On Nov 21, 2015, Malaysian Prime Minister Dato’ Sri Najib Abdul Razak and Indonesian President Joko Widodo agreed to establish the Council of Palm Oil Producing Countries (CPOPC). By joining forces, both countries have an opportunity to exert their dominance on the market, and to influence the harmonisation of sustainability standards as well as the competitiveness of palm oil.

The palm oil industry has withstood unwarranted initiatives over the last few years. These actions have included legislative proposals tabled in major markets, as well as anti-palm oil campaigns championed by biased NGOs and economic operators.

All the while, the Indonesian and Malaysian governments, as well as their industry associations, have acted independently to limit restrictions on palm oil. They have also worked to sway public perception with reasoned debate regarding the industry.

The assaults on the industry by several manufacturers and retailers, particularly in France and Belgium, have included the practice of affixing ‘no palm oil’ or ‘palm oil free’ labels on certain products. The campaigns have been waged both for alleged nutritional and environmental reasons. Colour-coded nutrition labelling schemes have also been implemented. In the biofuels sector, palm oil faces discrimination in the EU and the US.

In the EU, the Fuel Quality Directive and the Renewable Energy Directive provide for so-called ‘sustainability criteria’ that require biofuels to result in 35% greenhouse gas (GHG) emissions savings. These also state that the land used to produce biofuels must possess certain characteristics, in particular, that it does not have high biodiversity value and/or high carbon stock.

Biofuels that do not conform to these requirements may still be marketed in the EU, but are not eligible for demonstrating compliance with the relevant emissions reduction targets, or for financial support.

In the US, the Renewable Fuel Standard requires ‘renewable’ fuel to be blended into transportation fuels (for motor vehicles as well as non-road, locomotive and marine engines) in increasing amounts each year. Criteria for the ‘renewability’ of biofuels include the requirements that they produce at least 20% less lifecycle GHG emissions than their fossil fuel counterparts.

In the EU and the US, the relevant authorities have determined that palm-based biofuel does not meet the criteria for ‘sustainability’ and ‘renewability’. Additional review and consultation by the Indonesian and Malaysian Governments have been unable to result in improved conditions for access to both markets.

Sustainability standards

Outside of regulatory initiatives designed to, or resulting in, harm to the palm oil industry, significant efforts have been made by NGOs to affect public opinion regarding palm oil. Largely ignoring economic realities and practical difficulties, NGOs have launched generalised campaigns condemning palm oil producers for alleged inappropriate industry practices.

To combat such accusations, many private businesses have signed ‘no deforestation’ agreements, as well as supported the development of voluntary or mandatory national and international sustainability standards and certification schemes for palm oil.

These schemes have become increasingly popular as a means of encouraging (or enforcing) the sustainable production of palm oil, but have also created confusion and higher costs in the process of compliance.

One of the schemes most commonly referred to is the voluntary certification scheme by the Roundtable on Sustainable Palm Oil. In spite of its widespread use, the scheme appears particularly burdensome for producers, inter alia because the ‘Principles’ and ‘Criteria’ on which it is based are complex and change often.

Indonesia and Malaysia have since come up with national standards and certification schemes: the Indonesian Sustainable Palm Oil (ISPO) and the Malaysian Sustainable Palm Oil (MSPO) standards.

• The ISPO is a mandatory standard designed to ensure that all Indonesian palm oil producers (and not just those exporting to foreign markets) conform to sustainable production practices.

• The MSPO, initially launched as a voluntary scheme, is intended to become mandatory in the future.

The implementation of such standards has resulted in a noticeable improvement of the public perception of the industry, but has also brought about a situation of fragmented rules and uncertainty among producers.

Potential of the CPOPC

Although many Malaysian and Indonesian palm oil companies compete against one another in the international market, the common objective of ensuring that there is fair opportunity for palm oil, regardless of its origin, remains a high priority for them.

Where previously the Indonesian and Malaysian governments, as well as their respective industry associations, would separately invest their resources to pursue such objective, the establishment of the CPOPC provides significant increases to efficiency and leverage.

The CPOPC allows the two governments to pool resources and more effectively circulate accurate information to the public regarding the palm oil industry as a response to negative campaigns maintained by NGOs. Indeed, compared to other vegetable oil sources (maize, soybean, sunflower seed and rapeseed), the oil palm produces higher yields using less land and requiring fewer chemicals such as fertilisers and pesticides.

In addition, regulators, producers and traders have developed standards and adopted measures to help shift palm oil production to lands that are already degraded and turn a rapidly growing industry into a sustainable development model. A joint effort by Indonesia and Malaysia will surely result in a high ‘return on investment’ on external communication expenses, legal analysis and socio-economic engagement.

Indonesia and Malaysia are the two biggest palm oil-producing countries, together accounting for 85% of global output. As major representatives, they have an opportunity and, indeed, a duty to combine forces and jointly lobby against misleading legislative proposals or private initiatives, such as ‘traffic-light’ and ‘free-from’ labelling.

The CPOPC could also make efforts to secure ‘sustainable’ and ‘renewable’ status for Indonesian and Malaysian palm-based biofuel in the EU and the US.

Lastly, given their leverage, it should be for Indonesia and Malaysia to define the applicable sustainability standards for palm oil. They have at heart the destiny of this industry, the sustainability of their economic, industrial and employment practices, and the well-being of their forests and environmental assets.

At the very least, Indonesia and Malaysia could together propose an ASEAN Palm Oil Sustainability Standard, and work to grow such a regional standard into the internationally accepted sustainability standard for palm oil.

FratiniVergano – European Lawyers

The Malaysia Global Business Forum holds several industry level events each year on the issue of sustainability and food security, read more about the next event and how you could attend for free. The next Business Networking Lunch will also be focused on the new technologies that are emerging in the Palm Oil sector.