It is hard to overstate the importance of forests, both environmentally and otherwise.
Covering over 30% of the world's land mass[1], forests supply food, medicine, building materials and fuel for more than a billion people. Worldwide, they provide more than 86m green jobs and support the livelihoods of many more. In terms of biodiversity, forests are home to an estimated 80% of the world's plant and animal life[2].
Forests are clearly a resource but, as history proves, they have also been used as large, undeveloped swaths of land that can be cleared and converted for other purposes. Global deforestation continues to endanger local communities, contribute to global warming and result in the loss of biodiversity.
So, if palm oil causes deforestation, why can't we just stop using it?
At the heart of palm oil's success is its versatility. Palm oil is used in 70% of cosmetic products and found in around half of all supermarket products. It is a key ingredient in staple foods such as bread and margarine, as well as chocolate, ice cream, instant noodles, and biscuits. It can also be used in the production of biodiesel and biofuel for cars and power plants.
There are many reasons why palm oil is so popular. Firstly, palm trees produce 4-10 times more oil than other crops per unit of cultivated land and consume less water in the process[3]. This makes palm oil the most environmentally friendly vegetable oil in the world.
Second, palm oil's high yield makes it the cheapest vegetable oil on the market. The fact that palm oil is an ingredient in so many affordable foods is key here, particularly given our ever-increasing global population size and appetite.
Third, thanks to its natural preservative qualities, palm oil extends the shelf life of food products, thus reducing waste.[4]
With this in mind, environmental activists such as the World Wildlife Fund (WWF) argue that consumers should not boycott products containing palm oil.[5] Avoiding it could, in fact, have far worse environmental and societal consequences.
The winds of change: advocating to increase palm oil yields, sustainably
The Investor Working Group on Sustainable Palm Oil, which is coordinated by the United Nations Principles for Responsible Investment (UN PRI), is backed by over 60 global investment organisations, representing approximately $7.9tn in assets under management. What's more, we - at the international business of Federated Hermes - have joined forces with other stakeholders to raise concerns and lobby government authorities in Brazil and Indonesia.
Good intentions aside, with the global palm oil market expected to enjoy a compound annual growth rate (CAGR) of 5.6% over the 7-year period from 2018-2025[6], sustainable palm oil production remains a challenge. How can the industry achieve a greater volume of production ─ by increasing palm trees' yields ─ and avoid further deforestation?
The certification jungle: reforming standards and encouraging widespread adoption
At the same time, it is important to ensure that existing and additional production is delivered in a sustainable way. Buyers and investors currently use certification to ensure the sustainability of their purchases but navigating this can be tricky, with no uniform set of standards in use. Then, there is the issue of credibility. In obtaining certification, it is not unheard of for producers to cut corners and pay bribes.
Despite this, we would argue that certification is the way forward, provided the underlying standards are strengthened and the process for obtaining certification is made corruption-free.
To this end, we have been working with the UN PRI to strengthen certification standards and pushing to improve the process by which certification is granted and remove the risk of malpractice. Here, modern technology ─ from satellite monitoring to geolocation tracking and blockchain ─ could be used to enforce certification standards. Investigations on the ground might also complement a company's self-disclosure on ESG matters, as could third-party verification checks.
Sustainable palm oil: a commitment beyond the financial
Palm oil can be grown sustainably. To realise this goal, we will need to engage extensively with companies involved in the palm oil supply chain, but our outlook remains positive. With rates of deforestation declining globally, significant progress being made by leading companies, and mounting pressure from investors and other stakeholders alike, it would seem an end to deforestation may come sooner rather than later.
To access more in-depth analysis, research and commentary on sustainability direct from our investment teams, visit the new Federated Hermes sustainability hub
Disclaimer:
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For professional investors only. This is a marketing communication. The views and opinions contained herein are those of Elena Tedesco, CFA, Co-Portfolio Manager - ESG strategies, Global Emerging Markets, and may not necessarily represent views expressed or reflected in other communications, strategies or products. The information herein is believed to be reliable, but Federated Hermes does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. This document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Figures, unless otherwise indicated, are sourced from Federated Hermes. This document is not investment research and is available to any investment firm wishing to receive it. The distribution of the information contained in this document in certain jurisdictions may be restricted and, accordingly, persons into whose possession this document comes are required to make themselves aware of and to observe such restrictions.
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[1] According to the UN Food and Agriculture Organization (FAO) report, State of the World's Forests 2020 (July 2020), forests cover 31% of the global land area.
[2] Ibid
[3] See the Roundtable on Sustainable Palm Oil Certification (RSPO), About sustainable palm oil, for more detail.
[4] While some researchers are experimenting with alternatives such as algae-based oil, or microbes that convert food waste and industrial by-products into synthetic palm oil, growing these technologies on a scale that could compete with palm oil is difficult.
[6] As per Global Palm Oil Industry (September 2020).
