The palm oil sector and financial institutions have long been linked. In 2011, 50 of the world’s largest investor groups backed the Principles for Responsible Investment’s palm oil investor working group, which supports engagement to improve sustainable practices.
However, in today’s increasingly stringent regulatory environment, FIs looking to buy into palm oil need to show more than their potential for profit. Non-financial reporting and environment, social and governance (ESG) commitments mean FIs need to be able to demonstrate their sustainable impact in concrete terms.
What is of concern is how many global financial institutions continue to be exposed to deforestation, conversion and human rights risks through their portfolios by financing corporate buyers of palm oil that are lagging behind on their sustainability commitments.
Current statistics by WWF show that, in the period from January 2016 to December 2021, financial institutions provided a total of US$4.4 trillion to 239 entities who are also buyers of palm oil, yet another report highlights that only a quarter of the members of the Glasgow Financial Alliance for Net Zero (GFANZ), a coalition of leading FIs committed to accelerating the net-zero transition, have at least one deforestation policy for a high risk commodity.
Profit and sustainability as perfect partners
The industry is today at a juncture where climate finance requires a complete transformation, but therein lies the opportunity. The agriculture sector needs to see a 26-fold increase in annual funding to achieve its goals in line with the Paris Agreement, according to a Climate Policy Initiative study that preliminarily shows that the sector contributed about 13 to 21 per cent of global greenhouse gas emissions from 2013 to 2020. New sources of capital are therefore needed.
The positive thing to note is that the returns-to-investment ratio on such investments is estimated at 15 to 1 for society and businesses, according to the same study. In Indonesia, the Ministry of Foreign Affairs has estimated that palm oil’s success has alleviated poverty and improved livelihoods for over two million of the nation’s smallholders, creating job opportunities for 16.2 million people.
In these terms, it is clear that the sustainable transition of agriculture represents an area where investments can not only be profitable, but also impactful for improving livelihoods and protecting the environment.
Capital for smallholders
RSPO also believes that climate finance should start with smallholders, a view supported by many in the industry. Today, 40 per cent of the world’s total palm cultivation areas are managed by smallholders, so their influence on the sector’s sustainable transition is indispensable.
However, smallholders face significant challenges when it comes to accessing funding to maintain their palm oil plantations sustainable. Securing finance can be hard for smallholders who need support with legal documentation and land certificates to provide as collateral. They also need resources to invest in green technologies that can drive sustainable impacts.
For example, much of the credit for smallholders can only be used as working capital, and not for replanting. Therefore, allowing funds for replanting would enable smallholders to introduce more productive varieties that are more resilient to climate impacts, supporting their climate and sustainability goals.
As a next step, there is a need to identify entry points to direct climate finance into the palm oil sector and linking FIs with smallholders and small- and medium-sized enterprises (SMEs). This is highlighted in a World Bank report, which also underlines the need for capacity building and technical assistance provision for lenders and borrowers.
RSPO is ready to work together with FIs to identify these entry points and help secure sources of credit so that more smallholders can get access to the certified sustainable markets that provide the highest revenues. More financing can lead to better agricultural practices, which can in turn lead to higher yield and an improved capacity to demonstrate compliance.
RSPO held its annual roundtable conference in November 2023. It brought together key players in the climate finance space to look into how to enhance collaboration with FIs in the palm oil value chain. Image: Samantha Ho / Eco-Business
Helping the financial sector close its data gaps
To know where to invest, however, FIs will need better access to data. Palm oil stakeholders now have the data and insights that FIs need to make more sustainable, and profitable, investment decisions in the sector.
RSPO is well placed to facilitate access to such data through an end-to-end certification, trade and traceability platform, being developed in response to tightening regulations, that will help members with due diligence. The platform will enable more robust data gathering on palm oil supply chains, which can help fill data gaps for FIs in their reporting.
RSPO can also help members and stakeholders meet the definitions and standards needed to qualify for green bonds and other forms of climate finance. Investment from FIs can help build better infrastructure in remote regions. RSPO’s certification process enables its members to comply with new due diligence, green investment and reporting requirements, and at the same time, provides an ESG metric for FIs providing climate finance to the smallholders.
FIs have always played an irreplaceable role in the palm sector and can power the sector’s sustainable transition by providing finance. However, more collaboration is needed to better define a roadmap for efficient climate finance, and for understanding where climate finance can have the most impact and be the most scalable.
We observe with optimism that the financial industry is headed in this direction. Just recently, CIMB, one of the largest financial institutions in the Asean region, became the first bank globally to announce a science-based net-zero decarbonisation pathway for the palm oil sector. These developments are signaling a new era in climate finance within the palm oil sector.
Collaboration between FIs and the palm oil sector will mean more data, more verification, more credibility, and more impact for sustainability. By sharing data on investment impacts and pooling our resources with FIs in the region, as well as downstream palm oil actors, we will be able to ensure that palm oil’s sustainable transition can benefit everyone.
In short, FIs and stakeholders in the palm oil sector have a strong incentive to collaborate, given the opportunities available. There are mutually assured benefits for palm oil stakeholders and FIs to work more closely together, and a win-win situation for both sides can be created in the pursuit of a greener sector.
Joseph D’Cruz is the CEO of the Roundtable on Sustainable Palm Oil.
