Part 1 of 5 of a series on palm oil financing
Palm oil may be the single most important crop that you never heard of. A vegetable fat that resembles reddish butter at room temperature, palm oil is derived from the fruit of the oil palm tree. Both nutritious  and highly versatile , palm oil is now an important component of products ranging from biofuels and food to soaps and cosmetics. Estimates indicate that as much as 50 percent of the products used by the average Western consumer every day contain palm oil or its derivatives .
In 2013, the global market for palm oil was estimated at $44 billion . This figure is likely to increase in the near future, as manufacturers look for alternatives to trans fats in processed food products, and consumers in rapidly industrializing economies such as China and India add to growing global demand.
Unfortunately, the burgeoning market for palm oil is also fueling deforestation on a massive scale. As oil palm plantations expand, the industry clears rainforests, mangroves, and sensitive peatlands to make room. Palm oil-related deforestation is an especially severe problem in Malaysia and Indonesia, the two largest producers of palm oil, which together account for 85 to 90 percent of global production . This is despite the fact that neither country requires further deforestation to meet its palm oil production targets in the near future  . Such excessive deforestation destroys the habitats of endangered species such as the orangutan, the Sumatran tiger , and many others; displaces indigenous and forest-dependent communities;  and releases vast amounts of greenhouse gases into the atmosphere .
The orangutan, one of the many animals whose survival is threatened by oil palm expansion. Photo by Rhett A. Butler
Oil palm yields the most oil per hectare among all oilseed crops. But, some oil palm growers employ illegal and unsustainable methods, such as land-grabbing, illegal forest burning, planting without valid permits, and the use of forced and slave labor. These factors allow growers to produce palm oil much more cheaply compared to other vegetable oils, keeping demand high and creating a dangerous cycle of deforestation.
This does not mean that all palm oil is unsustainable or illegally produced. However, a large percentage of it is, and the poorly-regulated nature of the industry and the opaqueness of the palm oil supply chain make it difficult to separate sustainably-grown palm oil from that produced via unsustainable, destructive methods.
Attempts at regulating palm oil have been complicated by the complexity of the international palm oil supply chain, a network that encompasses growers, refiners, distributors, regulatory bodies, consumers, and financial institutions. Many of these actors prioritize financial profit far above sustainability. As a result, significant amounts of illegally-produced, environmentally-damaging palm oil continue to make its way into biofuels and supermarket aisles.
Palm fruit sliced lengthwise. Palm oil can be extracted from both the kernel (white) and the flesh (orange). Photo by Rhett A. Butler
As profit-seeking enterprises, oil palm growers ultimately rely on their customers and financial supporters to balance the books and finance the further expansion of their plantations. Until these financial supporters are identified and persuaded to take a strong stance against unsustainable palm oil, there will be little financial incentive for growers to stop their destructive activities.
Who, then, really funds the expansion of palm oil in Southeast Asia?
The first and most obvious group is made up of multinational consumer product manufacturers, many of which are familiar household names. By continuing to include palm oil and its derivatives in their products, these firms directly create consumer demand, which drives further deforestation.
In the face of public criticism, some manufacturers have opted to use so-called “certified sustainable palm oil,” based on standards maintained by the Roundtable on Sustainable Palm Oil (RSPO), the most important governing body for palm oil worldwide. However, in reality, such “certified sustainable palm oil” may not be completely produced via sustainable means. The RSPO operates three different schemes for certifying sustainable palm oil . Of these three, two schemes, “Book and Claim” and “Mass Balance,” involve various mechanisms that allow manufacturers to continue buying conventional palm oil, yet claim to be supporting sustainable production .
The only way for manufacturers to ensure that all the palm oil it purchases is sustainably grown is to purchase exclusively through the third scheme, the “Segregated” supply chain, where all oil purchased is kept separate and traceable to individual mills. No major manufacturer has yet achieved this. However, a few manufacturers have made credible commitments towards increasing traceability by setting percentage targets for traceable palm oil, as well as timelines for attaining them. These include Unilever, Nestle, Reckitt Benckiser, Mondelēz and L’Oreal 
Fresh fruit bunches loaded on the back of a motorbike in a plantation in Riau. These bunches will be weighed at an aggregation point and then taken to a mill for refining. Photo by Rhett Butler
The second group that funds palm oil-related deforestation in Southeast Asia is the distributors – companies that buy palm oil from plantation owners and supply them to consumer goods manufacturers. These companies, such as Wilmar, Cargill and Golden-Agri Resources, are among the largest agri-businesses in the world. Under pressure from NGOs and environmental watchdogs, most major distributors have adopted “No Deforestation” or similar policies, under which they have pledged to source palm oil and fruit bunches only from sustainable growers . However, reports have shown that despite this pledge, some distributors continue to work with growers guilty of deforestation   , revealing a gap between policy and implementation. Some distributors also maintain equity and interests in plantations that are known violators of environmental laws, raising questions about potential conflicts of interest and their actual level of commitment to stated company policy .
The third group that funds palm oil-related deforestation in Southeast Asia is made up of financial service providers, especially investment banks. These banks generally provide two kinds of financial services to oil palm companies: syndicating loans and underwriting initial public offerings (IPOs). In both cases, banks provide oil palm growers with large amounts of capital that is often used to expand land holdings and plantation acreage, thereby directly enabling deforestation . A wide array of banks in Malaysia, Indonesia, Europe, and the U.S. have a record of providing services to unsustainable growers. Banks that have provided the most significant amounts of support include HSBC and Rabobank  .
Many such banks have policies that prevent dealing with clients known to engage in unsustainable activities. However, these banks rely almost wholly on a single criterion, membership in the Roundtable on Sustainable Palm Oil, to determine whether a firm is sustainable or not. Reports by NGOs such as Greenpeace  and the World Wildlife Fund 
have shown that RSPO membership is not a reliable indicator of sustainability. In fact, as a result of inadequate penalties and monitoring efforts, firms may retain their RSPO membership while simultaneously engaging in severe deforestation and environmental destruction.
Rows of soap for sale, bearing the Roundtable on Sustainable Palm Oil (RSPO) logo. Critics say that the RSPO and its standards are inadequate for preventing further palm oil-related deforestation. Source: World Wildlife Fund
The fourth and final group financing the oil palm industry is made up of shareholders and institutional investors, which directly support palm oil companies with capital investments. By generating the expectation of investment returns, they also implicitly promote irresponsible profit-seeking practices, often with little regard to the environmental costs incurred in the process. Investors in palm oil companies with a track record of deforestation include investment management corporations such as BlackRock and Fidelity, mutual fund managers such as Vanguard, pension funds such as CalPERS, and sovereign investment funds based in countries such as Norway and Sweden . Most worryingly of all, due to the complexity of cash flows in the world of palm oil and the highly diversified nature of many mutual funds, some investors may actually be supporting illegal palm oil without realizing it.
This article is the first in a series exploring the links between business practices and deforestation in the oil palm industry. The next article will further explore the reasons for the rapid expansion of the oil palm industry in Southeast Asia, as well as the political factors and business practices encouraging oil palm-related deforestation.
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