Is palm oil beyond the reach of…

Is palm oil beyond the reach of…
Is palm oil beyond the reach of…

Johanna Englund: Welcome to Morningstar. Investing in palm oil companies can be a controversial subject due to the industry’s association with environmentally unfriendly practices, with palm oil cultivation being associated with deforestation, soil erosion and greenhouse gas emissions. But it can also offer opportunities for positive change. And with palm oil making up almost 50% of the packaged products we find in supermarkets, this is undoubtedly an interesting area for investors. Ruby Jeng joins me to talk about it. She is a senior analyst for stewardship at Morningstar Sustainalytics.

It’s a pleasure to have you, Ruby. Let’s start by saying that I think investors’ minds quickly turn to the negatives when palm oil is mentioned. What is your view on this industry and its challenges?

Ruby Jeng: Yes. First of all, I would like to highlight the importance of the palm oil industry. As you mentioned, 50% of our products in supermarkets contain palm oil. This shows the versatile properties of this product. Additionally, palm oil production can be very efficient. So, for example, each hectare of land can produce 0.7 tons of sunflower oil. The same area can produce 5 times more palm oil. This therefore means that palm oil production can be quite sustainable and efficient if we manage the risks correctly.

It is undeniable that over the past decades, the palm oil industry has come under intense scrutiny from various stakeholders, such as non-governmental organizations, academia, groups civil society and other responsible investors. The main reason for this is that palm oil production may be associated with or have a strong tendency to produce certain negative environmental and social impacts. For example, deforestation, which is also associated with biodiversity loss and negative impact change. On a social level, there have been conflicts around forestry work and poor working conditions throughout the supply chain. In summary, palm oil production can only be sustainable and efficient if we have a strong strategy and management throughout the supply chain.

Englundh: Indonesia and Malaysia represent more than 85% of the world’s palm oil supply. I know you’ve been to this part of the world to visit some of these companies. And when you were there, were you able to see a desire to move to more sustainable practices?

Jeng: Yes quite. Earlier this year, I spent a week and a half in Malaysia and Singapore visiting palm oil companies and their plantations, as well as relevant NGOs, with some of our investors. So we’re seeing improvements across the landscape and it’s not just me saying that, but other research institutions as well. We see, for example, that primary forest loss in Malaysia has been historically low and that there have been improvements on the labor front in the forestry sector. So overall, we’re seeing improvements across the whole landscape and maybe also a quick word on the engagement journey that I took at the start of the year. The objective of this trip was not only to establish a relationship of trust with the palm oil companies we already work with, but also to understand the trends, opportunities and challenges they face in the ‘industry.

Englundh: Yes that’s right. Can you give some examples of good practices that you have seen?

Jeng: Yes. One of the businesses we visited this time is called Sime Darby Plantation. We have been engaging with them for over five years and we see that improvements have been made in terms of environmental, social and governance issues over these five years. To give you a few examples, I think last year, early last year, the United States lifted the ban on their products because of their forestry record. This means that Sime Darby Plantation has improved a lot in terms of working conditions throughout the supply chain and working conditions. This also means that Sime Darby Plantation will once again be able to import its products into the US market.

I would also like to mention that at the end of last year the climate targets were verified by science-based target initiatives. This also means that this is an important step in their climate journey and that their climate targets are now not only science-based, but also take into account guidance on forest land and agriculture within the framework of initiatives based on scientific objectives. They are therefore on track to reach 1.5 degrees by 2050.

Englundh: For investors, what do you think is the most important thing to consider when investing in palm oil companies?

Jeng: Yes. For investors, it is important to identify and ensure that the company can manage its material ESG risks. How to do ? You can review their posts to see if they have a strong strategy and commitments in place and how they can ensure they are properly monitoring their performance and working in the right way to achieve their commitments. Second, if investors still have concerns or doubts about the company’s performance, they can establish a transparent dialogue with the company to show that we, as investors, care about this issue and that we we want it to be treated appropriately. Indeed, as investors, we do not want our money to be spent in a way that has negative consequences for society, people and the environment. Therefore, before putting your money in other people’s pockets, make sure that their track record includes good and sustainable practices.

Englundh: Thank you so much for joining us today, Ruby. Until next time, I’m Johanna Englundh for Morningstar.

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