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Sustainability Decision Making Strategies: Palm Oil Management
A Plan B Paper In Partial Fulfillment of the
Master of Science in Science, Technology, and Environmental Policy Degree Requirements
The Hubert H. Humphrey School of Public Affairs The University of Minnesota
Mary Kemp 5/3/2012
_____________________________________
Professor Jennifer Kuzma Paper Adviser
__________
Date
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Sustainability Decision Making Strategies: Palm Oil Management
Mary Kemp, Humphrey School of Public Affairs
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ABSTRACT This paper presents a new and integrated decision making approach for firms to utilize when
facing a complex sustainability issue using palm oil as a case study. The approach, Sustainability
Decision Making Protocol, includes five steps: mind mapping, stakeholder analysis, tradeoffs
analysis, systems dynamics and analyses with decision trees. The steps are not implemented in
a linear way, but as an iterative process. Outcomes from the different steps can be used help
improve the implementation of others. Using the tools in this way also provides an opportunity
for greater collaboration and communication among stakeholders. A decision is not developed
for a specific client, as there are a multitude of variables that are unique to each company.
Rather, this paper provides background and a protocol that can be used to inform sustainability
strategy development around this agricultural commodity.
Palm oil is an ingredient that has been rising in popularity for use in foods, cosmetics and the
production of biofuels. The growth of the oil palm sector has provided capital investment,
economic development and employment for communities in Indonesia and Malaysia. Though
the cultivation of palm oil uses land more efficiently (in terms of yield per hectare) than other
vegetable oils, it is increasingly controversial because its production along the supply chain has
come with accusations of deforestation, poor environmental management and unethical
treatment of communities and indigenous cultures. Because many companies across sectors
are invested in this commodity, in both brand image and daily business operations, it is
important for firms to determine a sustainability strategy for the use of this ingredient. There
are a variety of efforts occurring in both private and public organizations, but companies often
do not have an appropriate process to identify, review and communicate a strategy.
Sustainability Decision Making Protocol
1. Mind Map
2. Stakeholder Analysis
3. Tradeoffs Taxonomy
4. System Feedbacks
5. Decision Tree
Scenarios
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Table of Contents
Section I. Introduction ................................................................................................. 6
Section II. Setting the Context ..................................................................................... 8
Section III. Difficulties with Navigating Palm Oil Decisions .......................................... 20
Section IV. Current Firm Decision Options ................................................................. 25
Section V. Tradeoffs in Sustainability Decisions ......................................................... 33
Section VI. Sustainability Decision Making Protocol………………………………………………….34
Tool 1. Mind Mapping .............................................................................................................. 34 Tool 2. Stakeholder Analysis ..................................................................................................... 35 Tool 3. Tradeoffs Taxonomy ..................................................................................................... 36 Tool 4. Systems Analysis-‐ Casual Loops .................................................................................... 38 Tool 5. Decision Tree Analysis .................................................................................................. 41
Objectives Hierarchy ........................................................................................................ 42 Scenario 1: Business As Usual .......................................................................................... 43 Scenario 2: Carbon Regulation ......................................................................................... 45 Scenario 3: Biodiversity Management ............................................................................. 48
Section VII. Discussion ................................................................................................ 52
Bibliography ............................................................................................................... 56
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List of Figures and Tables FIGURE 1 Sustainability Decision Making Protocol………………………………………………………………7 FIGURE 2 Palm Oil Processing…………………………………………………………………………………………….10 FIGURE 3 Map of Palm Oil Cultivation………………………………………………………………………………..12 FIGURE 4 Mind Map of Palm Oil…………………………………………………………………………………………59 FIGURE 5 Mind Map of Palm Oil With Components Shown ……………………………………………….60 FIGURE 6 Stakeholder Analysis Matrix…. ………………………………………………………………………..…61 FIGURE 7 Tradeoffs Taxonomy ………………………………………………………………………………………….37 FIGURE 8 Causal Loops in Palm Oil Strategies ……………………………………………………………………40 FIGURE 9 Objectives Hierarchy of a Firm …………………………………………………………………………..42 FIGURE 10 Scenario 1 Decision Tree…………………………………………………………………………………….62 FIGURE 11 Scenario 2 Decision Tree ……………………………………………………………………………………63 FIGURE 12 Scenario 3 Decision Tree ……………………………………………………………………………………64
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I. Introduction The production of palm oil is an important sustainability issue, as it illustrates the complexity of
topics that overlap in the social, economic and environmental spheres across local and
international scales. Several characteristics of palm oil make it suitable for a case study of
sustainability decision making processes. First, palm oil has become a high profile food and
personal care ingredient with recent attention from consumers, NGOs, human rights and
environmental activists and policymakers. Some companies are more at risk of targeted attacks
than others, depending on their products and consumer base, but all should evaluate the risks
they face from using palm by considering the probability of backlash and its anticipated costs.
Second, palm oil is widely used and is an important commodity in the formulation of a wide
variety of commercial products across sectors. It also has traditional uses in food among
subsistence communities. Further, even though it is used widely, palm oil is unique in that it can
be an “invisible ingredient”. Palm oil not usually identified by labeling and marketing as
opposed to other commodities, such as coffee or cocoa, and actual use volumes in product
formulation can vary with commodity prices of other vegetable oils. The volumes of palm oil
used can even be difficult for the companies themselves to discern. Third, currently there are
sustainability initiatives underway, such as the Roundtable on Sustainable Palm Oil, that provide
insight into the perspectives of stakeholders and the strengths and weaknesses of different
approaches.
The purpose of this paper is to develop a process for the evaluation of sustainability options
available to companies in palm oil production, which can be used throughout the management
timeline, from initial identification and implementation of a strategy to its review and
modification. This approach was chosen rather than seeking to identify one “best” solution for a
firm to address palm oil sustainability as firms vary significantly, and there is no one size fits all
solution. A second rationale behind developing a new decision making tool is that there should
be increased emphasis on the process of choosing sustainability strategies rather than the final
product of the decision-‐making. As argued by Hjorth & Bagheri (2006) of the Swedish Institute,
“There is an emerging understanding that the quality of a decision-‐making process is absolutely
critical for the achievement of an effective product in the decision.” Sustainability is a moving
target to be continually evaluated and enhanced as the system and our understanding of it
evolves. For the purpose of this paper sustainability is defined as being socially, economically
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and environmentally responsible for both long and short-‐term. Additionally, sustainability
considers and values the perspectives of all stakeholders. It is acknowledged that different
stakeholders may define sustainability differently, but there is capacity to reconcile and utilize
all perspectives in order to reach the best decision. “Managing for the future is a ‘wicked’
problem, meaning that is has no definitive formulation and conclusively ‘best’ solutions, and
furthermore, that the problem is constantly shifting” (Hjorth & Bagheri, 2006). Therefore, it is
important for managers to develop a process to consider complex sustainability issues that
comprehends the relationships between actors, articulates the assumptions made and is
capable of adjusting to changing knowledge and understanding.
The five-‐step Sustainability Decision Making Protocol created in this paper responds to the need
for a new paradigm in which complex decisions are made. This approach is useful because it
exhibits advantages of disciplines such as risk management and systems thinking and provides
decision makers with tools to visually depict one’s perspective of an issues structure,
communicate with others about one’s understanding, and identify strategic leverage points
(Hjorth & Bagheri, 2006).
The Sustainability Decision Making Protocol is comprised of five steps. The first step is to
develop a mind map (Buzan, 1996) of the interrelated issues impacting the situation. The
second step is to conduct a stakeholder analysis (Bardach, 2011), which will allow the decision
Sustainability Decision Making Protocol
1. Mind Map
2. Stakeholder Analysis
3. Tradeoffs Taxonomy
4. System Feedbacks
5. Decision Tree
Scenarios
Figure 1 Sustainability Decision Making Protocol
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maker to better understand the different perspectives and influences of relevant stakeholders.
Next, a refinement of the mind map is completed by constructing a tradeoffs taxonomy to plot
actions available to the firm on the tradeoffs template to understand how different choices will
impact the different aspects of sustainability and to what level (metrics, actors or regulations).
System feedbacks (Sterman, 2000) are then identified to better understand how decisions will
impact other priorities within the firm. Lastly, decision trees (Clemen & Reilly, 2000) are then
built comparing the different decisions and areas of uncertainty a firm faces when making a
sustainability decisions. The five components of the process are to be utilized in an iterative
way. The outputs of different tools will help to inform the others. For example, engagement
with stakeholders to complete a stakeholder analysis will also help to enhance the modeling of
causal loops in the systems feedback and mind map tool. Additionally, examining causal loops
will improve the development of scenarios used in decision trees by making them more accurate
and incorporate factors such as policy resistance and delays. Beyond helping to complete the
sustainability decision making protocol, working with stakeholders presents an opportunity to
improve relationships among different groups. This paper will present the perspectives of
stakeholders involved. For example the goals of smallholder farmers and private plantation
owners are varied and each will react to potential strategies and polices differently.
