By Sherree DeCovny, Co-Founder and Research Principal
Palm oil is the largest vegetable oil in the world in terms of produced volume next to soybean oil. It’s mainly used in food and for cooking, but it is also used to manufacture soap, detergent, pharmaceutical products, cosmetics, biofuels and oleo products. Most of it originates in Indonesia and Malaysia, although a small amount comes from Thailand, Colombia, Honduras, Guatemala and Papua New Guinea.
The fruit is transported from the plantation to the mill, and then the crude oil is transported to the ports and shipped to refineries abroad. The EU is one of the largest importers of palm oil. In 2015, it imported 4.54 million tonnes, although volumes have been decreasing because of the gradual substitution of palm oil for other vegetable oils in foods. The Netherlands accounts for over 60% of European re-exports of palm oil, and Germany follows with 24%.
Sustainability is important because oil palms grow in ecologically vulnerable areas. Since 2004, the Roundtable on Sustainable Palm Oil (RSPO) has been collaborating with the global supply chain to transform the palm oil industry and support a transition toward 100% sustainable palm oil. It developed environmental and social criteria that companies must comply with to produce Certified Sustainable Palm Oil (CSPO), and many companies have adopted this standard as their industry benchmark.
RSPO also has a traceability system called PalmTrace for certified oil palm products. From the mill to the refineries, certified members of RSPO register their physical sales and processing activities of palm oil products. RSPO PalmTrace also offers a marketplace and the possibility to register off market deals (Book and Claim) for RSPO Credits. Buyers purchase certificates from approved producers under the Book and Claim system, which is cheaper than buying forest-friendly palm oil. The usage of RSPO PalmTrace is part of the RSPO certification program.
Deforestation is still a huge problem despite these efforts. According to Greenpeace, Indonesia has lost 31 million hectares of forest since 1990, surpassing Brazil as the country with the world’s highest rate of deforestation. Major brands including Mars, Mondelez International and Proctor & Gamble committed to supporting Greenpeace’s campaign to ensure the palm oil they buy is not linked to deforestation.
Yet when Greenpeace followed up with 14 of these companies in December 2015, it found that only a few were making significant headway toward ensuring there is no deforestation in their palm oil supply chains.
In addition, in November 2016 Amnesty International revealed shocking human rights abuses – including the use of child and forced labor as well as hazardous conditions – in Indonesia’s palm oil industry. The organization investigated palm oil plantations run by the world’s biggest grower, Singapore-based agri-business Wilmar, and traced palm oil to nine global firms including AFAMSA, ADM, Colgate-Palmolive, Elevance, Kellogg’s, Nestlé, Procter & Gamble, Reckitt Benckiser and Unilever.
Despite these abuses, which Wilmar acknowledged, three of the five palm growers that Amnesty International investigated in Indonesia are certified as producing “sustainable” palm oil under the RSPO. Seema Joshi, Head of Business and Human Rights at the organization said: “This report clearly shows that companies have used the Roundtable as a shield to deflect greater scrutiny. Our investigation uncovered that these companies have strong policies on paper but none could demonstrate that they had identified obvious risks of abuses in Wilmar’s supply chain.”
Trading conventions may contribute to these problems. Palm oil is traded in the physical market, the futures market, and the paper market. In the paper market, a shipment of palm oil from Asia could change owners several times before it reaches its destination. The paper markets are notorious for their lack of transparency, and critics maintain it enables the trade in non-CSPO product.
As an immutable record of transactions, blockchain could help to solve some of these transparency and traceability problems. Digital product information such as plantation origination details, batch numbers, mill and refinery processing data and shipping details could be digitally connected to palm oil, and the information could be entered to the blockchain along every step of the process. The data on the blockchain could be linked to geospatial information. For example, Indonesia’s One Map initiative aims to digitize data and information related to primary and secondary forests on a single portal and synchronize it with data on licenses attached to the land area.
Moreover, the Banking Environment Initiative (BEI) has developed the means by which internationally-recognized sustainability standards associated with individual commodities can be integrated into letters of credit (LCs). In fact, a paper titled The Banking Environment Initiative’s Sustainable Shipment Letter of Credit uses the palm oil supply chain as a demonstration case. The automation of LC processing has been the focus of several blockchain proof of concepts run by banks and fintech vendors.
Recognition of the serious problems that the palm oil industry faces is the first step to cleaning it up. The solution needs to incorporate innovative technologies, such as blockchain, at various points along the supply chain.