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July 23 — Foodmakers taking out trans fat in favor of more heart-heathy options could end up with a hidden ingredient: carbon.
The main sources of trans fat in American diets are partially hydrogenated oils, which were the target of a recent ban from the U.S. Food and Drug Administration. The ban is expected to accelerate a trend already underway toward using palm oil as a low-cost, trans-fat-free alternative.
Health impacts aside, the $50-billion-a-year commodity could have serious consequences for climate change, depending on how the palm oil is produced. Today, just one-fifth of the world's palm oil is produced sustainably.
“It’s time for the palm oil industry to look at its legacy,” said Scott Poynton, an Australian forester and founder of the Forest Trust, a global nonprofit that helps companies find a more responsible way to source forest-based commodities. He said “it has a positive legacy in that it’s created wealth for people who live in poverty” in Indonesia and Malaysia, where the world’s palm oil is predominately produced.
“But it’s got this negative environmental legacy, and a negative social legacy too,” Poynton told Bloomberg BNA. If these issues can be sorted out, then “the industry could look cleaner,” he said.
Palm oil, which comes from the fruit or seeds of oil palm trees, appears in an estimated half of all packaged products sold at supermarkets.
Unlike most vegetable oils, it’s solid at room temperature. That helps it give food the right texture, especially baked goods and sweets. It can also be used as a frying oil.
And it’s not just for eating. Palm oil derivatives are used in a range of personal care products, from shampoo and soap to toothpaste and lipstick, or it can be burned as a biofuel.
Another reason palm oil, now the most widely used vegetable oil in the world, has emerged as a favorite is that it’s a high-yielding crop, meaning it needs less than half the land required by other crops to produce the same amount of oil.
But with palm oil production often comes the clearing of forests and the destruction of peat lands—both of which drive up emissions of carbon dioxide and other heat-trapping gases as plants rot or burn. Tropical deforestation, to which expanding palm oil production contributes substantially, accounts for about 10 percent of annual carbon dioxide emissions, according to the Union of Concerned Scientists.
When previously untouched forests are cleared to make room for oil palm plantations, it can also threaten wildlife and force indigenous populations off their land. Human rights issues are a concern for plantation workers as well, as a Bloomberg Businessweek investigation recently showed.
Some have called for cutting down on the use of palm oil—or ditching it altogether—as a way to stem these problems, but not everyone agrees that is the answer.
“Palm oil is here to stay,” Lael Goodman, a tropical forest and climate analyst at the Union of Concerned Scientists, told Bloomberg BNA. “Whether or not people are thinking, ‘maybe we should switch to other oils,’ that’s just not going to happen because it is so high-yielding.”
“It is a very good use of land,” as long as it doesn’t involve environmental destruction, she added.
As incomes rise and more people eat processed food, global demand for palm oil is likely to grow from slightly more than 25 million tons produced at the turn of this century to 77 million tons in 2050, the United Nations Food and Agriculture Organization predicts.
The world’s biggest palm oil consumers are Indonesia, where domestic consumption has risen fast, as well as India, China and the European Union. In the U.S., food use of palm oil has climbed 480 percent from 2000 to today, according to Department of Agriculture data.
“Ever since…the FDA signaled back in 1999 that they weren’t looking at partially hydrogenated vegetable oils and trans fat in as positive a light as they used to, companies have seen the writing on the wall and have started switching over,” Goodman said.
So palm oil is “already in most Americans’ everyday lives, but it will be even more pervasive” with the FDA ban, she said.
The share of palm oil that is produced responsibly is also expected to grow as companies work toward new sustainability pledges that they have made, many of which have deadlines between 2015 and 2020.
“I have no doubt we will see more sustainable palm oil on the market starting in 2015 and moving forward resulting from increased demand, as evidenced by the deadlines that are in those commitments,” said Larysa Metanchuk, an analyst at Sustainalytics, a leading provider of environmental, social and governance (ESG) research for investors and financial institutions.
Three-quarters of the 20 biggest publicly traded producers, refiners and traders have pledged to have all of the large-scale oil palm plantations under their management certified as sustainable by 2020, according to an analysis Sustainalytics performed for Bloomberg BNA. Today, just over half of those companies certify some portion of their plantations.
The analysis excluded smallholders and companies that operate plantations of 100,000 hectares or less.
The last few years have marked unprecedented change in the industry as more consumer-facing companies—especially those in the packaged food and personal care sectors such as Nestlé S.A. and Unilever Plc—make commitments to only buy palm oil that is produced sustainably. Kellogg Co., Mars Inc. and others want their palm oil supply chains to be fully traceable too.
Some of these pledges have come amid pressure from environmental activists and consumers.
Swiss food and beverage giant Nestlé, for example, was the target of a Greenpeace campaign in 2009 that urged the company to “give rainforests a break,” in a nod to the slogan for its chocolate-covered Kit Kat bars, which contain palm oil. Not long after, Nestlé made a commitment—the first of its kind by a food company—that all of its products, not just those that contain palm oil, would be deforestation-free.
As of the end of 2014, about one-third of Nestlé’s palm oil was responsibly sourced, the company says on its website.