This paper addresses a need for a more comprehensive way for companies to develop strategies
to address complex sustainability issues. Review of the literature and current events provides
insight into the risks and challenges companies face when determining management approaches
in the face of increased consumer expectations for transparency and responsibility, complex
environmental issues and a globalized economy and lengthening supply chains. There is little
literature available to provide insight into how firms are making decisions, and it appears that
much of the approaches are developed as a reactionary tool to address rising controversy. It is
likely that there is not a systematic approach currently being implemented. Using palm oil as an
example, this paper contends that companies that are well prepared to address complex
sustainability issues will be more resilient over time and also will be better suited to be partners
with stakeholders to develop meaningful and impactful solutions. Thus, it is in the interest of
companies to implement a comprehensive approach to consider, choose and communicate
strategies.
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II. Setting the Context
HISTORY AND USES OF PALM OIL
Palm oil is an interesting case study of commodity sustainability because it ecologically grows
best in regions with high poverty rates and great need for economic development, such as
Southeast Asia, Western Africa, and Latin and South America. These areas also have concerns
about government and private sector management, as a result of unclear land rights and
government interest in promoting industry. The palm oil industry has undergone a transition as
the crude form of palm oil used for cooking in its countries of origin and is now an
internationally traded commodity with numerous applications. This transition has changed the
economic and social impacts of its production and consumption. Additionally, palm oil grows
best in areas with high levels of biodiversity. While palm oil covers a relatively small percentage
of land area, it is significant because of its potential for impacts on biodiversity hotspots and the
communities they support (Teoh, 2010). The occurrence of high poverty rates and biodiversity
in the same area can result in conflicting stakeholder priorities. As a result of these
characteristics, this is an appropriate case study for the exploration of how to balance different
factors of sustainability over the long term from the perspective of firms that engage in the
trade of this commodity.
Production of Palm Oil
The refinement of palm oil can be done at both the household and commercial scale. At the
household level, palm fruit is pressed and the solids and liquids separated, with the liquid used
for cooking oil. The methodologies throughout the processing steps vary by scale and amount
of resources but generally follow the same principles. Palm harvesting and oil processing is a
labor-‐intensive process, resulting in the industry’s high job creation in producing countries. Oil
palm trees produce two different sources of oil, from the fruit and from the kernel. The palm
fruit oil is the most commonly used and is the focus of this paper. Palm kernel oil is produced as
a by-‐product (FAO 2012).
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Figure 2 shows the palm oil extraction process, begins with pruning palm fronds to expose the
base of a bunch and then cutting the bunch and dropping it to the ground (Figure 2). Fallen
bunches are then loaded into transport containers and sent for reception and weighing by
processers.
The bunch is then broken down by manually separating the fruit-‐lined spikelets from the stem
and then removing the fruit from the spikelets with a machete or mechanized rotating drum.
The remaining waste material from the scraps of the palm bunches can be used as a cooking fuel
or burned to create ash which is used as a form of potassium fertilizer for the plantation. Next
the fruit is sterilized which helps to destroy oil-‐splitting enzymes and softens the fruit for later
processing. The fruit is then digested using a steam-‐heated vessel to begin to remove the oil
from the cells, which are then pressed through either a mechanical press or submerged in hot
Figure 2:
Palm Oil Processing (FAO, 2012)
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water to leach out the oil. Once the oil has been expelled it is clarified and passed through a
screen. A separate process, extraction of palm kernel oil uses a by-‐product of the palm fruit oil
extraction procedure. For background, oil from the kernels is extracted separately from oil
extracted from the fruit and is often carried out in mills that process other oilseeds such as
rapeseed or cottonseed. The kernel oil extraction process entails grinding the kernels, heating
the grounds, extracting the oil using an expeller or petroleum solvent and clarifying using a filter
(FAO, 2012).
Private companies operating in producing countries have primarily driven the expansion of palm
oil use. Many of the companies are those that were originally involved in rubber plantations
but then diversified to palm oil when rubber prices began to decrease in the mid 20th century.
Smallholders, acting independently and as part of larger production schemes, are also an
important component of the palm oil industry. Globally, it is estimated that there are three
million smallholder heads of family involved in the production of palm oil. The proportion of
private plantations versus smallholders varies across countries, ranging from 40% to 80% (Teoh,
2010).
Uses of Palm Oil
The demand for vegetable oil has grown with increasing populations and per capita
consumption and has more than tripled since 1980 (Teoh, 2010). Palm oil has undergone a
remarkable market transition. It is widely used in consumer food products, but the exact
estimates of how much have been difficult to develop. A 2005 projection by one NGO, Friends
of the Earth, estimated that palm oil is found in 10% of leading supermarket products.
However, a later investigation by The Independent, an English newspaper, found that the
number might actually be closer to 40% of the best selling grocery brands (Hickman, 2009).
What is limiting about these study results is that they do not include the volumes of palm oil, as
it can often be included as a ratio among other vegetable oils, depending upon the price of the
various oils. What this does provide, however, is an understanding of the scale of the market
and the stakeholders, such as Nestle and Unilever, which are engaged in this issue at some level.
Undoubtedly, the number of products that contain palm oil has grown over the past several
decades. According to Hickman, author of the Independent research, “Since 1990, the amount
of land used for palm-‐oil production has increased by 43 percent. Demand [for oil] is rising at
between six and ten percent a year” (Hickman, 2009).
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Palm is an attractive source of oil for consumer products for several reasons. First, trees
produce fruit for over thirty years and yield more oil per hectare than any other oilseed crop.
The main vegetable oil alternatives have efficiencies that are just 10-‐20% as high as palm per
hectare and thus require more land to produce the same volume oil (Laurance, 2010). The
demand for palm oil has increased rapidly, outpacing other vegetable oils. Second, oil palm is
highly suitable for a variety of formulations and applications and is a low cost alternative to
animal products. Another driver has been the global increase in demand for processed foods
using oils, and palm oil is attractive to consumers demanding non-‐GMO products. There was
historically a stigma about palm oil’s nutritional value, but it is now viewed as an alternative for
trans fats following studies showing trans fats are bad for human health. Palm oil is closely tied
to the world food economy, and with China’s increasing demand for vegetable oils and
particularly dramatic increase in soybean oil imports, there is a new demand for palm oil as the
price for soy oil has grown in recent years (Koh & Wilcove, 2008). Policies that support biofuels
have increased the demand for palm oil production (Teoh, 2010). Eighty percent of the global
palm oil output is used for food with the remaining proportion used for personal care (15%) and
biofuels (5%).
International Context
According to FAO data, the global extent of land used for oil palm cultivation increased from 3.6
million ha in 1961 to 13.2 million ha in 2006 (FAO 2007). Palm is grown in over forty countries
around the world with global production volumes of approximately 45 million tonnes annually,
but the majority is produced in the countries of Malaysia and Indonesia (Figure 3). Nigeria was
formerly the world’s largest producer, but its production volumes were surpassed by Indonesia
and Malaysia in the mid twentieth century (Teoh, 2010)(Hickman, 2009).
Figure 3 Map of Oil Palm Cultivation (FAO, 2007)
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The dependence on Malaysian and Indonesian palm oil is high; over 80% of the global supply
comes from these countries (Pearce, 2008). “While global plantings of oil palm grew eight-‐fold
in the past 4 decades to over 12 million ha in 2009, the area under cultivation in Malaysia
increased by 5 times and in Indonesia by a phenomenal 23 times over the same period” (Teoh,
2010). This is also the geographic area of the highest profile because of the incidence of
charismatic, endangered species, remarkable land use change, stakeholder campaigns and
governance policies that have drawn attention to the issue.
As a result, this analysis will focus on palm oil from these two countries. Palm oil has been
grown commercially in this region for a little over a century, replacing rubber plantations and
forests. In Malaysia, expansion shifted to the states of Sabah and Sarawak, often in association
with logging and was facilitated by the reclassification of some state forest reserves to allow
conversion to plantations (Fitzhebert, 2008). In Indonesia, the majority of expansion did not
occur until recent decades. “Today, ambiguities in the land tenure system and corruption,
combined with increased regional autonomy, have made it easier for timber, plywood and
paper pulp companies to obtain permission to clear millions of hectares of forest under the
pretext of plantation establishment, without later planting them” (Fitzhebert, 2008). Each
country also has its own approaches to oversight and management of the oil palm industry,
both in terms of the way in which the environment is protected and market promoted.
Examining Indonesia and Malaysia allows for a more focused evaluation of the country level
policies that have been implemented, stakeholder engagement and the impact of global trends
on a specific place. The framework and tools developed could be used to address the place
specific context of other producing countries.
