Case: Palm Oil 2016

FACTS:
In 2014, the four largest palm oil trading companies signed an agreement to end deforestation,
development of peat lands and exploitation of locals not only with their own operations, but also
from all of their suppliers. For environmental NGOs, the Indonesian Palm Oil Pledge (as the
agreement was named) represented a dramatic advance in their decades-long efforts to protect
the Indonesian rainforest from further destruction.
One year later the situation appeared to have reversed. Leading figures in the government of
Indonesia were calling upon the companies to withdraw their pledge. And the 2015 fire season
was the worst in nearly two decades, as would-be oil palm growers set fire to rainforests and
peatlands to clear them for planting.
The demand for palm oil had skyrocketed from 1990-2010 and crude palm oil (CPO) became the
most highly traded edible oil. The palm oil boom had significant impact on economic
development in rural Indonesia.  Forty percent of Indonesia’s palm oil was grown by an
estimated 3.5 million smallholder farmers. With government support, Indonesia had established
infrastructure to mill, refine, and export the substance. However, oil palm cultivation had created
social tensions as many rural inhabitants claimed that large plantation companies had violated
traditional land rights. Indonesian land-use laws were ambiguous and land ownership
unmapped.  This indeterminate state of affairs had led to widespread corruption, as companies
‘convinced’ local and national officials to support their land claims and look away when it came
to environmental regulation.  
In 2013, environmental campaigners believed they had found leverage to help change the palm
oil industry. The supply chain for CPO suggested an hourglass. Millions of growers (if one
included smallholders) supplied the raw materials. On the demand side, hundreds of thousands of
companies across the globe bought palm oil or palm oil fractions to include in a wide variety of
products.  Between supply and demand, however, six companies: Wilmar, Musim Mas, Golden
Agri (GAR), Cargill, IOI, and Bunge accounted for over 90% of the global trade. While these
trading companies were vertically integrated (they own about 15% of the oil palm land in
Indonesia and three own their own consumer brands of palm oil), they had vast influence on
growers. If they could be convinced to “green” not only their own operations but also that of
their suppliers, perhaps the problems in the palm oil industry could be resolved.
So when Indonesian Palm Oil Pledge (IPOP) brought together the major traders to endorse a
strong NDPE (no deforestation, no peat, no exploitation) standard, many environmentalists
believed that the agreement represented a breakthrough. The events of 2015 suggested otherwise,
forcing businesses, NGOs and sympathetic government officials to reconsider their positions and
strategies.
For the companies that signed IPOP, criticism of the pledge pressured them to reassess their
plans. Wilmar, in particular, faced difficult choices. The company was the largest trader of palm
oil in the world, selling in Europe, China, and India. Wilmar had been the first trader to adopt a
NDPE standard for all of its suppliers. The pledge and the government’s reaction to it had
created three sets of challenges for the company. First Wilmar had to find a way to police its
supply chain, identifying violators and determining ways of dealing with them, especially in the
face of continued NGO pressure. Secondly, some groups had indicated that they might try to
bypass Wilmar and sell their CPO directly to China and India; countries which had shown no
interest in sustainable palm oil. Finally, the Indonesian government’s displeasure with IPO and
the NDPE meant that Wilmar might lose portions of its concessions that it decided not to develop
to uphold the pledge. All of these challenges could represent substantial hits to Wilmar's business
if not handled correctly.
For Greenpeace and other NGOs, the opposition to IPOP raised questions of how to bring the
industry to adopt NDPE standard. Who should they target with their public campaigns? If they
called for a boycott of Indonesian palm oil, wouldn’t that hurt the companies who had supported
IPOP? Were there other influence levers they could use to pressure the government and
noncomplying companies into line?
 Government officials sympathetic to environmental concerns had their own set of questions to
consider and unravel. What was the best policy for the long-term social welfare of Indonesia?
How could the government balance legitimate development needs with concerns about
deforestation? And once a policy was framed, how could it be passed and enforced, especially
given the decentralized nature of Indonesian government and the widespread corruption that
permeated the state’s relationship with the palm oil industry?

