating the evolving risk for palm oil companies. RBC GAM’s investment teams integrate ESG in their investment process as well. Together with the CGRI team, they engage with RBC GAM’s investee companies on ESG-related issues facing the palm oil industry. The CGRI team also oversees RBC GAM’s proxy voting – where ESG-issue risks may be raised with the corporate boards of affected companies. In addition, the CGRI team engages with lawmakers and regulators. By taking this pro-active approach to the integration of material ESG factors in the investment process, RBC GAM is well positioned to manage the evolving risks and opportunities associated with palm oil.
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