Beyond stakeholder strategies and government policies to promote as well as inhibit the
industry, the palm oil sector is highly influenced by the global food economy particularly
because of its use for both foods and biofuels. Recent events with the decline of the global
economy and increase in world food prices have changed the vegetable oil sector (Bradsher,
2008). As reported in the New York Times, “a startling change is unfolding in the world’s food
markets. Soaring fuel prices have altered the equation for growing food and transporting it
across the globe. Huge demand for biofuels has created tension between using land to produce
fuel and using it for food.” Governments in many poor countries have tried to respond by
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stepping up food subsidies, imposing or tightening price controls, restricting exports and cutting
food import duties (Bradsher, 2008).
In recent years food riots have occurred around the world, in countries like Egypt, Mexico and
Bangladesh (Kostigen, 2011). Public reaction to government price controls and food riots have
also occurred in the area of palm oil production, as well. As reported in a 2008 New York Times
article, “Few crops illustrate the emerging problems in the global food chain as well as palm oil,
a vital commodity in much of the world and particularly Asia. From jungles and street markets in
Southeast Asia to food companies in the United States and biodiesel factories in Europe, soaring
prices for the oil are drawing environmentalists, energy companies, consumers, indigenous
peoples and governments into acrimonious disputes” (Bradsher, 2008).
POSITIVE CONSEQUENCES OF PALM OIL USE
As was discussed previously, palm oil offers benefits for the private sector. Palm oil is easily
formulated, cost-‐competitive and meets consumer preferences and expectations regarding
trans fats and genetic modification. Palm oil production also supplies the greater demand for oil
in general, as it has high yields compared to other oil seed crops. Poorly enforced land rights
make it easy for companies to gain access to the resource. Producers are incentive to develop
on forested land because the timber can be harvested and sold prior to planting of palm.
The growth of the palm oil industry has provided benefits to the communities on and
surrounding palm oil plantations by providing jobs, access to market, and investment in
infrastructure. Palm oil production, from field operations to fruit collection and processing, is a
labor-‐intensive process and thus has been an important employment opportunity in producing
countries. For example, between 1980 and 2009 the amount of people employed in palm oil in
Malaysia grew from an estimated ninety-‐thousand to over half a million. In Indonesia the
current estimate is that there are over three million people involved in the industry (Teoh, 2010)
In 2009 it was estimated that the industry contributed about 4.5% of the country’s GDP (USDA
FAS, 2010), while a 2011 estimate suggests the number may be even higher with a press release
claiming 6-‐7% (RSPO, 2011).
In Indonesia agriculture provides approximately two thirds of household income, and palm oil is
the second largest agricultural product behind rice paddies but has been the country’s most
significant agricultural export (World Growth, 2011).
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In addition to simply offering employment, palm oil production has been viewed as a tool for
economic development and poverty elevation. Government agencies like Malaysia’s Federal
Land Development Authority and the Federal Land Consolidation and Rehabilitation Authority
have both implemented programs to invest in the development of the industry, establishing
land lease programs, providing capital and creating ventures between communities, companies
and the government.
Indonesia has implemented programs with similar objectives. For example, a program
supported by the World Bank in the late 1970’s and early 1980’s was used to resettle the poor
to less densely populated areas. The migrants were then given land and investment from a
plantation company. Under the country’s “nucleus estates scheme”, a “government-‐linked
plantation company develops plasma areas of two hectares each for the settlers around the
company’s nucleus estate” (Vermeulen & Goad, 2006) (Teoh, 2010). The program went on to
expand to millions of people moved under the transmigration program and hundreds of
thousands of hectares of land. The program has since transitioned into a finance program that
provides access to subsidized loans (Teoh, 2010).
For producing governments the growth of the palm oil industry has provided benefits such as
synergy for other policy objectives, agricultural development, external investment in
infrastructure and expanded export earnings. Palm oil also provided economic stability in the
face of the 2008 economic crisis. Prof. K.S. Jomo of the UN Department of Economic and Social
Affairs, states ‘it was the palm oil industry that saved’ Malaysia during the economic crisis by
spurring economic growth” (Teoh, 2010).
For consumers, the benefits of palm oil are subtler. The use of palm oil in place of more
expensive oils helps to maintain stable prices of retail products. Some consumers may also
value the perceived sustainability benefits of biofuels and may be supportive of increasing
volumes of production and government mandates of biofuels (Vietze, 2010).
NEGATIVE CONSEQUENCES OF PALM OIL Pressure of Deforestation
The countries in which the palm oil industry is growing have sought to encourage this industry
through policies, such as Indonesia’s biofuels policies, which began in 2006 (Habrinderjit Singh
Dillon, 2008). Beyond simply benefiting the industry, it was thought that this low carbon
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alternative energy was also a solution to the issues of climate change. However, more recent
studies of palm oil has revealed the indirect land use impacts of its production, and now many
believe that the biofuel’s carbon costs actually out weigh fossil fuels given the amount of forest
that is cleared and carbon rich deposits that are disrupted (Danielsen, 2008)
The economics and politics of palm oil production have led to a favoring for expanding the area
under production as a means to increase yields, as opposed to capital investments into greater
yields per acre. This has occurred for several reasons. First, undefined land rights have made it
relatively easy for large companies to access unmanaged land for conversion to oil palm
plantations. In addition, there are no government limits on the size of plantations, so
companies are free to do so. Lastly as palm oil does not produce fruit until it is several years old,
producers seek to supplement that delay in revenue through the harvesting of timber on
existing forestlands. This provides capital and income to fuel the business as the palm trees
mature (Teoh, 2010).
Intensive farming techniques, such as enhanced water and chemical input systems, have been
proposed as a strategy to increase the yield per hectare, and minimize area expansion of palm
oil plantations. This is similar to the paradigm from food systems that being more intensive
would protect tropical forests, carbon, biodiversity, and other ecosystem services. In a recent
study, researchers studied the production of oil palm plantations in the Peruvian Amazon,
yielding results that have implications for global management. The researchers studied the area
increase of oil palm over a ten-‐year span and found that while low yield plantations accounted
for the majority of the increase, only 30% of that involved forest conversion. In contrast, while
it only accounted for a small percentage of the total land area expanded, 75% of high yield
plantations involved forest conversions (Kalaugher, 2012). Victor Gutiérrez states “Our analysis
reveals in a spatially explicit fashion that industrial-‐scale, high-‐yield oil-‐palm plantations in the
Peruvian Amazon are expanding at greater expense to old-‐growth forest than smallholders' low-‐
yield plantations"(Kalaugher, 2012).
High yield oil-‐palm farming is mostly carried out by private companies, which invest in
infrastructure. There are positive economies of scale, which encourage expansion and use of
additional land (Basiron 2007). Private companies are reluctant to take on previously cleared
land as tenure is more disputed and there are local politics to address. Old-‐growth forest
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belongs to the government, so tenure is more established on those lands. This demonstrates
that in addition to focusing on high yield agriculture, responsible management ought to also
include incentives to expand into already cleared or cultivated areas, rather than forested land
(Kalaugher, 2012).
Environmental Change
There are additional negative environmental consequences to the production of palm oil. Palm
oil plantations commonly replace biodiverse tropical forests, and destroy the habitat of highly
charismatic endangered species. The clearing of tropical forests has immense environmental
impacts because of their high carbon storage properties, both from standing forests and the
nutrient rich soil and peat on the forest floor (Hickman, 2009).
Oil palm plantations support fewer species than intact forests and other tree crops and their
establishment results in habitat fragmentation and pollution (Fitzhebert, 2008). A study
published in 2011 found that about six percent of carbon-‐rich peatlands in Peninsular Malaysia
and the islands of Borneo and Sumatra were cleared to make way for oil-‐palm plantations by the
early 2000s. In the process, about three percent of forest-‐dwelling birds across the region were
lost and massive quantities of carbon were released from clearing peatlands, according to the
authors' estimates (Maron, 2011). Another study estimated that “for the first 25 years after an
oil palm plantation is established in a peat-‐swamp forest, about 60 tonnes of carbon dioxide are
released per hectare every year” (Murdiyarso, 2010).
The greatest impacts from the establishment of palm oil plantations occur during land clearance
and preparation, as forest structure is lost, carbon and organic matter is burned off and species
are cleared from the area. Once in operation, the major environmental impact of palm oil
production arises from water pollution from plantation runoff of pesticides and fertilizers and
effluent from processing mills. According to Fitzhebert, “oil palm plantations are structurally
less complex than natural forests, with a uniform tree age structure, lower canopy, sparse
undergrowth, less stable microclimate and greater human disturbance and are cleared and
replanted on a 25–30 year rotation” (Fitzhebert, 2008).
While is it difficult to quantify the consequences and causes of changing land use, studies have
been completed that provide insight to the species loss and that palm oil plantations can cause.
A Princeton study using land cover data from the Food and Agriculture Organization, found that
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between 1995 and 2000 approximately half of all palm oil expansion in Malaysia and Indonesia
occurred through deforestation of forestland and a lesser percentage was due to conversion of
pre-‐existing croplands. The concerns about category systems are illustrated by this study
because at the same time, Malaysia reported no loss of primary forests. Instead it was reported
that the changes occurred on secondary or plantation forests, which can still have
environmental impacts, suggesting that limits on primary forest conversion may not be enough.