Developed in partnership with the National University of Singapore Business School

Published:
April 4, 2016
Revised Date:
April 4, 2016
Format:
Raw, online
Case Access:
Perspectives:
 Competitor/Strategy 
 Law & Contracts 
 Macroeconomics 
 Operations 
 Social Enterprise 
 State & Society 
 Sustainability

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CASE TITLE
A Case Analysis
 Group Leader: KRIZLLLE CARMELA JOY T. FARIÑAS
Group Member: JOSHUA MARIE S. DIEL

I. Introduction
I.1 Problem and Issues
1) Forty percent of Indonesia’s palm oil was grown by an estimated 3.5 million
smallholder farmers. While the process and infrastructure were in place, palm
cultivation led to social tensions due to alleged land violations by large
plantation companies.
2) Local land-use laws were unclear while ownership was unmapped. This
resulted in widespread corruption and violation of environmental laws.
3) In 2015 some of the companies that were party to IPOP were forced to reassess
their plans. One of the largest firms, that had taken a progressive step to adopt the
NDPE standard landed into multiple sets of challenges for the company:

ISSUES:
1) Need for additional policing to identify gaps and address them
2) Some groups were planning to sidestep the firm and sell their CPO directly to
their clients in China and India.
3) Local administration was not happy with IPOP and the NDPE that put the firm
at risk in terms of concessions.
4) NGOs were doubtful about achieving better NDPE compliance due to a lack of
government support. They were not sure of how to design their campaigns. A
boycott of local palm oil would hurt the firms that had supported IPOP. They
were unsure of levers that were available to pressurize the government and reduce
non-compliance.
5) Government officials in favor of sustainability faced challenges on how to best
design a policy that would ensure the long-term social welfare of Indonesia,
striking a balance between development and deforestation, enforcement of the
 policy given the decentralized structure of the government, and the deep-rooted
corruption that prevailed.

I.2 Thesis Statement

Identify ways and means to implement reforms through IPOP and ensure
complete compliance with NDPE measures for the CPO industry in
Indonesia.

II. Background
In 2014, the four largest palm oil trading companies of Indonesia agreed to end
deforestation, development of peatlands, and exploitation of locals by signing the
Indonesian Palm Oil Pledge (IPOP). While this move was hailed as a
transformative approach to protect the Indonesian rainforest from further
destruction, there were several challenges and ambiguities faced by the
stakeholders involved.

III. Evaluation of the Case

When Indonesian Palm Oil Pledge (IPOP) brought together the major traders to
endorse a strong NDPE (no deforestation, no peat, no exploitation) standard, many
environmentalists believed that the agreement represented a breakthrough. The
events of 2015 suggested otherwise, forcing businesses, NGOs and sympathetic
government officials to reconsider their positions and strategies. Government
officials sympathetic to environmental concerns had their own set of questions to
consider and unravel. What was the best policy for the long-term social welfare of
Indonesia? How could the government balance legitimate development needs with
concerns about deforestation? And once a policy was framed, how could it be passed
and enforced, especially given the decentralized nature of Indonesian government
and the widespread corruption that permeated the state’s relationship with the palm
oil industry?
IV. Proposed Solution/Changes
Many of the world’s most popular food and household companies are selling food,
cosmetics and other everyday staples containing palm oil, an ingredient that is tainted
by shocking human rights abuses.  The pledge and the government’s reaction to it
had created three sets of challenges for the company. First Wilmar had to find a way
to police its supply chain, identifying violators and determining ways of dealing with
them, especially in the face of continued NGO pressure. Secondly, some groups had
indicated that they might try to bypass Wilmar and sell their CPO directly to China
and India; countries which had shown no interest in sustainable palm oil. Finally, the
Indonesian government’s displeasure with IPO and the NDPE meant that Wilmar
might lose portions of its concessions that it decided not to develop to uphold the
pledge. All of these challenges could represent substantial hits to Wilmar's business
if not handled correctly.

V. Recommendation/s
In summary, there is consistent and rigorous evidence that converting forests to palm oil
plantations results in net greenhouse gas emissions. Emissions are extremely high if the
forest being converted is peat swamp forest, high from unlogged forest on mineral soils
and variable from selectively logged forest. Conversion of grasslands, however, can see a
net uptake of carbon dioxide. Future expansion of palm oil cultivation may result in
different deforestation patterns to those seen in the past. A large proportion of the suitable
oil palm planting area in Malaysia is now utilized, meaning that further deforestation is
likely to be focused on Sarawak, where the provincial government is promoting plantation
expansion. The proposed further doubling of palm oil in Indonesia could theoretically be
done without further loss of forestland and without compromising rice production, but it
remains to be seen whether such a course will be followed.