Who pays the price for Europe’s clean conscience?

In November 2021 the European Commission announced a proposal for a regulation to block the import of cocoa, coffee, cattle, soy, wood and palm oil, if these products can be linked to deforestation or forest degradation. The Roundtable on Sustainable Palm Oil (RSPO) is one of the most comprehensive voluntary agricultural standards worldwide and no deforestation is a key criteria in the RSPO standard for growers. As such the RSPO welcomes the Commission’s proposal and supports its efforts to tackle the global challenge of deforestation and forest degradation. Nonetheless, there are some major concerns which if not addressed in the current negotiations, could lead to large scale negative social impacts, lower overall levels of sustainability and greater net deforestation.

It is noteworthy that the objective of the Commission’s initiative is not to contribute to diminishing global deforestation but to curb deforestation and forest degradation that “is provoked by EU consumption and production”. If the current proposal is accepted unchanged, the European supply chain may be cleaned up without having a significant impact on global deforestation. But Europe’s clean conscience will come at a price. A price which will be paid, not by Europe, but by smallholder farmers in palm oil producing countries.?

The proposal

The current proposal consists of three pillars. An import ban, due diligence obligations and a risk benchmarking system for producing countries.?

The first pillar sets a ban on importing or exporting any product or commodity (in the chosen product groups) that runs a non-negligible risk of being related to deforestation. A “negligible risk” is deemed to be present if after a full assessment of product-specific risks and general information there is “no cause for concern”.?A formulation which provides little legal certainty to say the least.?

The due diligence requirements that underpin the import ban are, amongst others, strict information gathering and geo-localisation requirements. This means companies must not only show exactly from which plot of land the oil comes from, but they are also required to get the full contact details of any business or person from whom they have been supplied. Palm oil companies can have thousands of suppliers with hundreds of farmers involved in a single shipment. To obtain, manage and store for five years this data from smallholder farmers, more than 3 million alone in Indonesia and Malaysia, is a huge undertaking.??

The last element of the proposal is the benchmarking system which mandates the European Commission to rank producing countries according to a three-tier system: low, standard or high-risk. This system will categorise countries, taking into account deforestation and forest degradation linked to the relevant commodities alongside criteria related to the countries’ engagement in fighting deforestation and forest degradation. The objective of the system is “to incentivise countries to ensure stronger forest protection and governance, to facilitate trade and to better calibrate enforcement efforts by helping competent authorities to focus resources where they are most needed, and to reduce companies’ compliance costs.”??

There is a chain reaction of consequences to this objective. Countries classified as a high-risk area will be subject by EU national competent authorities to more checks on shipments. The second objective to concentrate already scarce enforcement resources will only be exacerbated by the enhanced scrutiny. Finally, it is hard to see how there can be a reduction of compliance costs for companies when it is likely that the administrative burdens will go up.??

Several RSPO members have already indicated that it will be difficult to sell certified sustainable palm oil to their customers if it is known that the product comes from a “high risk” country. There is perhaps a bigger risk, that a classification as “high-risk” can lead to divestment and disengagement of companies in areas that are still striving towards sustainable economic development. Thus punishing good suppliers in difficult areas and abandoning those who need the European support most. The EU should instead ensure that its engagement is designed around positive incentives. Measures that encourage companies to work with farmers to strengthen their knowledge on human rights, living wage and deforestation instead of making them the subject of possible penalties.

Smallholders paying the price

Palm oil is grown in many countries across Africa, South America, and Southeast Asia. But with approximately 84% of the global production coming from Indonesia and Malaysia, these two countries dominate the global market. In Indonesia approximately 42% of the production is led? by smallholders (= small scale farmers), a number which is expected to rise to 60% by 2030. In Malaysia, smallholders are responsible for almost one third of the total production. The total number of small smallholders working in oil palm fluctuates but is estimated to be at least 3 million in these two countries alone.

The European Commission rightfully acknowledges that “When too many barriers exist to include smallholders in the transition towards deforestation-free value chains, they are likely to be excluded and with it the opportunity to promote sustainable production, strengthen social inclusion and alleviate poverty.” With smallholders playing such an important part of the supply chain, it is crucial that Europe works with them to achieve global no deforestation goals. That is why the RSPO works with these smallholders to facilitate a transition to more sustainable practices which support both ecological goals and help local communities improve their livelihoods. These two goals are not mutually exclusive. On the contrary, one depends on the other. We can only achieve no deforestation goals if smallholders are given the opportunity to? reap the benefits of their sustainable efforts.? And this is only the case if there is a market and a supply chain for them to sell to.?

Europe is not the largest market for palm oil, but it is still the international driver of sustainable palm oil production. If the EU does not have an inclusive approach which considers the reality of smallholders, they will suffer the financial consequences of companies removing them from their supply chains to eliminate the risks of non-compliance. In the longer term, smallholders may shift to agri-commodities that are currently not covered by this regulation such as rubber or opt to sell to markets, such as China and India, that have lower sustainability requirements and offer them lesser protection against labour and other human rights abuses.?

So what should be done?

• An impact assessment of smallholders and local communities should be carried out before the regulation comes into force and not – as currently proposed – a maximum of five years after implementation.
• Instead of a one-size-fits-all-commodities approach, traceability and information storage requirements should be adapted to the specificities of the different commodities taking into account the maturity of the different supply chains and allowing for different time-bound plans for each of the commodities to adapt their supply chains.
• Traceability requirements should be inclusive of the reality of smallholders? and should be accompanied by concrete measures to support them in their journey towards compliance.??
• The Commission should define criteria which can be used to identify recognised multistakeholder certification standards and other third-party initiatives, that have adequate no deforestation as well as social criteria which can be used for companies as support tools for their risk assessment and mitigation in order to go beyond the minimum requirements of the regulation. (As highlighted by ISEAL) .
• Article 28 on cooperation with third countries should be strengthened, further elaborated on and specified to ensure that the ecological goals, including no deforestation, can be met through an inclusive and holistic approach which takes into account the needs and wishes of the most vulnerable in the supply chain, including smallholders and indigenous communities, by balancing the need for environmental protection with their right to economic development.

At this moment the proposal is being discussed further in the European Parliament and the Council (EU Member States), who will decide on its final form. On the 24th of March the Parliament gave a first indication of where it stands with the draft report of MEP Christophe Hansen . His proposed amendment 6 stating that “The new rules should aim to minimise the burden on smallholders in third countries and prevent barriers to their access to the market and international trade” is encouraging. ?His suggestion to remove the high-risk category from the benchmark is a good opening for further discussion. Other proposed amendments such as changing the traceability criteria from “plot of land” to “production areas” are also indicative of his understanding of the business reality. Although these might not be the final solutions, these proposals do give rise to optimism and the hope that the Commission’s proposal will be adjusted to serve a bigger goal than originally intended.

Because if we get this right, this regulation can become an example of the mutual strengthening of environmental protection and social development. It will illustrate the integrated and holistic approach that underpins the Sustainable Development Goals, and it will be a prime example of how the European Green Deal can be achieved.

The Commission launched its proposal, the European Parliament released its draft opinion, now it is up to the Member States delegations to answer the question:?

do I just want to clean up Europe’s supply chain or do I really want to address global deforestation, without farmers in Asia paying the price?

Ruben Brunsveld

Deputy Director EMEA / RSPO