According to the authors, “Using data on bird and butterfly diversity in Malaysia’s forests and
croplands, we argue that conversion of either primary or secondary (logged) forests to oil palm
may result in significant biodiversity losses, whereas conversion of pre-‐existing cropland
(rubber) to oil palm results in fewer losses” (Koh & Wilcove, 2008). Their analysis found that
conversion of primary forests to palm oil resulted in a 83% decrease in species richness of
butterflies, and, while lower, the conversion of logged forests to palm oil still have a large
impact on species richness. Diverting oil palm expansion onto areas of low conservation
importance (e.g. degraded grasslands) would avert much ecological damage. However, current
international policies do not help to ensure that such areas are being used in preference to
natural forests, and difficult issues such as governance and land tenure need to be tackled
effectively in producer countries (Fitzhebert, 2008).
Difficulty in quantifying change
It has been reported that it is difficult to identify the direct correlations between palm oil
production and deforestation for several reasons such as a lack of reliable data on fine scale
land-‐ cover change and incomplete understanding of its complex causes. The definitions of
forests are continually changing with different categorization schemes and there is limited
independent monitoring of figures released by the governments (Fitzhebert, 2008). One
suggestion to address this is investment in satellite imagery and a transition away from more
costly on the ground land surveys. In addition to tracking land-‐use changes, modeling the
anticipated change in biodiversity is also difficult as it is highly dependent on a variety of factors
including development and management practices, natural habitat features and species’
sensitivities.
Human Rights
In addition to harmful environmental impacts, the consequences of palm oil on economic
development and community employment have been scrutinized as well. Palm oil production in
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Malaysia and Indonesia provides economic development to communities and industries in the
region. Producing companies have implemented programs to support production of palm oil by
small farmers through subsidies and requirements that large operation work with and among
small producers. Organizations such as World Growth, the World Bank, Malaysian Council on
Palm Oil and Universities within producing countries have also published reports about the
economic benefits that the growth of the palm oil industry has provided often focusing on
poverty alleviation and regional development.
However, participation in the palm oil industry is not always voluntary. Some smallholders are
buried under debt and land titles and thus feel pushed to participate in the industry with no
other economic opportunities (Block, 2009). Indonesia has also implemented policies that have
directly impacted local farmers, such as its transmigration program, which paid landless farmers
to move to less populated islands. “Beginning in the 1980s, land reforms required local
residents to surrender roughly half of their land to commercial oil palm developers. In return,
smallholders received about 40 percent of the land in formal 2-‐3 hectare (5-‐8 acre) allotments.”
The government provided loans to cover the costs of seedlings and inputs and in the meantime,
before the trees reached maturity, the smallholders worked on as day laborers (Block, 2009). As
a result, the figures of millions of jobs and vast economic development should be taken with
caution because as the sector grows larger, so too does the potential for interventions that
could negatively impact the country’s people. For example, some people may have benefited
from access to higher value and more productive land than they had previously owned, while
others’ may have been moved from land where they have lived for generations and have
established cultural and traditional values.
Palm oil production can also produce negative impacts for the communities near palm oil
plantations. Land tenure rights of indigenous peoples are a particularly contentious issue, as
seen with many natural resource access cases around the world. Nomadic communities rely
upon harvesting and hunting from the forests and have faced diminishing access to food and
prey. A palm oil example in Borneo is the Dayaks, a semi-‐nomadic tribe of approximately 10,000
people. A researcher with Survival International, a human rights watch group conducted
interviews with the tribe and explored the impact that palm oil has had. "When the logging
started in the Nineties, we thought we had a big problem," he complained. "But when oil palm
arrived, logging was relegated to problem No 2. Our land and our forests have been taken by
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force” (Hickman, 2009). The loss of rights to land has limited the ability of the tribes to utilize
ecosystem services. The interviewee explained, "Our fruit trees are gone, our hunting grounds
are very limited, and the rivers are polluted, so the fish are dying. Before, there were lots of wild
boars around here. Now, we only find one every two or three months. In the documents, all of
our land has been given to the company" (Hickman, 2009).
Another anecdote of a Malaysian tribe also provides insight to how these land disputes have
been resolved in the legal system. The Bidau tribe is an indigenous group that lives in the state
of Sarawak on the island of Borneo. “Indigenous people in Malaysia have long complained that
their historical claims to their land are being sacrificed in the name of progress. But as the
country continues its push toward economic prosperity, with key commodities like palm oil a
valuable export, rights groups and lawyers say that encroachment on indigenous land is
increasing” (Gooch, 2011). The groups have sought to initiate a formal complaint with the
Human Rights Commission of Malaysia, which is investigating the land rights of indigenous
people. In 2009 a court had ruled that they did not prove their rights to the land. “The
commission has received almost 900 land rights complaints, with many detailing how palm oil
and logging companies, as well as state forestry officials, are infringing on their traditional lands
and, in some cases, forcing them to leave their villages” (Gooch, 2011). Some states have their
own land laws, while others follow national land code. The laws recognize indigenous people’s
“customary” land rights, but have not provided enough protection and are not well
implemented.
III. DIFFICULTIES NAVIGATING PALM OIL DECISIONS
There are many sustainability concerns with palm oil production across different stakeholder
groups and in regards to the environment. Different groups have sought to manage palm oil
production differently through. Governments have implemented mandates, non-‐government
organizations have developed certification programs and companies have altered sourcing
practices. Some of the stakeholders have faced backlash and had to quickly react and change
positions or faced criticisms from other stakeholders. Stakeholders that have fared well have
demonstrated they have more holistically considered the issue. However, there is still a need
for better decision-‐making tools available to all stakeholders to assess the situation and choose
an alternative for implementation, an objective of this paper.
21
Reactions from EU Government and Global Companies
In the European Union there has been interest in increasing the amount of renewable energy in
union’s energy consumption. In the 2009 leaders agreed upon the Renewable Energy Directive,
a “road map” for renewable energy, with the goal that 20% of the EU’s energy should be from
renewable energy, including a goal of 10% renewables for transportation. However, as the
European Union’s policies evolved, more stringent regulations were put in place regarding the
life cycle of the biofuels (Block, 2009). With the increasingly recognized negative consequences
of palm oil production, companies and governments have begun steps to assess the
sustainability of growing and processing palm oil. For example, under the European Union’s
Renewable Energy Directive any palm oil biodiesel imported must demonstrate a 35% reduction
in greenhouse gases from fossil fuel over its entire life cycle. This will be raised to a 60%
reduction by the year 2017 (Teoh, 2010). In addition the biofuel feedstock cannot be grown in
areas of high biodiversity or with large carbon stocks, which as watch groups have argued, are
difficult criteria to measure and enforce. Some critics have argued, however, that instead of
being an environmental policy, these requirements constitute protectionist trade policy, seeking
to favor European oilseed producers (World Watch Institute Series on Palm, April 2009).
While geographically outside of Malaysia and Indonesia, recent events in Africa demonstrate the
tradeoffs and risks in the quick responses to sustainability concerns about palm oil production.
Decisions made by stakeholders have unintended consequences, as demonstrated by an
example between Nigeria and the World Bank. Palm oil is an essential food in sub-‐Saharan
Africa, providing vitamins and calories. The sector also employs thousands of people, grows the
economy, and provides diversification from petroleum. The World Bank had given loans for
palm oil plantations in Nigeria. The loans have been used to invest in more efficient harvesting
and production techniques. Recently, after pressure from environmental groups, the World
Bank suspended the program and loans until a new approach to its palm oil programs was
determined (Ayodele, 2010).
By fighting for ending of funding of these programs rather than supporting a modification of the
programs and objectives, have environmental groups put ideology ahead of the needs of the
poor? As argued by Ayodele, “The critics of palm oil production, mostly in the United States and
Europe, claim that it contributes to the destruction of forests. Yes, Nigeria has a problem with
deforestation — but that is primarily in the country’s north, and almost all palm oil plantations
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are in the south. The forest depletion in the north is generally due to climate problems and the
population’s reliance on firewood for fuel” (2010). A potential consequence of reduced palm oil
production is a weakened economy, which may cause more Nigerians to chop down trees for
cooking fuel and shelter and perpetuate the deforestation dilemma. NGO’s like the Rainforest
Action Network responded by arguing that even though International Finance Corporation
investment in palm oil can help economic development in some areas of the world, because it is
such a major influence on the global scale it is important that they pause and consider a new
approach (Schaeffer, 2010). An updated framework and IFC strategy has been posted to the
World Bank’s website, but comes with the caution that the material has not been updated since
April 2011, so it is not clear what the actual impacts of the revisited strategy have been and how
it has impacted the Nigerian communities that lost investment (International Finance
Corporation, 2011).
