Why transparency and leadership are essential for ethical palm oil supply chains

If tropical deforestation is to be halted for good, government policies, such as moratoria on clearing primary forests and issuing licenses for new plantations, will be crucial. But companies have an equally important role to play in ensuring suppliers, farmers, middle-men and communities behave responsibly, in the interests of the environment while pursuing economic growth. 

Certainly deforestation is never out of the news, and the steady stream of forest protection initiatives do all point to the need for proper and effective collaboration. For the recently signed Amazon Declaration to succeed, for example, many stakeholders will need to play their part. The eight countries that share the Amazon basin in South America have now, of course, signed a “first-in-a-generation” agreement to tackle the problem of tree loss. The 10,000-word collaborative statement was driven by the Brazilian president, Lula da Silva, who has pushed for an agreement to end all “plundering” of natural resources for short-term economic gain. 

The declaration deals with a number of causes of deforestation, not least organised crime and industrial agriculture – and points to several solutions for nature conservation and restoration, as well as social benefits, that could be achieved in the region. And there is a big problem. Estimates suggest the Amazon has lost 12% of its forest area in the last 37 years. That’s 44m hectares lost as a result of agriculture, logging, mining and oil exploration.

In southeast Asia, while deforestation rates have in some cases fallen – in Indonesia, for example, deforestation in 2020 was at the lowest levels since monitoring began – the region remains vulnerable to tree loss, mainly driven by agricultural expansion. Across the region, some estimate as much as 1.2% of forests is lost every year and that between 2001 and 2019 the region lost forest equivalent to an area bigger than Thailand.

Ethical and transparent tropical commodity supply chains – delivering everything from palm oil and coffee to rice and cocoa – are fundamental to halting deforestation. They promote accountability, build trust, facilitate informed decision-making, aid in supply chain visibility and encourage collaboration. Transparency also ensure actors along the chain are complying with regulation, which helps to mitigate reputational risks too.

It is an issue that businesses such as Sime Darby Plantation (SDP) know all too well. The Malaysia-based business is the world’s largest sustainable palm oil producer, supplying edible oils, palm oil-based biodiesel, nutraceuticals and other palm oil derivatives to customers all over the world. 

Building an ethical supply chain starts with traceability, according to the company’s chief sustainability officer, Rashyid Redza Anwarudin. “You really need to know exactly where you’re sourcing from. But that’s a real challenge,” he says. The company has more than 70 of its own mills across Malaysia, Indonesia, Papa New Guinea, and the Solomon Islands. But it also sources third party oils from more than 1,100 different mills – a list that is constantly changing in a dynamic, fast-moving sector.

SDP largely knows where it is buying from having achieved 98% traceability all the way to each mill. In addition, 70% of the more than 1m tonnes of palm oil it sources every year is traceable to the estate where it originated. Anwarudin points out that sometimes mills just don’t have the information that SDP requires, “and that’s when we spend lots of time engaging with people to get the data”. The company uses satellite monitoring that can identify specific estates. “But when you only have traceability to a mill, you need to monitor a 50-kilometre radius [around that mill].”

Of course, once you know where something originates you can then work with that farm or plantation to ensure that the right policies, both environmental and social, are in place and adhered to. Investment in traceability is critical in not only building trust with customers who require an assurance that the oil they buy has been responsibly produced, but also in taking action when issues arise. “We make all this data available on our website, Crosscheck. Understanding where we source from makes it easier for stakeholders to raise any issues to us and for us to take action, conduct investigations and engage with suppliers,” Anwarudin says. 

Such public disclosure is the difference between achieving traceability (and you knowing where you are sourcing from) and transparency (when you tell the world where you are sourcing from). And this is crucial if companies the world over are to play their role in sourcing only materials, ingredients, goods and services that are not responsible for deforestation or other negative impacts. As Anwarudin points out, customers have got their own targets – on deforestation and on human rights, for example – so, they need to know, and suppliers need to be open with them, about where commodities come from. 

Transparency can be a business driver and a key differentiator for palm oil companies and other commodity businesses. To achieve this, though, requires leadership from senior management teams and the board. Supply chain data should be reported on a regular basis all the way up to the board and be constantly monitored at a management level. 

For SDP right now, the focus is on edging the traceability-to-mill numbers up towards 100% – something that will require more investment and internal resources. Maintaining momentum requires placing the appropriate value on the investment, Anwarudin adds. “It’s about value protection. We mainly serve large multinational FMCG companies in Europe, and these markets are more discerning when it comes to sourcing requirements. We must maintain our position to continue selling to these customers."

He says that for the business this is also about value creation in serving customers who are willing to pay a premium for sustainable palm oil or fully segregated supply chains. There is also a significant element of managing risk. The world is moving fast and there will only be more regulatory expectations. Companies involved in sourcing and selling commodities need to futureproof themselves and be ready ahead of regulations tightening further. 

For tropical commodities, and palm oil in particular, sector companies have been in the spotlight with regards sustainability issues for the past 20 years or more. And this focus is not going to go away – good corporate management requires a continual focus on how these issues can negatively impact a company’s reputation, and ongoing effort to develop the most sustainable supply chains possible.