Palm Oil

Inventory of the Major Bottlenecks and Sustainability

Initiatives in the Palm Oil Chain

On behalf of the Sustainable Economic Development Department

(DDE), Dutch Ministry of Foreign Affairs

March 2008

A i d en v i r o nmen t

Palm Oil

Inventory of the Major Bottlenecks and Sustainability

Initiatives in the Palm Oil Chain

On behalf of the Sustainable Economic Development Department

(DDE), Dutch Ministry of Foreign Affairs

March 2008

A i d en v i r o nmen t

Donker Curtiusstraat 7-523

1051 JL AMSTERDAM

Tel. +31 20 6868111

Fax. +31 20 6866251

Email: info@Aidenvironment.org

Website: www.Aidenvironment.org A1741b

Contents

Introduction ...................................................................................................................1

1. Major Bottlenecks to a Sustainable Palm Oil Chain............................................3

Forest conversion (environmental) ..............................................................................3

Pollution (environmental).............................................................................................4

Land conflicts (social) ..................................................................................................5

Labour conditions (social)............................................................................................5

Dependency / vulnerability of smallholders (economic) ...............................................5

Country specific lessons..............................................................................................6

2. Multi-stakeholder Initiatives in the Palm Oil Sector ............................................7

3. Conclusions / Lessons Learned.........................................................................14

4. Comparative Analysis of the Coffee and Palm Oil Chains................................16

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1

Introduction The oil palm (Elaeis Guineensis) is a tropical palm tree that originates from the coastal regions of West and Central Africa. In the twentieth century, the tree was exported to countries in Central America and Southeast Asia (notably Malaysia and Indonesia). Palm oil is derived from the fruit of this oil palm species. In general, oil palm trees are fruit bearing after 3 to 5 years for a period of 25 to 30 years, with optimal yields between 5 to10 years after planting. Each fruit contains a single seed (palm kernel), surrounded by a soft oily pulp. Crude Palm Oil (CPO) is extracted from the pulp of the fruit (palm oil), while Palm Kernel Oil (PKO) is extracted from the kernel. A third (by-) product is Palm Kernel Meal (PKM), which is used mainly as a component of animal feed for pigs and poultry.1 Over the past 20 years, palm oil became one of the fastest growing agricultural commodities in the world. In 2006, global palm oil production reached 37.15 million tons and is now the world’s most popular vegetable oil. Malaysia and Indonesia are the world’s largest producers of palm oil. In 2006 they produced 86% of total global palm oil output. Other producing countries are Thailand, Nigeria, Colombia, Ecuador, Papua New Guinea, Ivory Coast, Costa Rica and Honduras.2 Primary production of oil palm products is - compared to other food crops - fairly concentrated. About fifty plantation groups control about 75% of global production. Most of these plantation groups are Malaysian or Indonesian owned, with only a few European and American companies.3 Their primary mode of production is a large-scale mono-culture plantation system; large-scale meaning that the average economic size of a plantation estate with associated CPO mills is around 15,000 hectares, or an area of 12x12 km. The sector counts as well more than a million of small scale producers with plots ranging from 1 to 50 hectares.4 The concentration rate in the trading and refining segment is higher. An estimated fifteen business groups control about 75% of the global market. Vertical integration is increasing, with American traders investing upstream and Malaysian plantation companies investing downstream and upstream.5 The two oils - Crude Palm Oil and Palm Kernel Oil - are refined for usage in the food industry. The biggest importers of Crude Palm Oil are China (18%), EU (16%) with the Netherlands accounting for one third, and India (11%).6 A part of the oil is processed further for usage in the food and chemical industries. Concentration rates in these

1 Aidenvironment, Analysis of social–economic impacts of trade of selected commodities; Part II: Background Report 2. Palm Oil commodity in Indonesia and Malaysia, commissioned by The Netherlands Environmental Assessment Agency (MNP), Netherlands, 2007 2 Oil World Annual 2007, ISTA Mielke, Hamburg, 2007 3 Aidenvironment, Increasing the sustainability of EU and Dutch commodity trade through more effective policies; Volume two: Commodity profiles, commissioned by the Ministry of Housing, Spatial Planning and Environmental Management (VROM), Netherlands, 2006 4 Vermeulen, S. & Goad, N., Towards better practice in smallholder palm oil production, IIED, London, 2006 5 Aidenvironment, Increasing the sustainability of EU and Dutch commodity trade through more effective policies; Volume two: Commodity profiles, commissioned by the Ministry of Housing, Spatial Planning and Environmental Management (VROM), Netherlands, 2006 6 Oil World Annual 2007, ISTA Mielke, Hamburg, 2007