This is an important example when considering how important stakeholders should react to
concerns of unsustainable palm oil production in Indonesia and Malaysia. It has provided
economic growth and employment to the region, so instead of abandoning it, the best option
may be to consider how it can be done robustly over time. This contrasts with the approach
that the UK took of implementing strict environmental regulations on the palm industry, policies
that had previously contributed to the ramping up of biofuel demand. As argued by Ayodele
(2010), “Mission creep is a threat to any large bureaucracy. What has made the World Bank
almost uniquely successful over the last half-‐century has been its sustained focus on the most
important humanitarian goal: lessening poverty. The moment the bank takes its eye off
economic growth, it loses its reason for being. The residents of the developing world will be the
casualties.”
The debate about palm oil and the tension facing governments to promote economic growth
and protect the environment is just a recent example of the large amount of literature already
existing about sustainable economic development, ranging in topics from commodities,
geographies and governance structures (e.g. (Thorbecke, 1970) (Witt & Eicher, 1964) (Johnston
& Mellor, 1961) (Polasky, 2005))
How Stakeholders React and their Role
Stakeholders have criticized the production of palm oil from a variety of different perspectives,
such as drawing attention to deforestation, loss of orangutan habitat, disputed land ownership
23
and displacement of communities. Stakeholders have taken different approaches to draw
attention to this issue with a variety of objectives, such as phase out of palm oil, reform of
certification standards, encourage participation in more strict standards or increase consumer
education and awareness.
For example the World Wildlife Fund’s approach has been to evaluate palm oil suppliers and
their compliance with the Roundtable on Sustainable Palm Oil, an organization they are a part
of. Additionally, the organization works to educate consumers about palm oil in consumer
products and promote transparent land use planning processes (WWF, 2012).
The World Resources Institute has launched a program called “POTICO” which stands for Palm
Oil, Timber, and Carbon Offsets, to support ecosystem management in Indonesia. The goal of
POTICO is to divert palm oil plantation development from forests and on to already degraded
lands in order to continue to support the economic benefits of the oil’s production, while also
halting the destruction of forests (WRI, 2012).
The Rainforest Action Network, a NGO that seeks to protect forest health globally has focused
its work drawing attention to the role of large corporations as “bad actors” in sourcing
unsustainability and the impact of biofuel production on deforestation and land use change
(RAN, 2012). With a similar approach, Greenpeace has focused on palm oil’s role in
deforestation and destruction of orangutan habitat (Greenpeace, 2012). In April 2010
Greenpeace attacked the consumer products company Nestlé’s palm oil sourcing, focusing on
the Kit Kat brand using ads, social media and on-‐the-‐ground activism. Nestle responded by
changing policy and ending its relationship with a palm oil producer that had been targeted for
its deforestation practices (Harrild, 2010).
Later, Greenpeace then targeted, HSBC, a global bank that invested in a major producer, Sinar
Mas. Specialist and mainstream media followed this issue closely. The Guardian UK reported
that blogs accounted for “70% of the conversations on the web about palm oil” for the six
months following the launch, demonstrating the important role of blogs and specialist media is
the discussion of sustainability issues. As a result of campaign against the company, Sinar Mas
faced a damaged reputation, loss of business and decline in share price (Harrild, 2010). This
impacted other companies as well. Some of the companies who purchase from this producer
disassociated themselves while others, such as KFC and Cargill tried to slip their relationship
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with Sinar Mas under the radar. Sinar Mas tried to refute the accusations, but this only gave fuel
to NGO’s. As stated by Harrild, “its crisis communications strategy seemed routed in faceless PR
tactics and made little effort to engage with stakeholders online” (Harrild, 2010). This illustrates
the previously discussed need to accurately understand stakeholder positions in order to
effectively communicate and manage relationships. More experienced companies may have
had a better strategy, argues the author, “these responses [from Unilever, General Mills and the
Body Shop point to a robust and considered approach, based on having longer term experience
of the issue and its challenges. The same can be said about Nestlé and Burger King's
communications. They were prompted by a crisis, but came across as measured and
appreciative of the issues, and saved them from much of the negative commentary” (Harrild,
2010).
This case study shows two things. First, the influence social media and communications
campaigns can be valuable if executed strategically and consumers can become quickly engaged
in a sustainability issue. Second, companies that have comprehensively considered the issue
and developed strategies for sustainability issues will be better prepared to address them and
be less at risk to dramatic shifts in consumer opinion. This enforces that the a the new
Sustainability Decision Making Protocol will be a valuable tool to companies in developing and
refining their strategies.
How governments have sought to manage this material In addition the European Union’s management of the palm oil for use in biofuels, there are
other policies that have shaped the context of the issue. While not a policy implemented to
directly relate to palm oil, the US Food and Drug Administration’s findings on the negative
health effects of trans fats, and subsequent requirement that it is listed on nutritional labels
beginning in 2006 has changed the market for vegetable oils (FDA, 2011). With more consumers
aware of the negative health effects, there is now a demand for substitute for alternatives
without trans fats, which includes palm oil.
An absence of policy has also been important in shaping the palm oil market. India and China,
which consume about half of the total palm oil volume each year, do not yet have firm policies
in place or a consumer demand for sustainably certified palm oil. As a result, many companies
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have placed more immediate benchmarks for providing sustainable oil in the US and Europe,
while pushed their goals for sustainable oil in India and China until a later time (Block, 2009)
Indonesia has implemented a variety of policies that impact palm oil. In addition to historical
policies to support the expansion of the industry, more recent policies have included tax
programs to benefit producers, biofuel mandates and limits on clearing of peat land for palm oil
plantations (MacKinnon, 2009). Other countries have sought to influence Indonesia’s land use,
“In May 2010, Indonesia and Norway signed a Letter of Intent comprising a framework for
Indonesia to receive financial contributions from the Norwegian Government in return for the
implementation of emission reducing policies, including a two-‐year suspension on all new
concessions for conversion of peat and natural forest” (World Growth, 2011).
In Malaysia, palm oil expansion was a part of state-‐led development through resettlement
schemes and in-‐situ development of plantations, later followed by emphasis by private sector
participation in land development. The Malaysian Palm Oil Council, an industry group, was a
founding member of the Roundtable on Sustainable Palm Oil (Teoh, 2010). In recent years, both
countries have also suggested that they are in preliminary stages of developing palm oil
sustainability standards for each of their countries. It is unclear how these standards will
compare to the voluntary global certification standards. As demonstrated, producing countries
often have contradictory roles of both promoting industry growth and protecting social and
environmental sustainability. Both countries have exhibited mixed messages in their
commitment to these roles.
IV. CURRENT KEY FIRM DECISION OPTIONS
There are several options available to firms that seek to source sustainable palm oil, each with
advantages and disadvantages, stakeholder perspectives and financial costs. The main
alternatives are: membership in the Roundtable on Sustainable Palm Oil (RSPO) as it currently
stands, membership in the Roundtable on Sustainable Palm Oil provided certain revisions are
made, development and use of International Organization for Standardization (ISO) guidelines,
third party partnerships and auditing and internal management.
1. Roundtable on Sustainable Palm Membership & Certification
One approach to ensure that palm oil meets sustainability standards is to utilize the already
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existing Roundtable on Sustainable Palm Oil standards. The Roundtable on Sustainable Palm
Oil (RSPO) is an international non-‐profit organization that unites stakeholders in palm oil
production, from producers, retailers, and banks to environmental NGO’s. The organization
was established in 2004 with the goal of promoting sustainable palm oil, developing clear
standards and engaging stakeholders. The RSPO meets annually and is governed by an
executive board (Teoh, 2010). Any stakeholder can become a member of the roundtable,
but in order to be certified growers and processors must follow eight principles, each with
more specific criteria. The eight principles are:
1. Commitment to Transparency 2. Compliance with Applicable Laws and Regulations 3. Commitment to Long-‐Term Economic and Financial Viability 4. Use of appropriate Best Practices by Growers and Millers 5. Environmental Responsibility and Conservation of Natural Resources and
Biodiversity 6. Responsible Consideration of Employees and of Individuals and Communities by
Growers and Millers 7. Responsible Development of New Plantings 8. Commitment to Continuous Improvement in Key Areas
According to the standards it is acceptable to clear existing forests, provided the land is not
deemed “high-‐value conservation forest” by the member government. Given that the RSPO
is comprised of members from around the world, the term “high value” is open for
interpretation by each country (Laurance, 2010).
The RSPO’s standards are dependent on when the land was cleared for the establishment of
the palm oil plantations. “If the land was cleared before 2005, irrespective of who logged it
or cleared it, any plantation on that land can be certified to produce sustainable oil,
provided there are no land conflicts over that land and the company has not broken any
laws in establishing the plantation,” said Dr. Rao, a plant biologist (Gooch, 2009). The RSPO
standards were implemented in late 2005, and an additional rule was implemented
requiring that “if planting was done after November 2005, it can only be certified if the
company has done a conservation study and found that there are no conservation values
present.” If there are rare or endangered species on the land, the owners must develop
conservation plans and must also develop preservation strategies to manage cultural relics
of indigenous people (Gooch, 2009).