Wilmar International Ltd., the world’s largest palm oil trader, also made waves when it vowed in 2013 to end deforestation, peatland destruction and exploitation across its global supply chain. Not long afterwards, Wilmar’s competitors Cargill Inc. and Golden Agri-Resources Ltd. issued no-deforestation pledges of their own.
Wilmar’s commitment came after months of negotiations with the founders of Forest Heroes, a group looking to protect the world’s forests, and the Forest Trust.
A key factor in making the Wilmar pledge happen was ensuring that Unilever, one of the world’s biggest palm oil buyers, got on board.
“We see sustainability as a journey and in order for policies like ours to have a transformational impact on the industry, many other stakeholders must also be involved,” Jeremy Goon, Wilmar’s chief sustainability officer, said in an e-mail from Singapore.
If big buyers of palm oil, like Unilever and Nestlé, don’t want sustainable oil or don’t require it, then traders, processors and growers “will have far less of an incentive to change and improve,” Goon said. Since not all of the palm oil Wilmar processes comes from plantations it owns, he said it is also important for the company’s third-party suppliers to understand that sustainability has to be “the new norm.”
Banks play a role, too, in deciding which growers to lend money to, Goon said.
“So many stakeholders play a vital part in this sustainable oil palm equation,” he told Bloomberg BNA. “It’s a complex one and if it were just Wilmar to have this commitment, it just would not work.”
Other corporate pledges have come after lobbying from investors.
Kellogg, for example, agreed to buy palm oil only from suppliers who can prove it was produced responsibly after Green Century Capital Management filed a shareholder resolution on the subject in 2014.
The cereal maker, which uses palm oil in some of its other snack brands like Eggo waffles and Pop-Tarts, has been working on sourcing the oil in a more sustainable way since 2009.
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“Kellogg is committed to working with its global palm oil suppliers to source fully traceable palm oil, produced in a manner that’s environmentally responsible, socially beneficial, and economically viable,” company spokeswoman Kris Charles said in a statement.
Investors have also secured commitments from Starbucks Corp., J. M. Smucker Co. and Safeway Inc., among others.
Those still without sustainability pledges, or with weak pledges, tend to fall into two categories: fast food, including Domino’s Pizza Inc. and Wendy’s Co., or store brand products, such as those from Target and CVS, a Union of Concerned Scientists scorecard showed.
Getting a better handle on palm oil supply chains will be important as companies try to implement their sustainability pledges, many of which include traceability as a key goal.
“The supply chain as it is now has an hourglass shape,” Jeff Conant, who directs Friends of the Earth's international forests program, said in an interview. “At one end, you have tens of thousands of small growers, who are selling to about a dozen global traders, and then they’re supplying thousands of consumer-facing companies.”
Conant said Friends of the Earth is focusing its advocacy on traders, “the dip in the hourglass,” because if they can trace their palm oil back to the plantation level, “then we can know where it all comes from.”
So far, most companies have only been able to trace their palm oil down to the mills where fresh fruit is processed before being refined into oil. In January, Wilmar became the first agricultural commodities trader ever to publicly list the nearly 900 palm oil mills it buys from—information usually kept secret.
Dunkin’ Brands—the parent company of Dunkin’ Donuts, which uses palm oil for frying, and Baskin-Robbins—has also spent time mapping out its global supply chain. So far it’s 95 percent mapped, according to its latest corporate sustainability report, published in May.
“Dunkin’ Brands is a relatively minor user of palm oil,” the company said in a statement. “We recognize, however, that sourcing even limited amounts of palm oil irresponsibly can contribute to climate change, loss of natural habitats for endangered species and other environmental and social concerns including the violation of human rights.”
For that reason, the company has set a goal to source palm oil that is 100 percent fully traceable to the plantation level, certified as sustainable and compliant with Dunkin’s own standards by the end of 2016.
Palm oil disclosure thus far has been voluntary. Friends of the Earth wants mandatory reporting guidelines, perhaps along the lines of the U.S. Securities and Exchange Commission’s disclosure rules for conflict minerals.
Ideally, Conant says, they would be broader: corporate reporting of all environmental, social and governance risks, including those related to palm oil. Another possible model is the Lacey Act—a long-standing law that prevents U.S. imports of illegally harvested timber—though he admits it’s a long-shot.
“It’s one thing to trace timber from an illegally harvested tree, where you can actually put a stamp on the tree at the time it’s cut down and trace that to a foreign port,” Conant said. “It’s a whole other thing to trace a very small percentage of the ingredients of a chocolate bar.”
Right now, 20 percent of the world’s palm oil is certified as sustainable by the Roundtable on Sustainable Palm Oil (RSPO).
The roundtable was established in 2004 to bring together palm oil growers, refiners, traders, retailers and other stakeholders like financial institutions to develop and implement global standards for sustainable palm oil.
Its standards have been criticized, however, for not fully protecting forests and peatlands and for their seemingly lax enforcement. Environmental groups account for much of that criticism, but it has also come from some of the world’s largest and most recognizable consumer brands.
At the beginning of June, PepsiCo Inc., Procter & Gamble Co., Wal-Mart Stores Inc. and a handful of other corporations joined with institutional investors representing $5 trillion in assets under management to call on RSPO to strengthen its standards.