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industries differ. The detergent and cosmetics industry is fairly concentrated on a global scale, but the concentration rate in most segments of the food industry is smaller (such as the confectionery and biscuits industry). In the snacks and margarine industry the concentration rate is fairly high, with a few multinational companies having significant market shares across many countries.7 In terms of volumes of palm oil and palm kernel oil consumed, the most significant consumer products in the oil palm production chain are: cooking oil, margarine, sauces and mayonnaise, bakery products, snacks, soap and shampoo, detergents, cosmetics, biofuel and electricity.8

7 Aidenvironment, Increasing the sustainability of EU and Dutch commodity trade through more effective policies; Volume two: Commodity profiles, commissioned by the Ministry of Housing, Spatial Planning and Environmental Management (VROM), Netherlands, 2006/ Van Gelder, J.W., Greasy Palms: European buyers of Indonesian palm oil, Friends of the Earth UK, London, March 2004 8 Van Gelder, J.W., Greasy Palms: European buyers of Indonesian palm oil, Friends of the Earth UK, London, March 2004

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1. Major Bottlenecks to a Sustainable Palm Oil Chain The most pressing issues are forest conversion and land conflicts. Other issues are pollution, labour conditions and smallholder dependency.

Forest conversion (environmental) In 2006, about 10.5 million hectares of oil palm plantations globally were mature, of which 43% in Indonesia and 36% in Malaysia.9 Much of the expansion of oil palm plantations in Indonesia and Malaysia over the past decades took place in areas that were once covered by tropical forests. According to industry estimates, about 33% of all oil palm plantations in Malaysia are located in once-forested areas which were cleared for plantation development. This percentage is likely to be higher. In Indonesia, 66% of all oil palm plantations are located in once-forested areas. The tropical rainforests of equatorial Southeast Asia support the highest biodiversity of any terrestrial ecosystem. The forest areas that are cleared for oil palm development often once provided habitat for well known keystone species, such as the orang utan, Sumatran tiger, rhinoceros, and the world's largest butterfly, the Queen Alexandra Birdwing.10 An issue closely related to deforestation, is the drainage to maintain the level of the water table of production sites. Both in Sumatra and in Kalimantan large areas of oil palm plantations are located in peat swamp areas, where drainage is especially critical to productivity. The potential adverse environmental effects of drainage include both local (e.g. salination of the soil if sea water is allowed to enter drainage channels in low lying costal areas) and landscape effects (changes to hydrology of peat swamp forest outside plantations).11 Deforestation also leads to the emission of greenhouse gasses, because essentially all above ground natural vegetation is released in the atmosphere. Especially, the clearing (often by burning) of peat soils contribute disproportionately to haze and carbon emissions. Fires are not only used as a tool in clearing cut vegetation, but also as a way to degrade neighbouring lands so that permission to plant oil palm is more likely to be granted in the future. Sometimes, fires are set to grab land illegally for cultivation, or used as a weapon in land-tenure disputes. Such fires often destroy larger areas than planned. This was the case with the enormous fires that occurred during the 1997/8 El Niño Southern Oscillation (ENSO) drought when 10 million ha of forestland were burnt in Indonesia (many of these fires were associated with the burning of peat lands for conversion to plantations), contributing to 13-40% of total global non-fossil-fuel carbon emissions in those years.12

9 Oil World Annual 2007, ISTA Mielke, Hamburg, 2007 10 Palm oil, forests and sustainability - Discussion paper for the Round Table on Sustainable Oil Palm, ProForest, Oxford, 2003 (Aidenvironment) in collaboration with Sawit Watch Indonesia and Joanna de Rozario, Friends of the Earth UK, London, 2004 11 ProForest, Palm oil, forests and sustainability - Discussion paper for the Round Table on Sustainable Oil Palm, Oxford, 2003 12 ProForest, Palm oil, forests and sustainability - Discussion paper for the Round Table on Sustainable Oil Palm, Oxford, 2003

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The increasing demand for palm oil as a source of agro fuel or bio fuel and electricity production leads to the conversion of even more land, as palm is considerably more productive per hectare than either soy or rapeseed.13 It is unclear to what extent this trend will continue. Since new palm oil plantations will likely increase rather than decrease the greenhouse gas emissions under current common development and management practices, palm oil as a source for bio fuels and electricity is unlikely to pass the sustainability threshold of future Western regulation. There are also signs of a consumer backlash because of negative social and environmental impacts of plantation expansion.14 However, countries with less stringent regulations, especially palm oil producing countries, will likely to continue to substitute fossil fuels by bio fuels from palm oil plantations. Much will depend on how governments will tackle this issue. The Roundtable for Sustainable Palm Oil (RSPO) might influence this discussion as well. RSPO formal position on biofuels is that any 1st generation feedstock for biofuels should provide clear greenhouse gas benefits after considering the entire lifecycle of the raw material. RSPO acknowledges that this may lead to the need to develop additional criteria, compatible with the current RSPO principles and criteria.

