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A Tale of Two Companies (Or “The Paths of Light and Darkness”)

Hundreds of consumer-facing companies have pledged to purge deforestation from their supply chains – often by only buying products that are certified as being sustainably grown. But what happens when a certified company gets caught cheating? In this case, quite a lot.

Shares in Sustainable Palm Oil Companies Outperform Those of Bad Actors by 25%

Steve Zwick

For decades, palm oil companies got big by being bad – specifically, by chopping forests to make way for oil palm plantations. The Roundtable on Sustainable Palm Oil (RSPO) was created in 2004 to change that, and there’s mounting evidence it may be working. New research of RSPO members outperforms shares of non-members by 25 percent, just as a new index of RSPO members launches.

31 May 2019 | Deforestation consistently generates more than 12 percent of all man-emitted greenhouse gasses, and sometimes much more, as we grind forests into pulp or chop them to meet our ravenous appetites for soy, beef, leather, and palm oil. Environmental NGOs have long aimed to fix that in part by making bad companies suffer for their actions and rewarding good actors.

That seems to be paying off, according to new analysis published today by the Climate Advisers, an environmental consultancy, in support of the Climate Advisers Better Palm Oil Index (Ticker: CABPLM), which is a new stock index launched together with S-Network Global Indexes.

The index is comprised only of companies that belong to the Roundtable on Sustainable Palm Oil (RSPO) and meet specific market capitalization and other requirements. The research shows shares of companies in the index have outperformed companies that aren’t RSPO members by nearly 25 percent since the end of 2012.

The Index

The RSPO has more than 3,500 members, including household names like Boots, CVS, and Aldi, but the index is designed to focus on major producers. As a result, it only includes publicly-traded agricultural companies that derive more than 20 percent of their revenue from activities directly related to palm oil and that have a market capitalization of at least $25 million and a float percentage of at least 10 percent.

It is comprised of 18 of publicly-traded companies, and is rebalanced quarterly.

The Performance

Climate Advisers conducted a composite performance simulation of palm oil companies from December 2012 to April 2019, and found that shares of RSPO member companies outperformed an index of all companies active in the palm oil sector by 4.6 percentage points and those that were not RSPO members by 24.7 percentage points.

The Limits of RSPO Membership as a Benchmark

The RSPO is a membership-based organization that was formed by a consortium of NGOs and industry groups in 2004 to promote sustainable palm oil production. It sets standards and certifies individual plantations that meet social and environmental criteria as RSPO Certified Sustainable Palm Oil (CSPO). Today, roughly 19 percent of all palm oil is RSPO certified, with most of it being shipped to Europe and the United States.

Being a member, however, doesn’t mean that all of a company’s palm oil is certified, because RSPO certifies individual plantations and not entire supply chains.

“While the RSPO has received some criticism for not adopting stringent enough sustainability guidelines in certain areas, there has been substantive progress in the right direction, with many members adopting No Deforestation, No Peat, No Exploitation (NDPE) policies in order to align with the RSPO’s guidelines,” says Matt Piotrowski, a senior analyst with Climate Advisers.

He also concedes that, while correlation is not causation, good management and sustainability increasingly go hand-in-hand.

“Other factors, such as market cap, good management, and a wider customer base do indeed play a role in stronger financial returns, but companies that have taken measures in transparency and reducing deforestation risks have incorporated business practices that help them perform well financially,” he says. “The factors all build off of each other. Managing risk on their supply chains, through following RSPO principles, is positive for both returns and management.”

Why Does Palm Oil Matter?

Palm oil is used in everything from soaps and snacks to biofuel, but roughly 60 percent of it comes at the expense of forests, which is why it’s so important for companies to publicly disclose the progress they make towards keeping their promises to change their business practices. In 2018, the Forest Trends Supply Change initiative identified 447 companies that have made 764 individual pledges to reduce their impact on forests, and it found that companies that belong to organizations like the RSPO are more transparent that companies that don’t.

Who Invests in Palm Oil?

Investors are increasingly under pressure to avoid putting their money into companies that cause deforestation, and leading US lawmakers recently began pressurizing investors there to pull their money from companies that deforest.

Analysis by Chain Reaction Research, however, shows that Southeast Asian banks provide 66 percent of the loans outstanding to palm oil companies. Specifically, Indonesian banks provide 33 percent, Malaysian banks provide 22 percent, and Singaporean banks provided 12 percent of $11.4 billion in outstanding loans, or $7.6 billion total.

Steve Zwick is Managing Editor of Ecosystem Marketplace and produces the Bionic Planet podcast. Before joining Ecosystem Marketplace, he covered European business for Time Magazine and Fortune Magazine and produced the award-winning program Money Talks on Deutsche Welle Radio in Bonn, Germany.

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