Food industry leader Cargill has announced plans to ensure that the palm oil sold to Europe,
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the US, Canada, Australia and New Zealand is certified by the RSPO within the next several
years. By 2020, the company plans to sell only RSPO certified palm oil globally. Cargill
justified the two-‐tiered approach because the markets for the premium priced sustainable
products in different geographic regions are at different stages of development. This plan
excludes palm kernel oil because it utilizes a different supply chain (Bardelline, 2011).
Unilever has a long history of using palm oil in its products, and currently buys over a million
tons of oil from Malaysia and Indonesia each year (Pearce, 2008). Unilever was among the
founders of the Roundtable on Sustainable Palm Oil and has the goal that 100% of its palm
oil will come from sustainable plantations by 2015 (Pearce, 2008). Despite the commitment
to sustainable palm oil, in 2007 Greenpeace published a critical report titled “How Unilever
Palm Oil Suppliers are Burning up Borneo” that summarized how companies, primarily
Unilever as the largest consumer, were driving deforestation and climate change
(Greenpeace, 2007). To address the concerns raised by stakeholders and consumers
following the release of the report Unilever hired a third party consultant to assess the
claims made in Greenpeace’s publication. This report found that, despite some flaws, many
of the accusations were accurate and “shared the study’s funding with [its] suppliers and
urged them to address the shortcomings” (Unilever, 2012).
Despite the large number of member countries and partner organizations and companies,
there is still criticism of the RSPO’s process and effectiveness in ensuring palm oil
sustainability. For example, one activist group, the Center for Orangutan Protection has
strongly opposed the measures, stating, "All criteria on sustainable palm oil and certification
process are merely public lies" (World Watch Institute Series on Palm, April 2009).
Additionally, in 2008 environmental and human rights groups put forth a declaration against
“the greenwashing of palm oil by the RSPO” (Pearce, 2008). The open letter was signed by
over one hundred activist organizations from dozens of countries including Friends of the
Earth, Global Indigenous Peoples Movement and Save our Borneo. The letter listed
grievances against the RSPO including that it: undermines food sovereignty, insufficiently
manages deforestation and climate change drivers, permits the us of toxic pesticides in
production, and caters to business interests. The signatories then go on to make several
demands such as total halting of land use conversion to palm, protection of communities
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hurt by monoculture plantations, resolution of all land conflicts, and a moratorium of EU’s
incentives for biofuels (Barry, 2009).
The limitations of the structure and requirements of the RSPO have been criticized for
several reasons (Laurance, 2010). The RSPO’s membership and executive board is
dominated by industry along the supply chain including growers, processors and traders.
There is no ban on destruction of peat forests for oil palm production, one of the most
significant environmental impacts of palm oil production. Additionally, critics argue that the
environmental impacts of palm oil production are underestimated and not properly
acknowledged by the RSPO. In 2009, the RSPO decided not to include greenhouse gas
emissions standards in its certifications. Some stakeholders objected, and subsequent
publications have been released listing the loopholes that exist (Browne, 2009).
Noncompliance with RSPO certification standards may be widespread. On the ground
research by NGO’s has suggested that oversight is insufficient and sub-‐suppliers within the
complex supply chain may not be properly managed. Critics also argue that the organization
and its standards lack authority, which could be due to the fact that the RSPO has a low
annual budget (which is funded by member dues). Additionally, the RSPO has limited
monitoring capacity. A particular criticism is over the lack of remote sensing used to uphold
accountability and transparency. The ease of gaining membership in the RSPO is another
point of concern. A group can become a member without certification and adherence to
RSPO principles, as long as it can provide confidence that it is working towards certification.
The final criticism is that the RSPO has not created the market demand for sustainable palm
oil as was hoped it would. RSPO certification is not yet appealing to markets like China and
India and only a small percentage of all certified oil available has been purchased.
Additionally, RSPO certification does not translate into fulfillment of EU directives for
renewable energy and fuel quality (Lim, 2009). The price premium for certified palm oil has
been decreasing, but many producers say it may need to be even smaller if they want to
regain business in the EU. “At the moment, demand for certified palm oil is only 1% of the
[produced] volume, so this has been disappointing for the growers and we feel the food
companies should keep their end of the promise," said Lee Yeow Chor, executive director of
Malaysia's second-‐largest palm oil producer, IOI Corp. Bhd (Lim, 2009).
29
Cadbury reversed a formulation decision after criticism from consumers. In 2009, Cadbury
had announced it would add palm oil to its chocolate in select countries, touting that it
would produce an improved product texture. The public rejected this change; with
consumers arguing it was a cheap substitute and be environmentally unsustainable.
Cadbury wrote in response to protestors that they were board members of the RSPO and
would be purchasing independently verified Green Palm certificates. The company was
then criticized for the fact that the move was not replacing existing palm oil, but would
rather create new consumption demands for palm oil. Cadbury responded to “passionate
comments via social media environments” and also joined Twitter (Fitzsimmons, 2009). This
demonstrates that some companies will have consumer bases that are highly engaged in the
issue, particularly if it is more transparent (rather than hidden in processing), and may not
accept the RSPO as sufficient evidence of sustainability (Fitzsimmons, 2009).
Critics also argue that the representation of conservation and human rights organizations is
lacking in the RSPO and that when it was established in 2004 it was tightly positioned within
the palm oil industry, giving industry ongoing control over the standards and operation of
the RSPO (Laurance, 2010). Additionally, the reach of the RSPO is actually not that
significant in relation to the global production and use of palm oil. For example, RSPO
memberships account for 40% percent of global producers by volume, and but only a
fraction of that is certified (The Economist, 2010).
2. Use Roundtable on Sustainable Palm Oil Membership, with updates and revisions
Alternatives have been proposed to reform RSPO and address its limitations and credibility.
The primary suggestion is to restructure the organization to give more weight to
environmental organizations and experts. Some advocates suggest using the Forest
Stewardship Council (FSC) as an example framework, citing its public acceptance and
fulfillment of objectives (Laurance, 2010). To address the limitations of the RSPO’s oversight
enhanced monitoring and enforcement capability within or through partnership has been
proposed. Possible tools include remote sensing to oversee tract management and chain of
custody tracking to keep certified and unsustainable palm oil separate. Oversight and
transparency can also be maintained by requiring members to submit annual
communications of progress towards RSPO sustainability criteria. These reports can also be
30
incorporated into the solicitation of an independent watchdog group that monitors and
critiques the RSPO and its fulfillment of its own rules and objectives. Again, this is a similar
approach to the FSC. Lastly, to increase consumer awareness and demand, the authors
suggest promoting more rigorous labeling requirements of certified vs. non-‐ certified palm
oil (Laurance, 2010).
As evidenced in the limitations described, some stakeholders suggest that the Forest
Stewardship Council model could be useful in enhancing the success of the RSPO. The
Forest Trust, a non-‐profit based in the UK, has proposed to develop a unique model for
trade in sustainable palm oil using market leverages to prevent deforestation. Other
organizations, such as the Rainforest Alliance or Global GAP, have developed their own
certification systems for other agricultural crops, which could be applied to the palm oil
sector. These approaches could be expensive as the non-‐profits would act as consultants
and help facilitate the firm through the process, but could also present cost savings in terms
of protecting a firms reputation and helping it to achieve standards that consumers are
willing to pay a premium for.
Some organizations have already implemented this method of modifying RSPO standards.
Indonesian production company, Golden Agri-‐Resources (GAR) is working with The Forest
Trust (TFT) to comply with new standards that expand upon the RSPO standards. Under this
approach, the company will not plant oil palm on peat and will not clear land with high
carbon storage (35 tonnes carbon/ha was the tentative ceiling). GAR is the second largest
producer of palm oil in the world and is seeking to take the lead after receiving criticism.
Franky Wijaya, GAR's chairman and CEO stated "Our partnership with TFT allows us to grow
palm oil in ways that conserve forests and that also respond to Indonesia's development
needs; creating much needed employment while building shareholder value" (Black, 2011).
Nestle purchases from Golden Agri-‐Resources and influenced this transition as it evaluated
its own supply chain. Nestle also publicly partnered with The Forest Trust to purchase
sustainable palm oil, following high profile criticism from NGOs and consumers. In May
2010 Nestle and TFT worked together to establish “Responsible Sourcing Guidelines” that
guide Nestlé’s procurement process. Plantations supplying Nestle were subject to TFT
assessments. GAR’s subsidiaries then implemented supply chain controls to ensure
traceability across the supply chain (which is also audited by a third party international
31
agency, TUV Rheinland Group). Nestle also implemented long term plans, called a Forest
Conservation Policy, to ensure that: there is no development on high carbon stock or high
conservation value forest areas; free, prior informed consent from communities; and
compliance with laws and RSPO criteria (The Forest Trust, 2011).