Pollution (environmental) As oil palm fruits have to be processed within 24 hours, every 5,000 hectares need a CPO mill. As a consequence, hundreds of processing facilities operate throughout the countryside of production countries. Of the various types of waste produced by these CPO mills, Palm Oil Mill Effluent (POME) is responsible for most of the pollution. POME is a mixture of water, crushed shells and a small amount of fat residue. Most CPO mills have outdoor basins in which POME is stored and to a certain extent detoxified (by adding oxygen). These basins easily overflow due to heavy rain or intensive production. Some companies allow the liquid to flow directly into the rivers. Because of its high Biological Oxygen Demand (BOD), POME is highly polluting to waterways and has significant negative effects on aquatic life downstream.15 Land clearing for oil palm plantations also causes considerable increases in topsoil run-off, disturbing stream-flow and increasing sediment loads in rivers and streams. Soil erosion for example, is five to seven times greater during clearance, while sediment loads in rivers increase by a factor four.16 Although some of these impacts are temporary, the pressure on river and coastal ecosystems remains significant. Land clearing and development is continuously taking place in different areas in the same watershed.17 Another form of pollution is caused by the use of pesticides running off into watersheds. Well-run plantations hardly use pesticide and rely on Integrated Pest Management.

13 How the oil palm industry is cooking the climate, Greenpeace, Amsterdam, 2007 14 Losing ground: The human rights impact of oil palm plantation expansion in Indonesia, Friends of the Earth, Life Mosaic, Sawit Watch, February 2008 15 Wakker, E. (Aidenvironment), Greasy Palms - The social and ecological impacts of large-scale oil palm plantation development in Southeast Asia, in collaboration with Sawit Watch Indonesia and Joanna de Rozario, Friends of the Earth UK, London, 2004 16 Henson, I.E., Environmental Impacts of Oil Palm Plantations in Malaysia, PORIM Occasional Paper No. 33., 2004 17 Wakker, E. (Aidenvironment), Greasy Palms - The social and ecological impacts of large-scale oil palm plantation development in Southeast Asia, in collaboration with Sawit Watch Indonesia and Joanna de Rozario, Friends of the Earth UK, London, 2004

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However, some NGO campaigns have reported pollution caused by excessive pesticide use.18

Land conflicts (social) Land right conflicts are very persistent in the oil palm plantation sector. Indonesia's forestlands provide livelihoods to some 100 million people, of which 40 million are indigenous people. Because these communities rarely have formal rights, licensed palm oil companies have taken over large tracts, which communities perceive as theirs by customary law. The plantation business is the most conflict-prone land-based sector in Indonesia.19 According to Sawit Watch, a NGO monitoring land-use conflicts in Indonesia, 13% of the land occupied by palm oil plantations has been (or still is) involved in land conflicts. In most cases, private palm oil companies are involved.20

Labour conditions (social) In the major production countries the rights of employees are not always respected and the conditions in which employees have to work are a cause for concern. In Indonesia many labourers are paid according to their production targets. To reach these targets, they sometimes need structural - unpaid - help from their wives and children. Plantation wages are at a subsistence level, barely covering the costs of sending a child to school. Minimum wage legislation is not consequently applied and working tools and safety equipment are not always provided. Trade unions are often not recognised and labour conflicts suppressed.21

A study in 2002 among oil palm plantation workers in Malaysia reported widespread pesticide poisonings and significant problems22 associated with the pesticide paraquat among approximately 30,000 women work daily as pesticide sprayers.23

