Is Palm Oil Off Limits for ESG Investors?

VIDEO: Morningstar Sustainalytics Ruby Jeng explains that companies can manage their material ESG risks

Johanna Englundh 21 June, 2024 | 9:18AM
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Johanna Englundh: Welcome to Morningstar. Investing in palm oil companies can be a controversial topic due to the industry's association with environmentally unfriendly practices, with palm oil cultivation associated with deforestation, soil erosion and greenhouse gas emissions. But it can also present opportunities for positive change. And with palm oil being part of almost 50% of the packaged products we find in supermarkets, it's definitely an interesting area for investors to look at. Joining me to talk about this is Ruby Jeng. She's a senior analyst for Stewardship at Morningstar Sustainalytics.

It's great to have you here, Ruby. Let's start by saying that I think investors' minds quickly turn to negative things when palm oil is mentioned. What's your take on the industry and its challenges?

Ruby Jeng: Yes. Firstly, I would like to highlight the importance of the palm oil industry. As you mentioned, 50% of our products in the supermarket contain palm oil. So that shows the versatile properties of this product. And what's more, palm oil production can be quite efficient. So, for example, each hectare of land can produce 0.7 tonnes of sunflower oil. The same land can produce 5 times more palm oil. So this means that palm oil production can be quite sustainable and efficient if we manage the risks properly.

And undeniably, over the past decades, the palm oil industry has come under scrutiny from various stakeholders, such as non-governmental organisations, academia, civil society groups and other responsible investors. The main reason is that palm oil production may be associated with or have a high tendency towards certain negative environmental and social impacts. For example, deforestation, which is also associated with biodiversity loss and negative impact change. And on the social side, there were some conflicts around forest labour and also poor working conditions throughout the supply chain. So in a nutshell, palm oil production can only be sustainable and effective if we have a robust strategy and management in place throughout the supply chain.

Englundh: Indonesia and Malaysia account for over 85 per cent of the global supply of palm oil. And I know you've been to this part of the world to visit some of these companies. And when you were there, could you see a willingness to change to a more sustainable practice?

Jeng: Yes, definitely. Earlier this year, I spent maybe a week and a half in Malaysia and Singapore to visit with some of our investors some palm oil companies and their plantations and also related NGOs. So we see that there are some improvements across the landscape and it's not just me saying this, but also according to some other research institutes, we see for example that the Malaysian primary forest loss has been historically low and there have been some improvements also on the forestry labour front. So, overall, we are seeing improvements across the landscape and maybe also a little bit about the engagement trip that I had earlier this year. The purpose of the trip was not only to build trust and a relationship with the palm oil companies that we already work with, but also to really understand what trends, opportunities and challenges they face in the industry.

Englundh: Yes, that's right. Can you give some examples of good practice that you've seen?

Jeng: Yes. One of the companies that we visited this time is called Sime Darby Plantation. We've actually been in dialogue with them for more than five years now and we see that there have been some improvements in terms of environmental, social and governance issues in those five years. Just to give you some examples, I think last year, early last year, the US lifted a ban on their product because of these forestry results. That means that Sime Darby Plantation has improved a lot in terms of labour conditions throughout the supply chain and also working conditions. So it also means that Sime Darby Plantation will be able to import its product again to the US market.

And another thing I want to mention is that at the end of last year, they also got their climate target verified by science-based target initiatives. So that also means that that's a pretty big milestone for their climate journey and that their climate targets are now not only science-based but also take into account forest land and agriculture-related guidance on science-based target initiatives. So they are on track towards 1.5 degrees by 2050.

Englundh: So, for investors, what would you say is the most important thing for investors to consider when investing in palm oil companies?

Jeng: Yes. For investors, it's important to identify and ensure that the company can manage its material ESG risks. So how do you do that? You can look at their public disclosures to see if they have a robust strategy and commitments in place and how they can ensure that they are properly monitoring their performance and working in the right way to realise their commitments. And secondly, if investors still have concerns or doubts about the company's performance, they can establish a transparent dialogue with the company to really show the company that we as investors care about this issue and that we want you to address it properly. Because as investors, we don't want our money to be spent in a way that has negative consequences for society, people and the environment. So before you as an investor put your money in other people's pockets, make sure they have good and sustainable practices in their roadmap.

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

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Johanna Englundh  Johanna Englundh is an editor for Morningstar in Sweden 

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