22/07/2024 (The Edge Malaysia) - The environmental, social and governance (ESG) movement is gathering steam, but how much of it is real, and how much is hot air? Across industries, transparent and accountable ESG reporting is crucial to ensure that companies are on the right track to improve their environmental and social performance, strengthen governance and earn the trust of stakeholders. However, the lack of standardisation and challenges in quantifying impact have made the evaluation of ESG performance a difficult task.

Norges Bank Investment Management, which manages Norway’s US$1.6 trillion sovereign wealth fund, notes: “[ESG rating] providers use a variety of data sources including companies’ own sustainability reporting and third-party data, but often estimate data points or use industry averages when data is unavailable. Reliability of data inputs can also be an issue, given the infrequent assurance of sustainability reporting.”

In response to these challenges and to shed palm oil’s bad boy image, the Malaysian government took a proactive stance. With input from the industry’s stakeholders, the government developed a deforestation-free sustainability benchmark — the Malaysian Sustainable Palm Oil (MSPO) certification scheme.

Launched in 2015 and made mandatory on Jan 1, 2020, this certification holds industry players accountable for their environmental footprint, labour practices and impact on local communities, ultimately strengthening trust and credibility with key stakeholders, including investors, consumers and regulators. MSPO certification is not a one-off achievement. Subject to four surveillance audits, the certificate is valid for only five years and entities seeking continued recognition of their sustainability efforts must undergo recertification.

MSPO standards are reviewed every five years. In 2022, the standards were revised with improved sustainability requirements in line with the United Nations’ Sustainable Development Goals. It incorporates requirements for Supply Chain Certification Standard (SCCS), Social Impact Assessment (SIA), High Conservation Value (HCV) and Greenhouse Gas (GHG) calculations, among others. It also demands ethical conduct and anti-bribery practices. Should oil palm planters and millers fail to comply with the scheme, they will be penalised or have their licence suspended or revoked.

Assessment of the MSPO standards by experts such as palm oil and rubber certification expert Pierre Bois d’Enghien highlight the robust requirements, along with mandatory reporting and auditing procedures. The MSPO sets a higher bar for labour practices than the European Union Deforestation Regulation (EUDR). Additionally, it prohibits deforestation starting in 2019, a year ahead of the EU’s cut-off date. During a recent webinar organised by the Malaysian Palm Oil Council (MPOC), d’Enghien commended the scheme, saying: “The MSPO is by any standards a world-class standard for agriculture.”

Building credibility through transparency

The compulsory MSPO certification aside, palm oil companies can also refer to other standards and regulations to ensure they are on the right track when it comes to their ESG performance and risk exposure. There are frameworks such as the widely recognised Global Reporting Initiative (GRI), which provides a set of guidelines for sustainability reporting covering universal, sector and topic standards. There is also the Task Force on Climate-related Financial Disclosures (TCFD), which has been incorporated into the International Financial Reporting Standards (IFRS) Foundation’s IFRS S1 and IFRS S2 requirements. Additionally, companies may refer to the International Labour Organization’s 11 indicators of forced labour.

The palm oil industry also faces environmental compliance regulations enforced by the Department of Environment, Sabah Environment Protection Department and the Natural Resources and Environment Board of Sarawak. Laws like the Environmental Quality Act 1974 require industry players to continuously monitor, control and report their emissions. For instance, Regulation 8 of the Environmental Quality (Clean Air) Regulations 2014 stipulates that should a company’s air pollution control system malfunction, its officials must notify the DoE’s director-general within an hour. Failure to do so can result in legal charges.

Furthermore, palm oil companies listed on Bursa Malaysia have to meet the regulator’s enhanced sustainability reporting requirements. For instance, listed issuers need to disclose common sustainability matters, which are anti-corruption, community or society, diversity, energy management, health and safety, labour practices and standards, supply chain management, data privacy and security, and water.

Several tools readily exist to verify the sustainable sourcing of Malaysian palm oil. Stakeholders are able to track the origin of the commodity all the way from oil palm plantings via platforms like MSPO Trace. This is further supported by the Malaysian Palm Oil Board’s Sawit Intelligent Management System (SIMS), which provides additional traceability and transaction details. Together, these platforms enable manufacturers, retailers and consumers to verify the traceability and source of MSPO-certified palm oil. This plays a vital role in meeting product traceability requirements mandated by recent global sustainability legislation, such as the EUDR.

Through Global Forest Watch, users can analyse data such as land cover, forest change and land use in order to assess deforestation-free claims. Meanwhile, with the No Deforestation, No Peat, No Exploitation (NDPE) Implementation Reporting Framework (IRF), buyers can monitor what proportion of their supply chain is demonstrably meeting the policy’s commitments.

Responsible palm oil players also embrace public accountability by publishing comprehensive ESG reports that disclose the impact of their initiatives that seek to support local communities, labour rights and social equity. This includes quantifying the frequency and type of community engagement activities, such as workshops or grievance redressal mechanisms. Others report on the findings of social impact assessments and detail livelihood programmes like skills training and income diversification projects. Still others outline their investments in infrastructure development, education programmes and healthcare initiatives.

The Malaysian palm oil industry’s efforts to address deforestation and protect endangered species have led to a significant reduction in forest loss in Malaysia and further strengthened ESG compliance. The country reduced primary forest loss by 70% between 2014 and 2020 and deforestation rates reduced by 57% (Report by Washington-based Global Forest Watch). This progress has been praised by the World Resources Institute (WRI), the Food and Agriculture Organization (FAO) and Global Forest Watch, which describes Malaysia as a “success story” and states, “Palm oil is no longer a driver of deforestation.”

Making ESG an integral part of the agenda

In order to accurately identify the issues they need to address, palm oil companies integrate ESG considerations into their corporate governance practices in several key ways, such as the inclusion of members with ESG expertise in their board composition and regular discussions of ESG risks and opportunities alongside traditional financial considerations at board meetings. Some firms integrate ESG metrics into executive compensation while implementing clear ESG policies and procedures that guide employee behaviour and decision-making.

With an eye on long-term growth and value creation, these companies develop forward-looking sustainability plans that align with their overall business strategy and ESG goals. These may include implementing biomass technologies such as mulching, palm oil mill effluent (POME) anaerobic digestion, direct co-firing of palm kernel shells and the utilisation of a combined heat and power system. Planters may incorporate biogas plants that use POME to generate electricity. They may also develop new solar power generation capacity to transition to renewable energy sources, create new product lines with lower environmental impact to cut greenhouse gas emissions, and purchase carbon offsets to neutralise emissions and ultimately achieve carbon neutrality.

Action and accountability are the backbone of a credible ESG programme. In ensuring transparency, responsible palm oil companies position themselves for success in a world where ESG considerations are becoming increasingly important. To learn more about Malaysia’s sustainable palm oil industry and the MPOC’s sustainability initiatives, please email webmaster@mpoc.org.my.

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