Dependency / vulnerability of smallholders (economic) Oil palm smallholders in Indonesia and Malaysia are fully dependent on neighbouring plantation companies for inputs, such as seedlings, credits, fertiliser, and for marketing. As oil palm fruits have to be processed within 24 hours, smallholders have no choice but 18 ProForest, Palm oil, forests and sustainability - Discussion paper for the Round Table on Sustainable Oil Palm, Oxford, 2003 19 Wakker, E. (Aidenvironment), Greasy Palms - The social and ecological impacts of large-scale oil palm plantation development in Southeast Asia, in collaboration with Sawit Watch Indonesia and Joanna de Rozario, Friends of the Earth UK, London, 2004 20 Sawit Watch Case DataBase Monitoring update august 2006 21 Wakker, E. (Aidenvironment), Greasy Palms - The social and ecological impacts of large-scale oil palm plantation development in Southeast Asia, in collaboration with Sawit Watch Indonesia and Joanna de Rozario, Friends of the Earth UK, London, 2004 22 Paraquat poisoning symptoms include nosebleeds, eye irritation, contact dermatitis, skin irritation and sores, nail discoloration, nail loss and abdominal ulceration 23 News Note: Malaysian Paraquat Ban Threatened. http://www.panna.org/resources/gpc/gpc_200304.13.1.15.dv.html; Paraquat: Syngenta's Controversial Herbicide, April 2002, Berne Declaration, Quellenstrase 25, PO Box Ch-8031 Zürich, Switzerland; Poisoned and Silenced: A Study of Pesticide Poisoning in the Plantations, Tenaganita and PAN Asia Pacific.

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to supply their fruits to the CPO mill of the plantation company. These companies have in general a local monopoly position. There are reports of companies exploiting their bargaining power to offer very low prices to smallholders especially when there are no strong collective bodies defending their interests.24 There is anecdotal information that suggests that smallholders operating in areas with various independent CPO mills (i.e. without associated plantations) such as in North Sumatra are significantly better off economically than smallholders linked to a tied relationship with a single company (“locked up”) who owns the CPO mill and who controls the FFB input (volume, prices, quality standards, etc.).

Country specific lessons The above mentioned issues are mainly based on the situation in South East Asia and particularly Malaysia and Indonesia. With 86% of the global production, these two countries have been the focus of the sustainability debate in the palm oil sector. The situation in these two countries is more or less the same. Land right conflicts in Indonesia might occur more often, while the use of paraquat is a typical Malaysian issue. In other countries, with a fast expanding palm oil sector, like Colombia and Papua New Guinea (PNG) the same problems exist, although the significance of each problem may be different. For example, in PNG deforestation is a major issue. Land right conflicts are as well common in PNG. Land is owned by communities with customary decision making processes. The introduction of palm oil puts these customary processes under a lot of pressure, resulting in many conflicts within and between communities.25 On the contrary, in Colombia, forest conversion seems to be less prominent. Here, land right conflicts, forced displacements and labour issues are more prominent, but they can not be seen apart from the context of an armed conflict and narcotraffic.

24 Increasing the sustainability of EU and Dutch commodity trade through more effective policies; Volume two: Commodity profiles, Aidenvironment, commissioned by the Ministry of Housing, Spatial Planning and Environmental Management (VROM), Netherlands, 2006 25 Wakker, E. (Aidenvironment), Greasy Palms - The social and ecological impacts of large-scale oil palm plantation development in Southeast Asia, in collaboration with Sawit Watch Indonesia and Joanna de Rozario, Friends of the Earth UK, London, 2004

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2. Multi-stakeholder Initiatives in the Palm Oil Sector One initiative in the palm oil sector can be considered as a multi-stakeholder initiative with a The major initiative in the palm oil sector that can be considered as a multi-stakeholder initiative with a potential substantial influence on the sustainability of the sector is the Round Table for Sustainable Palm Oil (RSPO).26 Governance and structure RSPO is an association under Article 60 of the Swiss Civil Code. The organisational chart is as follows:

The RSPO considers seven kinds of stakeholders in the Palm Oil chain; all of them are eligible to become ordinary member. In July 2007, 183 ordinary members were divided as follows: • Oil palm growers (41) • Palm oil processors or traders (72) • Consumer goods manufacturers (29) • Retailers (21) • Banks and investors (8) • Environmental or Nature Conservation NGOs (7)

26 The information in this paragraph is collected from the information available on the RSPO website (http://www.rspo.org), viewed in February 2008. This information included the RSPO Statutes, the RSPO By-laws, the RSPO Principles and Criteria for Sustainable Palm Oil Production (October 2007), RSPO Supply Chain Certification Requirements (November 2007) and RSPO Certification Systems (June 2007)

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• Social or Development NGOs (5) Members need to conform to the RSPO Principles & Criteria, the statutes and by-laws. Organisations or individuals who are not actively involved in any of the above seven sectors, but have expressed an interest in the objectives and activities of the RSPO can become affiliate members. RSPO is managed by an Executive Board comprised of sixteen members, designated by the General Assembly for a period of two years. The Executive Board members can be re-elected. The allocation of seats for the various sectors of membership is as follows: Sector Number of seats Sector Number of seats Oil palm growers27 4 Banks/investors 2 Palm oil processors and/or traders