3. Phase out oil palm, reduce purchasing volumes and reformulate
Some companies have sought alternative approaches to the RSPO. For example, in the
cosmetics industry, which uses approximately seven percent of all palm oil supply, Lush has
developed a substitute material. The palm substitute “combines sunflower oil, rapeseed oil
and coconut oil with sodium hydroxide and water, mixed together and boiled to accelerate
the saponification process. Salt is added to separate the soap from the mixture, and the
finished soap is then extruded to produce "dry noodles" (Siegle, 2010).
While this approach can be useful for promoting a “sustainable brand image” with
consumers and media and also to protect the company from the potential volatility of the
palm oil global value chain due to quickly evolving perceptions and markets, there are also
some potential downsides to this approach. For example, developing an alternative
material to replace of palm oil could be costly, both in terms of research and development
funds and the cost of the material. Additionally, if a company were to completely remove
palm oil and its derivatives and replace it with an alternative there could be performance
changes in the product. This could be an issue if this product no longer meets consumer
expectations, such as texture of a food or effectiveness of a surfactant.
4. Form partnerships with other industry members and NGOs
Companies have also initiated one-‐to-‐one relationships with environmental NGO’s. “There
might be more scope for producers to contribute to payments for environmental services
schemes aimed at slowing deforestation, and to conserve forest remnants within their
plantations. Strategic alliances between multiple stakeholders, such as oil palm producers,
environmental organizations, rural communities, government agencies and carbon off
setters, have the largest chance of success” (Fitzhebert, 2008). In partnership with WWF,
Migros, a Swiss retail chain, implemented a strict set of social and environmental criteria to
be met by their palm oil suppliers. For example, oil palm plantations must not be grown on
newly deforested land and must include secure wildlife and forest corridors. Social concerns
32
are also taken into account to minimize conflict with local communities and ensure that
workers' basic pay and conditions are met” (Fitzhebert, 2008). Some companies seek to
slowly increase the amount of sustainable palm oil across their product lines, while others
focus on specific products as part of a marketing strategy (Grant, 2002). General Mills has
also announced a palm oil policy that includes objectives to: protect Indigenous rights,
protect rainforests and peat lands, and use environmentally sustainable palm across the
entire supply chain by 2015 (Rainforest Action Network, 2010).
5. International Organization for Standardization (ISO) Certification
“Another possibility would be for producing countries to develop their own certification
systems for sustainable palm oil that could perhaps be accredited by an international
organization such as the International Organization for Standardization (ISO).” (Teoh, 2010).
Other potentially relevant ISO standards include ISO 26000 (Social Responsibility), ISO 22000
(Food Safety Management) and ISO 14000 series (Environmental Management) and ISO
9000 (Quality Management) (ISO, 2012).
ISO 14001 has been explored as a possible alternative that could be modified for palm oil
production. ISO, similar to the RSPO is based on the idea that an environmental
management system (EMS) that includes self-‐regulation by corporations along with market
incentives can result in effective environmental management and minimize the need for
government enforcement. “We may readily assume that a good EMS, if well implemented,
will reduce negative environmental impacts. However, a certified EMS can only ensure that
a firm or plant meets “a process standard rather than a technical standard”” (McCarthy &
Zen, 2010). A company’s management strategies can achieve ISO 14011 certification
standards provided there is a system in place for identifying and complying with standards.
However that does not guarantee than the actual outcomes will improve or that the
company will go beyond the baseline standards for the process. As a result, it is limited in its
means to ensure environmental improvement in areas such as carbon emissions, water
management or soil quality. An additional critique is that the ISO system is most
appropriate and achievable for large scale production (where the supply chain is under the
control of only a few firms) rather than small-‐scale growers. “At this early stage it remains
unclear wether application of ISO criteria will lead to real reform of practices rather than
merely imrpovements that remain primarily technical and administrative in nature”
33
(McCarthy & Zen, 2010).
The ISO alternative is still relatively new and undefined. There is little literature available
about the potential of the approach towards palm oil sustainability and does not appear to
be a comprehensive strategy that any firms are implementing as their sole management
strategy. It will be important to continue to monitor this alternative as it evolves to
document how to it is used by companies and perceived by stakeholders Additionally, it will
be important to monitor if ISO certified palm oil has different environmental impacts than
palm oil certified under other schemes.
V. TRADEOFFS IN SUSTAINABILITY DECISIONS
In 1987 the Brundtland Commission gave momentum to the concept of sustainable
development, which joins together the dimensions of environment, economy and society.
Sustainability requires understanding the connections and tradeoffs between society and the
environment rather than a focus on fixed points and states in time (Hjorth & Bagheri, 2006).
Given that the areas with the highest rates of poverty are also often areas with the greatest
biological wealth, there historically has been interest in developing management approaches
that seek to address both these factors, creating win-‐win solutions such as creating markets for
non-‐timber forest products. In these cases, biodiversity would be conserved and there would be
impetus for social and economic development. However, actual case studies have
demonstrated that tradeoffs occur even within types of objectives (ie. conservation) and across
them, such as livelihoods and conservation (McShane, 2011). Examples include ecological and
economic tradeoffs of dam removal (Stanley, 2003), the implementation of REDD projects in the
Amazon and land rights (Stickler, 2009) and biodiversity conservation and poverty alleviation
(Adam, 2004) (Roe, 2008).
These sustainable development problems are difficult because tradeoffs must be made between
different interests and priorities, across long and short term, and benefits and costs at different
spatial scales. Also, “many times choices are made implicitly, without even knowing that
something is being overlooked or given up because there is a lack of knowledge or the right
people are not at the negotiating table” (McShane, 2011). There is also a tendency to avoid
acknowledging the undesirable effects of projects and instead offer optimistic viewpoints.
34
Offering optimistic viewpoints is attractive because projects appear to be efficient by creating
synergies between priorities and create single message for communication. By not being open
about tradeoffs, a stakeholder can perpetuate this problem. Groups who were supposed to
“win” or those who were not even considered in the first place feel the negative tradeoffs. “In
general, understanding and communicating projects and policies as win–win does not provide a
broad enough view of the multiple dynamics and complexities of most conservation and
development scenarios” (McShane, 2011). There are three general assumptions made in the
tradeoff framework: the definition means that some things are gained and some things are lost,
tradeoffs allows actors to recognize the hard choices involved in conservation and development,
and acknowledgement of tradeoffs may lead to move resilient outcomes (McShane, 2011).
Policy analysis also provides a method of evaluating tradeoffs, and elements of the approach are
utilized in this paper (Bardach, 2011).
Palm oil management is an example that illustrates the concepts outlined in the tradeoff
framework. For example, if a firm focuses on the economic aspect of sustainability (ie. low
production costs through economy of scale), this can often come at the cost of environmental
health (e.g. biodiversity loss from loss of ecological corridors) as a result of allocation of funds,
research or changes in harvesting practices. However, there are instances where sustainability
can maximize two or more of the “legs” of sustainability (economic, environment and society),
such as creation of cooperatives that provide education on best management and harvesting
practices to palm oil, while providing access to market and capital for local communities.
Understanding where these risks and opportunities exist would be beneficial for firms.
VI. SUSTAINABILITY DECISION MAKING PROTOCOL
There are five tools in the Sustainability Decision Making Process Protocol that have been
developed to help companies address the tradeoffs inherent in strategy development. These
tools will help companies comprehend the context in which a decision is to be made, recognize
staekholder interests and influence, identify tradeoffs in sustainability, leverage causal loops
and make decisions.
TOOL 1. MIND MAPPING
The first step in the sustainability decision-‐making process protocol is “mind mapping”, a
technique widely used in decision-‐making (Buzan, 1996). Mind mapping begins by
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brainstorming and organizing important concepts, actors and issues regarding the chosen topic.
Next, connections among the different items are made as they are reorganized to show
influence upon one another and the issue being examined. This technique is useful in exploring
and evaluating the context in which firms and stakeholders operate, including government
policies, priority issues, academic engagement and consumer priorities. As explained by Hjorth
and Bagheri, “Issues about sustainability are not merely complicated; they involve subsystems at
a variety of scale levels, and there is no single privileged point of view for their measurement
and analysis. Such problems can neither be captured nor solved by sciences that assume the
relevant systems are simple” (2006). As shown in Figures 4 and 5 the factors and actors were
organized around the topics of social, economic and environmental impacts and influences. The
figures were developed by reviewing academic literature and stakeholder publications. Next,
the components of the mind map were coded. The three different codes are metrics, actors and
regulations. The metrics related to each of the three branches of sustainability are red, while
the actors are colored in green and regulations are yellow.