In fact, some companies, including chocolate makers Mars and the Hershey Co., have already started to go above and beyond RSPO’s standards.
When Hershey joined the roundtable in 2011, it set a goal to source 100 percent mass-balance palm oil—in which sustainable palm oil from certified sources is mixed with conventional palm oil—by 2015. After achieving that goal more than a year ahead of schedule, “we realized there was more we could do,” Eric Boyle, Hershey’s senior sourcing manager, said in an e-mail.
“We felt it was important to go beyond RSPO-certified palm oil and achieve a truly responsible and sustainable palm oil supply chain,” he said.
So, with the help of the Forest Trust, the Pennsylvania-based company started working with its suppliers to reach fully traceable and sustainably sourced palm oil. Hershey then issued a new sourcing policy detailing how it would get there.
“We know that transparency is important for our stakeholders, who want to understand where our ingredients come from and how they are sourced,” Boyle said.
Still, with more than 2,000 members, RSPO remains the frontrunner internationally.
The roundtable’s certified palm oil comes in three forms. First, there’s segregated sustainable palm oil, which is kept separate from ordinary palm oil throughout the entire supply chain.
Segregation can be complicated and expensive. So that’s why mixed palm oil, like Hershey uses, is considered the next best option.
The final option—representing more than half of RSPO-certified sustainable palm oil sales—is for manufacturers and retailers to buy a GreenPalm certificate to offset each ton of palm oil they use, with the proceeds supporting certified growers.
Between the three, total sales have grown tenfold from 2008 to 2014, according to RSPO data. Much of it goes to the EU, where trans fat limits are already in place in many countries and where RSPO is aiming for 100 percent certified palm oil use by 2020.
Even with that explosive sales growth, there’s been a mismatch between supply and demand for sustainable palm oil.
Between 2009 and 2013, physical uptake of RSPO’s certified palm oil averaged just 14.5 percent, indicating most of the supply was still waiting for a buyer. If GreenPalm certificates are added in, combined uptake in 2013 reached slightly more than 50 percent, according to RSPO.
That supply-demand disparity is putting downward pressure on price premiums received by certified growers for the production of sustainable palm oil, according to a 2012 study from the World Wildlife Fund (WWF) on the costs and benefits of RSPO certification.
“Price obviously is an issue,” Danielle Morley, who directs RSPO’s European outreach efforts, told Bloomberg BNA, noting that the average price premium for GreenPalm has come down “massively.”
The cost of the certificates—which is separate from the cost of palm oil itself and is meant to reimburse certified producers for their additional costs—started at a high point of about $44.50 per ton on average in 2008 and reached a mere $1.85 per ton in 2014, according to the roundtable’s data. Palm kernel oil certificate premiums have followed a different pattern, dropping at first and then rising significantly since 2012.
Physical supplies of certified palm oil have a price premium of their own compared to conventional palm oil. For mass-balance palm oil, the premium can range from $10 to $25 per ton, and, for segregated palm oil, it can go as high as $50 a ton, the WWF study found.
The study said the benefits of certifying palm oil as sustainable go beyond price, however, due to efficiencies gained in the process and other indirect benefits, such as reducing social conflicts that can cause costly delays.
Morley thinks the limited uptake of RSPO’s physical palm oil has more to do with “the complexity of the supply chain and the fact that palm oil is used in so many products.”
“It’s matching supply with demand—that seems to be one of the main challenges,” she said.
There are signs sustainable palm oil supply and demand may come into balance soon. RSPO reported sales of physical sustainable palm oil in the first half of 2014 shot up 65 percent over the year before, while supply increased 29 percent—the first time demand rose faster than supply.
This is good news for certified growers, who could get a better return on investment for their sustainable practices, the roundtable says. It has yet to translate into a valuation premium for palm oil companies like New Britain Palm Oil and Golden Agri-Resources that are considered more sustainable than their peers, according to a Bloomberg Intelligence analysis.
When it comes to changing the palm oil industry, some follow an all-or-nothing approach.
Norway’s government pension fund, which in 2012 and 2013 divested from 27 companies that were considered to produce palm oil unsustainably, is one of them.
So is French ecology minister Ségolène Royal, who suggested in an interview on French television channel Canal+ in June that consumers should stop eating the chocolate hazelnut spread Nutella because of environmental concerns associated with palm oil.
But groups like the Forest Trust were quick to point out that Ferrero SpA, the Italian company that makes Nutella, is actually considered a leader in the industry. The comment also prompted a backlash from Royal’s Italian counterpart. She later tweeted an apology.
Ultimately, the Forest Trust said shunning Nutella and other palm-oil-containing products is “the wrong approach.”
“A boycott risks rerouting palm oil sales to less regulated markets, or worse, crashing local economies and leading to desperate survival activities that are neither good for the forests nor the people who need to be making a sustainable livelihood alongside them,” TFT’s Poynton said in a note at the time.
“At TFT, we have found that it is engagement not isolation that will stop the chainsaws, protect the orang-utans and help lift forest-based communities out of poverty,” he added.
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