2 Environmental/nature conservation NGOs

2

Consumer manufacturers

2 Social/development NGOs

2

Retailers 2 History In 2001, WWF asked a Dutch consultant to explore the possibilities for a Roundtable on Sustainable Palm Oil. The result was an informal co-operation among different chain actors together with WWF. Two meetings held in 2002 by these organisations, led to the constitution of an Organising Committee. The task of this Committee was to organise the first Roundtable meeting and to prepare the foundation for the organisational and governance structure. The Dutch consultant acted as the Organising Committee's facilitator until April 2004. The inaugural meeting of the Roundtable took place in Malaysia in August 2003 and was attended by 200 participants from 16 countries. The key output from this meeting was the adoption of the Statement of Intent (SOI), a non-legally binding expression of support for the Roundtable process. In April 2004, the "Roundtable on Sustainable Palm Oil (RSPO)," was formally established. The seat of the association is in Zurich, Switzerland, while the secretariat is currently based in Kuala Lumpur, with a liaison office in Indonesia. Content of initiative RSPO's main objectives are to promote the use of sustainable palm oil through cooperation within the supply chain and an open dialogue between its stakeholders. Towards this end, the RSPO is promoting the development of a globally acceptable credible definition of sustainable palm oil production and use, and the implementation of better management practices that comply with this definition. The RSPO encourages members to actively participate in the development of the criteria and undertake practical

27 One representative each for Malaysia, Indonesia, the smallholder sector and the "Rest of the World."

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projects to facilitate implementation of better management practices along the supply chain. Different projects have been set up to make these objectives operational: Development of Principles & Criteria for Sustainable Palm Oil Production The RSPO has developed criteria to establish a credible definition of sustainable palm oil production. In 2004, a Technical Group convened by the Organising Committee designed a framework and process to develop the criteria. The RSPO Principles and Criteria (P&C) were adopted in November 2005 for an initial pilot implementation period of two years and to be reviewed at the end of this period (2007). The objective of the pilot implementation period was to enable field testing of the principles and criteria and associated guidance. Based on the learnings and experiences over this two-year period, the P&C were reviewed by the RSPO Criteria Working Group (CWG) in October 2007. The revised P&C were approved by the RSPO Executive Board and adopted by General Assembly (GA4) in November 2007. National Implementation and Interpretation of the Principles & Criteria This project developed procedures to ensure that the P&C implementation is not just up to expectations of the stakeholders, but congruent or compatible with the norms, laws and values of countries, or sovereign states. Based on these procedures, the National Implementation and Interpretation of the P&C for Indonesia, Malaysia and Papua New Guinea are currently being developed and almost finalised. Smallholder task force To apply the RSPO Principles & Criteria by smallholders seeking for certification of their holdings and produce, additional guidance is necessary. First, because the RSPO P&C were elaborated mainly with large-scale plantations in mind and, secondly, considering the scale of small-holdings, it is unrealistic to expect them to possess the kind of documents and management tools that auditors would normally look for in assessing compliance with the RSPO P&C. Therefore, the RSPO Task Force on Smallholders has been mandated by the Executive Board of the RSPO to carry out consultations to develop special guidance suited for oil palm smallholders. This will lead to a smallholder interpretation of the RSPO standard and the inclusion of group certifications. Verification Working Group No public claims relating to compliance with the RSPO principles and criteria can be made without third party certification and authorisation by RSPO. Third party certification arrangements are needed to evaluate compliance with the RSPO Principles and Criteria, and for supply chain audits to verify compliance with requirements for sustainable palm oil. The RSPO Verification Working Group (VWG) has provided detailed

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recommendations on verification arrangements. The objective of these detailed requirements is to ensure that RSPO assessments are carried out with objectivity and consistency, together with the required levels of technical rigour and stakeholder credibility. The work of the Verification Working Group has resulted in the RSPO certification systems. The current certification systems will be reviewed after two years. Supply chain project Two different supply chain mechanisms have been approved by RSPO. Segregated supply chains (which could be worked out in a mass balance system) and parallel certificate trading (book and claim). The segregation approach involves keeping material from RSPO plantations separate from non RSPO plantations at every stage of production, processing, refining and manufacturing throughout the supply chain. In the book and claim approach, instead of trying to trace RSPO material through the supply chain to the end-user, the ‘RSPO’ element of the oil is traded separately from the oil itself. This is done by issuing a tradable certificate to producers implementing the RSPO criteria, which can then be sold to users wanting to use RSPO for their products. The actual oil enters the normal supply chain and is traded without any claim attached.28 Marketing claims Reliable market claims are essential for RSPO’s longer term credibility and market acceptance of palm oil products. Therefore, the RSPO has set up a working group on market claims. The involvement of stakeholders As stated above, the RSPO considers seven stakeholder groups in the palm oil sector. Each stakeholder group is represented in the General Assembly, the Executive Board of the RSPO and in most of the working groups. Organisations or individuals who are not actively involved in any of the seven sectors can become affiliate members, or participate in different sessions of the working groups and the Round Table Conferences. For the development of the sustainability criteria various public consultation rounds have been organised. The certification scheme Certification standard The RSPO certification scheme has two certification standards: specific requirements for sustainable production of palm oil and requirements for the supply chain. Sustainable palm oil production comprises legal, economically viable, environmentally appropriate and socially beneficial management and operations. Sustainable production can be realised by applying the RSPO Principles and Criteria for Sustainable Palm Oil 28 Personal comment Ronald Hiel (Schuttelaar) on 24 February 2008

