The Oil Palm

CEO of MPOC: Room for All in Certification

RSPO’s 13th annual roundtable commences in Kuala Lumpur this week. It has been an extraordinary 12 months for palm oil certification more broadly.

The Malaysian Sustainable Palm Oil (MSPO) standard was launched at the beginning of this year.

Greenpeace and other members of the High Carbon Stock Approach released their toolkit. The Sustainable Palm Oil Manifesto also completed its draft study on high carbon stock.

Throughout this, RSPO has maintained its position as the world’s largest palm oil certification system. The RSPO is not perfect; a certification system or a standard should be a compromise if it is to become a widely used benchmark system.

But there are three interesting aspects to the current certification debate that are rarely discussed.

The first is CSPO uptake.

As my colleague Carl Bek-Nielsen pointed out in the Malaysian media recently, the uptake of CSPO has been very low by purchasers.

Around 20 percent of palm oil is now certified sustainable. Yet, only half of this is purchased as CSPO with minimum or negligible market premiums attached.

One thing about CSPO is that it ultimately certifies a process, not a specification. It is an assurance that certain process-based criteria have been met. These criteria do not impact the performance of the product for its end use.

There is no incentive for purchasers to buy CSPO based on performance; the incentive should be that there is an assurance that the processes and environmental management is better. But, apparently, this incentive is not considered to be great enough; the buyer need for assurance is only present in 10 per cent of the market.

What does this mean?

This leads to my second point, which is about different levels or types of certification in the marketplace.

There is, simply, enough room for different levels of certification in the global palm oil marketplace.

There are basically three classes of certification. One, government-endorsed standards; two, private consensus standards; and three, NGO endorsements.

In the first category, is the MSPO, as well as Indonesia’s government-backed Indonesian Sustainable Palm Oil (ISPO), and a number of proposed standards, including one for Thailand and a pan-ASEAN standard.

The second category contains RSPO.

The third category is not so much a standard, but an endorsement by groups of particular companies and their approach to palm oil.

None of these types of certification has a particular hold on any particular market. As stated above, if demand for CSPO was high, the uptake would be at 100 per cent, and companies would be scrambling to increase their certified output.

So what is likely to happen?

RSPO will continue as it is. Demand will change in line with market preferences. The stellar demand growth – the low hanging fruit – we have seen in recent years will probably taper.

Government-backed schemes will increase the supply of CSPO on the market. This will mean the uptake of CSPO will increase, not through demand preferences but because of changes in production.

NGO-endorsed output will increase also, but there will be limits to what can be achieved. The NGO-endorsed criteria – traceability, zero deforestation, etc – are only achievable through the largest, vertically integrated producers. Large purchasers that have ongoing relationships with these companies are therefore able to apply policies that accord with these supply strategies.

The remainder of the market – comprising SMEs – will remain outside of both RSPO and NGO endorsements. This isn’t because there’s a reluctance to improve environmental management to the levels asked. It’s simply because the market demand for these improvements (outside of those larger companies) isn’t there.

What does this say about certification more broadly?

It says that there is room for all three tiers of certification in the market.

I have said before that there is a useful parallel in timber, pulp and paper markets. A range of sustainable forest management standards exists. These include government and industry-backed standards, private consensus standards, and NGO endorsements.

Around 30 per cent of global roundwood (timber) production is certified according to government and industry or private standards. Most falls under the former category. But the large majority of timber has no level of certification at all.

Again, this illustrates that there is room in the market for production according to different standards.

Some commentators have spoken of the ‘danger’ of a palm oil market becoming fragmented between certified and non-certified palm oil. But there is no danger, it is simply a reality of markets.

There is already fragmentation in markets for organic or non-organic food, recycled or non-recycled paper, products made according to animal welfare standards, etc.

These product differentiations co-exist, and more expensive production techniques are reflected in price premiums, at least in some product categories.

There is no reason to think that global palm oil markets are any different – the upshot of this being that all forms of certified palm oil products, whatever their certification standard, as well as non-certified products, can co-exist in the marketplace together. This, surely, is what the future of palm oil certification will look like.

By Dr Yusof Basiron, CEO of MPOC