Palm oil: nightmare or sustainable development dream?

To say that palm oil is popular would be an understatement. Palm oil's long shelf-life makes it one of the most widely used vegetable oils in the world; found in nearly 50% of the packaged products that we find in supermarkets, from pizza to chocolate, deodorant to lipsticks. It is also utilised in animal feeds and used as a biofuel in many parts of the world1. The fact is that the majority of us use palm oil on a daily basis without even realising it.

An encouraging number of companies have made the commitment to source palm oil sustainably, but with a vast and complex supply chain, palm oil supply is difficult to trace and certify.

Palm oil plantations cover more than 27 million hectares and produce more than 70 million tonnes of palm oil annually. That is an area bigger than New Zealand producing double what they were producing just twenty years ago.2 Withdrawing from palm oil is not a viable solution and given the high yield of the product and a growing global population, sustainable palm oil can provide significant benefits. It is arguably better to contribute to the sustainability of the sector by carefully investing in funds whose managers respect the need to support companies who are obtaining their palm oil from sustainable sources.

Forest fires across Malaysia and Indonesia and the resulting haze over many parts of South East Asia, forced the global community to confront the unsustainable nature of many palm oil producers. Despite the integral role it plays in our daily lives, palm oil attracts considerable controversy due to the environmental and ethical issues surrounding the development, operations and management of plantations. The demand for palm oil has led to the proliferation of plantations in Indonesia and Malaysia but often at the expense of local ecosystems, with forests burned to obtain land, resulting in smog pollution and rising levels of CO2. Other controversial elements of the process include the labour force and their treatment, often with harsh working conditions and low pay.3 If palm oil production continues to cause unconstrained deforestation, the destruction of biodiversity and the production carbon emissions, the industry is likely to seal its own fate.

Whilst many strong voices in the global debate passionately call on financial institutions to divest from palm oil completely, others call for active engagement and open dialogue. Advocates of the latter approach include non-governmental organisations such as the World Wildlife Foundation (WWF) who believe that divestment does not provide a solution. Despite the controversial nature of its production, the demand for palm oil is not slowing, rather it is expected to increase. Furthermore, for many local communities and rural economies, palm oil has become a major source of income.4 Aside from benefitting society and the environment, the adoption of sustainable palm oil practices will also benefit palm oil companies, as they will have increased access to global markets and commercial opportunities, whilst securing their reputations. Ultimately for businesses, the implementation costs are a short term sacrifice for long term price premiums via stronger operational controls, reduced inputs and increased yields.5

Palm oil in itself is not a harmful substance. The damaging effects for our global community largely stem from abuses surrounding the production process. An encouraging number of companies have made the commitment to source palm oil sustainably, but with a vast and complex supply chain, palm oil supply is difficult to trace and certify. One of the world's largest buyers of palm oil is Unilever, who buy one million tonnes of crude palm oil and around half a million tonnes of palm kernel oil and other derivatives each year.6 Understanding the need to change the wider industry through increased accountability and transparency in supply chains, Unilever helped pioneer the Roundtable on Sustainable Palm Oil (RSPO), the only globally recognised certification standard to drive sustainable production. This organisation involves growers and buyers, as well as influential organisations, non-profit groups, mill operators and commodity traders.7 Unilever's efforts meant that in 2016, WWF awarded the company with a score of nine out of nine for its work towards their target, whilst Greenpeace commended the company for its transparency. By the end of last year, 56% of Unilever's volume of palm oil was from certified sources with 78% traceable and they have pledged to source all of its palm oil from sustainable sources by the end of 2019. As at 1st May 2019, they have already reached 81% of their palm oil ambition target and are on track to deliver it by the end of the year.8 Unilever continues to drive change and increase its positive social impact to help make sustainable living commonplace.

Sustainability is a long-term force for change in communities and countries, markets and companies. We also strive to support socio-economic development and sustainable business practices. Through our recently launched LGT Vestra Sustainable Model Portfolio Service (Sustainable MPS), we aim to invest in funds that have a strong focus on the environment, society and good governance. Comprised of three diversified portfolios, our Sustainable MPS seeks to invest in funds holding companies that are categorised in one of three ways: Responsible, Sustainable or Impactful. Responsible focuses on the use of negative screening to filter out companies with connections to activities or industries deemed controversial. The Sustainable category focuses on the incorporation and integration of environmental, social and governance (ESG) factors. Lastly, the Impactful category aims to invest in funds that hold companies determined to create a positive environmental and social impact. By investing across these three categories,

your clients will benefit from increased diversification, enabling a great degree of risk management in the portfolios, as well as our proven investment process and strategy.

We realise that wealth has social and human dimensions and that investment decisions are driven by hopes, fears and dreams as much as by facts and analysis. Our Sustainable MPS allows for clients to hold assets that are in line with their ethical values, making a positive contribution to society whilst aiming to generate consistent earnings. We believe that prioritising the future should not mean compromising your returns.