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Production and the accompanying indicators and guidance. All relevant RSPO Criteria also apply to CPO mills. These principles and criteria are currently being adapted to national contexts. Supply chain requirements for sustainable palm oil form the chain of custody requirements for fully segregated and mass balance supply mechanisms.29 They are to be used by certification bodies to evaluate traceability through the supply chain of all products produced from RSPO materials only (i.e. 100% RSPO), or a mixture of RSPO and non-RSPO sources. Accreditation of third party certification body Certification bodies must be accredited by national or international accreditation bodies, such that their organisation, systems and procedures conform to ISO Guide 65 and/or ISO Guide 66. The accreditation body itself must be operating in accordance with the requirements of ISO 17011. Several certification bodies are already approved by the Executive Board. Certification process requirements To provide the technical rigour and credibility required for a sector specific approach such as the RSPO Principles and Criteria, the ISO Guide 65 and ISO Guide 66 have been supplemented with a set of certification process requirements. These requirements concern the competences of the assessment team, the assessment process, the gathering of evidence from stakeholders during certification assessment, public availability of information, conflict of interest, mechanisms for complaints and grievances, and control of claims. The maximum period of validity of a certificate is 5 years. A re-assessment of compliance must take place before the end of the 5-year period. During the lifetime of the certificate, monitoring or surveillance assessments to check continued compliance must take place at least annually and have to capture seasonal variation. RSPO Certification audit are probably running within a few months. Concerning the chain of custody requirements, different models are currently being tested. Utz Certified has been selected to coordinate the registration of all trade volumes. Funding of RSPO certification RSPO certification will begin on the basis of direct commercial relationships between the certification body and the auditee.

29 Detailed requirements for the parallel certificate trading (or book and claim) option have been developed by the RSPO endorsed GreenPalm scheme. GreenPalm is the sole endorsed broker for trade in certificates of RSPO palm oil (RSPO Supply Chain Requirements, November 2007)

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Grievance procedure A Grievance Process has been developed to fulfil RSPO's need to address complaints against RSPO members in a manner that reflects the nature, mission and the goals of RSPO. Communication model The core of RSPO’s communication model is the yearly Round Table Conference. Ordinary members, affiliate members and other interested organisations or individuals participate in this conference. During the conference the RSPO’s General Assembly takes place, as well as different working group sessions, various side meetings and the Executive Board meeting. Occasionally, regional RSPO conferences are organised, for example in October 2007 in Brussels to share the important RSPO results with stakeholders at European level and to activate its European members. The Executive Board meets at least once a year. Each working group or RSPO project team organises as many meetings per year as necessary. Another important communication tool is RSPO’s website. It shows relevant publications, documents, minutes and news updates. The yearly publication of the ‘RSPO Annual Communication of Progress Booklet’ provides a formal and high profile opportunity for Member companies and organisations to reflect and share their achievements on sustainable palm oil in a given year. Financial resources Costs of the normal ongoing function of RSPO are financed by membership fees. The membership fees are 2000 Euro per year for ordinary members and 250 Euro for affiliate members. Project costs cannot be covered by regular membership fees. A sponsorship fund has been set up to finance the Round Table Conferences, the working group meetings and projects. The sponsors are interested RSPO members and/or external donors. Each year the financial records of the RSPO are audited by an independent auditor and the results are published on the website. Chain coverage The different actors in the palm oil chain are covered by the certification of sustainable production of palm oil and the chain of custody certification requirements for palm oil traceability. The actual members cover around 40% of global production and trade of palm oil30, although none of them has been certified till today.

