Palm Oil Giants In Indonesia Backtrack On “Zero Deforestation” Pledge: What It Means For Investors?

In 2014, a few major palm oil producers operating in Indonesia, including the Singapore-listed duo of Golden Agri-Resources Ltd (SGX: E5H) and Wilmar International Limited (SGX: F34), signed the Indonesia Palm Oil Pledge (IPOP). The IPOP is a voluntary agreement to fight deforestation and developments on peat lands.

But, the signatories have abandoned the pledge. In a statement released by IPOP last week, it was revealed that the companies that have signed the pledge will be “phasing out IPOP as an entity.”

The statement also added that “IPOP signatories have decided that recent groundbreaking policy developments in Indonesia have fulfilled the purpose of IPOP to help accelerate and promote this transformation towards sustainability and therefore its presence can be dissolved.”

zero deforestation palm oil

If we trace back in time, we can find that the Indonesian government was not supportive of the IPOP to begin with. The government believes that the IPOP’s standards are too strict and might be difficult for smaller plantations to comply with. The Indonesian government even started investigations a few months ago into IPOP’s signatories for possible cartel practices.

To counter self-regulation by big palm oil producers, Indonesia’s government established its own mandatory certification standards for sustainable palm oil production called the Indonesian Sustainable Palm Oil (ISPO). The ISPO bans any land-clearing in primary forests and peatlands but does not restrict the clearing of secondary forests or bushlands with high carbon content, things which the IPOP does not allow.

The dissolution of the IPOP gives us two insights on the palm oil industry in Indonesia.

First, even huge palm oil producers (Golden Agri-Resources, for instance, is the world’s second largest oil palm company) are still very careful in dealing with Indonesia’s government. And, it seems their stance is to work with the authorities rather than against when it comes to how the industry should function.

Second, it shows that the government of Indonesia might now take on a more active role in shaping the palm oil industry, especially on issues such as balancing regulations (onerous regulations can affect the business of small plantations) with pressures from neighbouring countries and environmental groups. This might be an interesting force that can shape the palm oil industry in Indonesia in the coming years.

Developments in Indonesia’s palm oil industry can be important to observe for all who have a stake in palm oil – Indonesia happens to be the world’s largest exporter of the oil.

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