Responding to China's Green Signals: Industry Players’ Readiness & Efforts to Capture New Opportunities in the Sustainable Palm Oil Business
As the second largest palm oil importer in the world and one of the Indonesia’s largest export destinations for palm, the ongoing sustainable business transformation in China presents an opportunity for our country, given that the transition towards sustainable palm oil has been underway in our homeland for quite some time. However, the readiness of industry players as the primary stakeholders of Indonesian palm oil can be the key to accelerating this transition. So, how prepared are they to capture the existing opportunities?
Readiness of Industry Players & Indonesia's Opportunity to Become the Major Supplier
Around 80 percent of the use of palm oil in China is for consumption purposes while the remaining 20 percent is for industrial processes. During Indonesia's temporary ban on palm oil exports in mid-2022, Chinese food producers scrambled to secure supplies as prices rose amidst a shortage of palm oil.
This indicates that Indonesia holds a strategic role in China's palm oil trade, thus widening the opportunity for Indonesia to become the main supplier of palm oil to China. Moreover, with the ongoing acceleration of the Indonesian Sustainable Palm Oil (ISPO) certification alongside the sustainable business transformation in China, this opportunity is further expanding.
Industry players in Indonesia have been capitalizing on this opportunity, as seven out of ten Indonesian palm oil suppliers to China have already incorporated the No Deforestation, No Peat, and No Exploitation (NDPE) policy into their production processes.
At the international level, several global palm oil companies operating in Indonesia such as GAR, Wilmar International, and Cargill have strengthened their commitment by signing the Agricultural Commodity Companies Corporate Statement of Purpose at COP26.
On the domestic level, many palm oil companies have demonstrated their ongoing commitment through certification. According to data from the Indonesian Palm Oil Entrepreneurs Association (GAPKI), as many as 560 out of 718 GAPKI member companies have been certified with ISPO.
Other efforts, as demonstrated by Sinar Mas Agro Resources and Technology (SMART), a subsidiary of GAR, which promotes sustainable practices through traceability and transparency in its supply chain. SMART collaborates with third-party palm oil mills (pabrik kelapa sawit/PKS) that purchase from farmers or agents to ensure the achievement of Traceability to Plantation (TTP) by tracing the source of raw materials. As of the end of 2021, SMART had achieved 95 percent TTP throughout its supply chain.
Another palm oil company, Asian Agri also made a number of initiatives such as establishing the alliance 'SUSTAIN (Sustainable Assurance and Innovation Alliance)’. This initiative is a form of collaboration with companies such as Nestle and KAO to develop a shared blockchain platform, so all parties can trace, monitor the policy compliance, and efficiently sell Tandan Buah Segar (TBS), and access microfinance.
In terms of efforts to promote RSPO certification, three companies, Apical, Asian Agri, and KAO, have initiated a joint program called 'SMILE (Smallholder Inclusion for Better Livelihood and Empowerment)'. This program provides sustainable agriculture training for farmers to increase their income through improving productivity and access to RSPO certification.
The readiness of sustainable palm oil industry players can contribute positively to the government's readiness to respond to China's green trade initiative. Some of the Indonesian government's efforts include intensifying the implementation of ISPO certification for all oil palm plantations in Indonesia, issuing the National Sustainable Palm Oil Action Plan (RAN-KSB) 2019-2024, and the National Strategic Program on Rejuvenation of Smallholder Palm Oil (PSR).
At the global level, Indonesia has committed to halt and restore deforestation and land degradation by 2030. This was demonstrated through its participation in the Glasgow Leaders' Declaration on Forest and Land Use at COP26 in 2021.
Strategies to Capture New Opportunities for Sustainable Palm Oil
The global trend towards green business opportunities, including in China, is in line with the demand for optimal implementation of sustainable palm oil in Indonesia. Companies can take several measures to maximize opportunities from green business trends, including:
1. Increasing yields and productivity
Engaging smallholder farmers is one of the most important steps to increase productivity. Smallholders account for a significant portion of plantation management, reaching 41.24 percent (BPS, 2021). Therefore, increasing their capacity can effectively increase production.
2. Transforming towards sustainable business models
Transformation towards sustainable business models is a necessity. Adopting technology for methane capture facilities and biogas cogeneration by producers can not only generate profits but also reduce the risk of rising emission costs.
3. Improving land and asset efficiency
Companies no longer need to expand their land for palm oil development, but need to improve the efficiency of existing land. Furthermore, companies need to tighten the implementation of No Deforestation, No Peat, No Exploitation (NDPE) policies, reduce emissions in land management and production processes. To prevent land expansion, companies need to improve the efficiency of their assets and use the latest technology.
4. Strengthening policy implementation
Indonesia already has policies that support sustainable palm oil, but their implementation needs to be strengthened, particularly in strengthening the implementation of the National Action Plan on Sustainable Palm Oil (RAN-KSB). There is a need for shared awareness from the national to the local levels to implement this policy.
5. Strengthening legality
Indonesia also needs to continue strengthening the Indonesian Sustainable Palm Oil (ISPO) certification system. This can be done by tightening sanctions against companies that have not applied ISPO and violated regulations on opening new land. To optimize ISPO's credibility, it needs to be harmonized with global standards to strengthen NDPE commitments. Regenerative agriculture practices, data transparency, traceability, and NDPE commitments need to be included in the implementation of ISPO.
6. Promoting supply chain accountability frameworks
Companies can adopt guidelines and practice guides such as the Accountability Framework (AF) module to establish, implement, monitor, and promote more sustainable supply chain accountability commitments. This globally recognized guideline can also provide technical assistance through self-assessment to implement sustainable commitments for industry players.
When these efforts are implemented, palm oil industry players will benefit from increased revenue from sustainable and productive palm oil markets, reduced production costs from technology and asset utilization, and new income from carbon credit and low-carbon investment markets. However, there are several challenges still need to be addressed, such as low productivity among smallholders and the low adoption of ISPO or RSPO certification.
The potential of China's "green call" offers great opportunities, depending on companies' efforts to utilize existing initiatives and manage potential challenges that could hamper the optimization of sustainable palm oil practices.