30 How the oil palm industry is cooking the climate, Greenpeace, Amsterdam, 2007

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Economic benefits It is not clear yet whether and how a price premium will be attached to sustainable palm oil. Such a premium could benefit the whole supply chain. However, the creation of the Smallholder task group was based on the fear that smallholders are not able to profit from the potential benefits of the RSPO. The outcomes of the Smallholder task group will tackle this problem. Local communities affected by palm oil production will benefit from the RSPO standards as the application of these standards leads to less land and environment related issues. Country and sector specific experiences and lessons As 85% percent of the global palm oil production comes from Indonesia and Malaysia, much attention has been given by the RSPO to these countries. In fact, only few of the palm oil producer members come from outside South East Asia. The influence of the initial participants on the outcomes The initiative for the RSPO came from WWF. This might explain why environmental issues seem to have attracted more attention during the first years of the RSPO. In recent years, significantly more attention is given to social issues, specifically to smallholder and land issues. Ownership The RSPO is mainly a European and Asian driven initiative. Most ordinary and board members come from Europe (predominantly from the Netherlands), Indonesia and Malaysia. The different groups of stakeholders are members of the Executive Board. Next steps The RSPO has formulated several actions for the coming period: • finalise the national implementations of the Principles & Criteria; • finalise the smallholder interpretation and start trial audits of group certifications; • start the certification of sustainable palm oil production sites and mills; • finalise the chain of custody certification process and start its implementation; • study whether and how greenhouse gas emissions criteria can in be included in the

P&C; • inform European consumers about the arrival of RSPO oil (expected in the second

quarter of 2008); • increase the number of producers and traders that are RSPO-members.

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3. Conclusions / Lessons Learned As the Sustainable Palm Oil certification system is not yet operational it is too early to speak of lessons learned based on proven success or failure. Nevertheless, several preliminary conclusions, potential weaknesses and challenges can be identified, and some lessons learned can be drawn. • The RSPO is a true non-governmental multi-stakeholder process, considering the

governance structure and the process in which the RSPO Principles & Criteria (P&C) have been developed. All seven stakeholder groups have actively participated in this process. A broad consensus exists on the current international version of the P&C and certification protocols, but the national interpretations are still subject to review and the results of this review may stir up controversy. This could have been prevented by including relevant actors, or their representatives, at this level (grass roots NGOs, government authorities, etc.) at an earlier stage. Although it is virtually impossible to launch an initiative that involves all actors and covers all issues at a global scale, the decision on who to include at an early stage should also depend on their envisaged role in the implementation. If actors crucial to the actual implementation are not included from the start, they may refuse to participate at a later stage.

• Many relevant stakeholders still remain outside the RSPO: governments

(institutionally excluded from RSPO), NGOs (at grassroots and international level) and the private sector (producers, buyers and financers). Whereas RSPO can lead the way forward, governments will ultimately have to adopt RSPO performance requirements and ensure that all companies in the trade and investment chain adhere to the new standards. Unions are not involved as a stakeholder group, possibly because unions in Indonesia and especially in Malaysia are linked to or controlled by the government or companies. It is not always clear whose interests they defend.

• Compared to agronomic and environmental aspects, the social agenda was

somewhat neglected during the initial stages of the development of the P&C. On the other hand, it can be argued that the chosen lengthy approach needs to deliver certain ‘quick wins’ in order to keep the process going and the actors motivated. Within the complex sustainability challenges facing the sector, the environmental issues seem easier to address than the social ones, which are politically sensitive. As a consequence, additional efforts are now needed to address the social issues in a meaningful way to prevent the RSPO from losing support. This may result in adapting the already validated P&C and certification protocols, which in turn could have a negative impact on its legitimacy and delay implementation.

• Once the smallholder interpretation of the P&C and certification protocols are

validated, independent smallholders will most probably need extra technical and/or financial support to meet the RSPO criteria for certification. At the same time, an active outreach effort is considered necessary to inform smallholders about membership benefits and convince them to participate.

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• Many issues can be resolved by plantation companies at the estate level, but others need to be incorporated within government policy frameworks. RSPO acknowledges this challenge, but has so far done little to address this problem.

• RSPO is perceived to be a certification initiative, but its grievance procedure (for

members) must also be recognised as a crucial tool for demonstrating to stakeholders that their concerns are being addressed. Besides actual certifications issued, these concerns may also be about general performance measured against RSPO objectives and the grievance procedure itself is not necessarily tied to the actual certification procedure. Currently, the procedure is being tested in one major case and has so far resulted in meaningful progress.

• Different certification bodies have been approved that will need to develop tools to

audit against the RSPO P&C. This will probably result in contested certification decisions. Frequent problems may undermine the RSPO’s legitimacy. To prevent this from happening, the RSPO should define auditing procedures, provide standardised tools for certification and/or assure the quality and efficiency of complaints procedures to resolve disputes and develop RSPO jurisprudence.

