Investing in the value of nature: why the palm oil sector is an economic opportunity, not a burden

By Rizal Algamar, Southeast Asia Regional Director, Tropical Forest Alliance, World Economic Forum.

Food and nature are set to be central themes at COP28, hot on the agenda of key climate stakeholders. This is crucial. If we are to reach a 1.5°C pathway, stopping the conversion of critical ecosystems by 2030, with significant progress made by 2025, must be achieved. We cannot do this without addressing the deforestation caused by food production.?

Palm oil is one of the key sectors where progress to halt deforestation is being made. This presents the industry with a unique opportunity to showcase recent successes and encourage other companies and sectors to follow in their footsteps.??

Once viewed as an environmental bogeyman, palm oil is now heralded as a pioneer for cross-sector action on deforestation. In Indonesia and Malaysia, where 85% of palm oil is produced, forest loss caused by the commodity has fallen by 64% and 54% respectively between 2015-2017 and 2020-2022.?

A cross-sector commitment to transforming supply chains?

The decline in deforestation linked to palm oil production has been driven by the increased efforts of governments, supply-chain actors and civil society in tackling forest destruction, including stronger regulation of the palm oil sector (e.g. the 2011 implementation of Indonesia’s moratorium on new licences to convert primary forests and peatlands) as well as the implementation of No Deforestation, No Peat and No Exploitation (NDPE) commitments made by supply-chain companies. NDPE commitments now cover 83% of palm oil refineries in Indonesia and Malaysia.??

The NDPE has been a gamechanger in reducing deforestation from palm oil, but companies need to strengthen this commitment within their own supply chains by helping independent smallholders meet the commitment’s requirements and cutting ties with those that refuse to follow the rules within a specified time period. We also need companies that are not signed-up to develop roadmaps that will help put them on a path towards meeting NDPE requirements.?

As well as sector commitments like this one, we also need to see more focus on intensification – meaning increasing yields per hectare – in a way that’s sustainable and enhances soil health. This will be critical if we are to cope with the global demand for palm oil without causing further damage to our already fragile ecosystems.??

We also need to see more focus on intensification – meaning increasing yields per hectare – in a way that’s sustainable and enhances soil health.

It’s no secret that agriculture is also closely linked to human rights abuses and poor labour conditions, as well as environmental damage. Just a few years ago, the Associated Press revealed allegations of abuse and mistreatment on palm oil plantations in Malaysia, linked to some of the world’s biggest brands. This must be addressed as a top priority, and traders should drive this, with support from governments on tougher regulations and policies.?

Traders should already be doing this through the NDPE, but they must also take additional steps to ensure that workers are treated fairly and paid well, and to further reduce the risk of exploitation. ?

New tools and regulations to help fully revolutionize palm oil production?

Technology has revolutionised agriculture over the past few years, with new traceability tools and satellite monitoring improving our understanding of commodity-driven deforestation.??

This has already played a key role in Indonesia and Malaysia, where improved monitoring has highlighted areas where deforestation is particularly acute, helping traders and other palm oil actors identify where they need to best invest time and money to reduce forest loss.?

This is set to advance even further, with the Roundtable on Sustainable Palm Oil partnering with global agri-tech firms to integrate Certification, Trade and Traceability components into an end-to-end system for its stakeholders. To add to this, UNEP is exploring how blockchain – the technology that powers cryptocurrencies – could serve as a trusted source of truth for agri-traceability due to the robust way it collects and stores data.?

Developments in traceability will play a key role in helping palm oil producers comply with the new EU deforestation regulations that are set to come into force on 30 December 2024. But, while these rules are a clear step in the right direction, not everyone has access to these traceability tools. Some producer countries, including Indonesia and Malaysia, have also rightly raised concerns about whether smallholder farmers will be able to prove that their products aren’t linked to deforestation. These regulations must be complemented by a smart mix of measures to ensure that smallholder farmers aren’t left behind or penalised due to the new rules, and to help drive an inclusive transition towards greener supply chains. This includes productive relationships with producer and consumer countries, steps to divert capital away from harmful practices and into sustainable ones, and support for systems that help companies monitor risk and risk mitigation in their supply chains.?

Finance for nature?

New policies and private-sector action must be underpinned by tougher finance measures by local and regional banks that direct capital away from harmful companies and towards 100% sustainable palm oil. The simplest way to do this is to join international banks in only funding businesses that are certified by the Roundtable on Sustainable Palm Oil (RSPO).

Many finance companies are already starting to take a harder line on sustainability as they have their own net-zero targets to meet and reputation to worry about, but more still needs to be done to incentivise a transition across the palm oil sector.?

While much effort has been put in place over the last decade in the palm sector, there is a last-mile transformation gap amongst smaller companies, stand-alone mills, and smallholders. Addressing this will require a combination of policy, finance and private sector action like the steps laid out by leading palm oil companies in the Agriculture Sector Roadmap to 1.5°C.?

As world leaders, businesses and investors gather in Dubai, I hope we see the food system transformation get the attention it deserves during nature finance debates. It is imperative that governments and critical climate stakeholders provide the necessary support to help put industries like palm oil, cattle and soy on a fully sustainable trajectory.?