• The progress made by RSPO may be considered meaningful, but stands in no

balanced relation to the extraordinarily rapid issuance and expansion of oil palm concessions – notably in Indonesia – both by RSPO members and by non-RSPO members. As a consequence, there is a risk that adverse effects can only be addressed through complaints procedures and certification efforts.

• The palm oil sector opted for a more top down, global and (almost) all-inclusive

approach, involving many actors and many, but not all, sustainability issues. Such an approach could enhance the RSPO’s legitimacy and facilitate the implementation process. However, developing and eventually implementing such an approach is a relatively slow process as it implies negotiations at all levels and striking a balance between opposing interests and the sustainability issues at stake. This approach runs the risk of becoming too bureaucratic. It could harm the credibility of the RSPO and may prove not to be very effective (in achieving compliance) or efficient on a local level.

• The time between setting up the RSPO and the implementation of certification was

considerable. This is partly due to the fact that different processes have been undertaken successively, whereas some activities could have been conducted simultaneously.

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4. Comparative Analysis of the Coffee and Palm Oil Chains

The research institutes were asked to provide a comparative analysis of the sectors they studied and to identify additional lessons learned that may serve the new initiatives to be selected by the IDH. For Aidenvironment this concerns the palm oil and coffee sectors. It is important to understand that impediments to sustainability are largely determined by the characteristics of the specific sector and that these set important conditions for the initiatives that have emerged. It is evident that the palm oil and coffee sectors have a multitude of fundamentally different characteristics that will make it difficult to identify a basis for meaningful comparisons. Bottlenecks First, historically coffee has been produced and traded on a much larger scale than palm oil. Coffee has been the second biggest agrocommodity for decades, whereas it is only in the last 20 years that palm oil has developed into a booming business. The demand for coffee has been relatively stable for several decades, but palm oil production is expanding rapidly. Second, the direct impact of coffee on poverty levels in developing countries is much greater than that of palm oil. More than 25 million people in nearly 80 countries depend on coffee production. Palm oil production, on the other hand, is mainly concentrated in Malaysia and Indonesia, with just a few million people involved. Third, concentration levels in the sector are also different. Around 70% of the coffee is produced by smallholders, while only a handful of traders and roasters dominate the sector. Within the palm oil value chain, 50 companies produce about 75% of the world production, while traders and processors are slightly less concentrated than in the coffee chain. Fourth, coffee is a consumer product, whereas palm oil is used in business-to-business commerce as an ingredient in other products, which means that coffee is a much more visible commodity to consumers. Finally, coffee is a relatively heterogeneous product. Apart from mainstream coffee, many niches exist in the consumer market, with different qualities, tastes and origins. Palm oil is (still) a bulk product without any niche markets. Sustainability initiatives Sector characteristics might have resulted in the following differences between the multi-stakeholder initiatives. First, sustainability has been an issue in the coffee sector for several decades. The first sustainability initiatives in this sector had no precedent and have developed through a process of ‘learning-by-doing’. In the palm oil sector sustainability became an issue only a few years ago. Drawing lessons from initiatives in other commodities, the RSPO therefore starts from a totally different basis. Second, within the coffee sector social and economic issues seem to have been a priority for the first sustainability initiatives (fair wages, solidarity), while the palm oil sector has been approached from a more environmentally driven standpoint. Third, the sustainability issues in the coffee sector have been addressed from different angles, which has

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resulted in a very fragmented pallet of mainly sustainability initiatives focusing on niche markets, with various degrees of stakeholder involvement. Initiatives targeting the mainstream coffee have emerged only recently. In the palm oil sector only one serious initiative has been set up that directly targets the mainstream market, with the objective of involving all relevant stakeholders and eventually covering the whole sector. Looking at the sustainability initiatives in the coffee and palm oil sector, we can identify a few similarities. First, all identified initiatives more or less ignore the role of public policy and no governmental institutions are involved as primary stakeholders. Second, all initiatives face a potential tension between legitimacy and credibility (in terms of effectiveness of compliance and efficiency). Those approaches that do not include all stakeholders may relatively rapidly gain the required credibility regarding the sustainability issues they target (for instance Fairtrade). However, they do not have the sector-wide support needed for scaling up. Opening up to other stakeholders may involve having to renegotiate the principles and criteria which underpin their legitimacy. Initiatives that include all stakeholders from the start earn more legitimacy, but do need considerable time and resources before they can deliver results, especially if they want to include more sustainability issues. This can be seen within the 4c and RSPO initiatives. Despite the different degrees of progress and success, the overall impact of the initiatives in both sectors has so far been limited. It is still too early to determine which approach will have most impact on sustainability.