TOOL 2. STAKEHOLDER ANALYSIS The second step in the protocol is to conduct a stakeholder analysis, which builds upon the work
completed in the mind mapping. In addition to use in public policy, stakeholder analysis has
been a tool used in business ethics for several decades. “The term ‘stakeholder; appears to
have been invented in the early 1960 as a deliberate play on the word “stockholder” to signify
that there are other parties having a “stake” in the decision-‐making of the modern, publicly
held, corporation in addition to those holding equity positions” (Goodpaster, 1991). A
stakeholder is defined, as “any group or individual who can affect or is affected by the
achievement of the organization’s objectives”. As a result, conducting a stakeholder analysis is
an important component of the sustainability decision making protocol process, helping
decision makers to comprehend the positions and power of stakeholders and anticipate their
reactions to different decisions. The stakeholder analysis utilized principles from Bardach’s
eight-‐fold path: stakeholders and their positions were identified and their involvement, interest
and influence were characterized (Bardach, 2011).
The stakeholder matrix, shown in Figure 6, was completed using literature, news reports and
publications from the organizations studied. Some of the data was inferred and developed by
grouping similar organizations together. Much of the information from the stakeholder analysis
36
is embedded in the paper, but there are several important points raised in the matrix. For
example, the interests and influence of producing countries are more complex than what can be
summarized in a stakeholder matrix. The countries have implemented different programs and
policies at different points in time and also have multiple objectives to manage, such as
environmental quality and economic development. The role of mainstream media is another
interesting point on the stakeholder matrix. Mainstream media has a large amount of influence
but until this point has been relatively uninvolved with the palm oil sustainability debate, as
most of the attention has come from specialized media. If this issue were to become more
prominent in the mainstream media then this could be an important shift in consumer
awareness. The stakeholder matrix shows that palm oil is important to different companies in
varying ways. Much of the pressure to change to a sustainably certified source of palm oil has
consumer and NGO pressure. Companies with consumer facing products, such as personal care
and processed foods have typically been most at risk from negative campaigns while the
practices of business-‐to-‐business companies have been less exposed.
TOOL 3. TRADEOFFS TAXONOMY
In addition to looking at each of the “pillars” separately, the complex problem can be examined
by looking at the metrics, actors involved and the regulations and obligations that impact the
pillars. Connections can be drawn across each of these aspects; for example, one regulation
may have impacts on economics and environmental health and involve many actors. This
approach can be used to explore the tradeoffs of a chosen strategy for palm oil management.
To demonstrate this approach, three different “metrics” are plotted (Figure 6). Employment is
plotted almost between social and economic because it can be either one of those types of
sustainability factors. Human rights are categorized as a social sustainability factor. Ecosystem
services are plotted near the border between environmental and economic factors because they
have the potential to be both factors. In this example, companies are able to assess where the
impacts of their funding and strategy decisions are on the different aspects of sustainability and
model the impacts of decisions dependent upon which sustainability priorities, and thus their
metrics, are valued highest. For instance, a firm may emphasize increasing production volumes
through expanded land conversion and intensive management. This could be expressed as
“volumes of palm oil” metric near the center of the circle, showing the priorities of the firm.
The taxonomy is helpful in showing that the firm may not be prioritizing other issues, such as
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international protocols like the Convention on Biodiversity. The Convention on Biodiversity
could be plotted on the “regulations” circle, incorporating both the social and environmental
legs of sustainability. A company’s goal should be to evenly balance priorities across the entire
area of the tradeoff’s taxonomy. For example, if a company’s priorities are only located in the
center of the bullseye then it is successful in balancing the metrics of three sustainability pillars,
but unsuccessful in comprehensively addressing the actors and regulations involved. Examining
the environmental aspects of palm oil, a company must balance the metrics (biodiversity of area
under management), actors (relationships with environmental NGO’s and impacted
communities) and regulations (compliance with national and international environmental laws).
In regard to the social aspects of palm oil, the metrics (prior informed consent), actors (advocacy
groups and consumers) and regulations (international labor organization principles and
relocation programs) must be balanced. Finally, the economic metrics (GDP and wages), actors
(employees and government agencies) and regulations (trade policies and mandates) need to be
considered.
This taxonomy can be used to build upon the mind mapping developed as part of the first tool.
The mind map helped to explore the different metrics, actors and policies that interact in the
Figure 7: Tradeoffs Taxonomy
metrics metrics
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complex issue of palm oil management. This new taxonomy is a way to further compare
different components of the issue and consider the value each of the three sustainability
principles. This will help firms understand the tradeoffs implicit in their strategies, and also the
values of their stakeholders and competition.
TOOL 4. SYSTEMS ANALYSIS-‐ CAUSAL LOOPS
The next step within the Sustainability Decision Making Protocol is to consider casual loops that
exist within the system. This is an important next step after identifying tradeoffs, as tradeoffs
are a function of the systems that are operating and how things are connected to each other.
Understanding causal loops will help actors comprehend the reactions that occur when a
strategy is made, in that other factors are influenced even when they are seemingly unrelated.
As described previously, there are tradeoffs associated with each strategy. This can also help to
explore how external factors outside of the control of the firm will impact its own operations.
Examples of external factors include carbon regulations, environmental changes, and lawsuits.
Using causal loops is a transition from the linear thinking that has historically dominated
problem solving. Many describe the important issues currently being faced as “interrelated in
ways that defy linear causation” (Hjorth & Bagheri, 2006). Situations in which a variable
functions as both a cause and effect are now common. “In order to understand the source and
the solutions to modern problems, linear and mechanistic thinking must give way to non-‐linear
and organic thinking, more commonly referred to as systems thinking-‐a way of thinking where
the primacy of the whole is acknowledged” (Hjorth & Bagheri, 2006). System dynamics allows
several benefits: understanding of feedback loops, modification of mental models of the real
world, and improvement in system performance by understanding the targets better. System
dynamics presents a method to review many factors at a time and to appreciate the complexity
of the system as a whole, rather than just view as a sum of its parts and allows the identification
of leverage points within a system where a small shift can produce big changes.
Causal loops are developed by identifying variables that are important in the system, such as
money for environmental projects and revenue. Casual relationships between the variables are
identified and lines are drawn to connect them. The polarity of causal links is assigned. The
polarity is positive if the variables move in the same direction, and negative if they move in
opposite directions. Causal loops are then identified and defined as reinforcing and balancing
39
loops. In Figure 8, the competing feedback loops associated with environmental stewardship are
drawn, and balancing and reinforcing loops are identified for a focus part of the system. The
reinforcing loop, in blue, shows that money devoted to environmental projects increases the
capacity of a firm to achieve environmental stewardship (through payment of premiums for
certified products or hiring of additional staff to monitor company actions, funding of grants).
As shown by the positive signs on the blue circle, each of these steps has a positive relationship
with the next; a reinforcing loop enhances growth. Reinforcing loops can generate both growth
and collapse. An example of growth is that increased environmental stewardship would lead to
increased consumer interest in supporting and purchasing of the brand. With increased
purchases, there will be additional money to continue investment in environmental projects. In
an opposite scenario that generated growth, if less money is devoted to environmental
stewardship then consumer purchasing would decline and so would revenue.
A balancing loop is on the outside of the diagram, in red. A balancing loop occurs when the net
polarity of the causal loops is negative and limits the change occurring as a result of the
reinforcing loop. All other things constant, when more money is used for environmental
projects, there is less money for new product development at the firm. When there is money
for product development, product attractiveness and marketing is positively influenced, and
thus more products sold. With more products sold, there is higher revenue and more money
available for environmental projects.
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Figure 8 Causal Loops in Palm Oil Strategies
Mapping causal loops is an important step for firms because it helps to identify unanticipated
consequences of decisions and particularly those made in conjunction with one another. For
example, if a firm were to simply look at the reinforcing loop and decide to follow a strategy of
devoting money for environmental products, it would overestimate the actual impact of this
decision on the firms operation and profits. The balancing loop shows that by simply devoting
money to environmental projects (and at the expense of other business operations such as
money for new product development) will eventually limit the number of products sold the
money available. The loops may have different rates of change and could be influenced by
outside factors. For example, if competitors begin to replicate the environmental stewardship
exhibited by the firm then consumer perception may not be as significant in differentiating the
firm. A firm may respond by refocusing efforts on developing new products, emphasizing other
characteristics such as costs or performance as a way to differentiate them. This is an
important dynamic for firms to consider for other decisions they face in addressing sustainability
issues. The case of funds for environmental stewardship in competition with product
development is an example of a simple diagram that can be constructed, but does not include
the many other loops that actually exist. Adding these loops would help identify ways in which
these variables are not always in conflict, and can even be beneficial to each other. An example
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would be if a product can be designed to be environmentally sustainable as part of its
development. One way in which additional loops can be developed and enhanced would be to
collaborate with stakeholders to better understand relationships. For example, different
stakeholders such as environmental NGO’s and small producers may view components of a
causal loop differently. A company’s strategy to implement an environmental initiative, such as
sourcing from only certified suppliers, could be viewed a benefit by stakeholders focusing on
biodiversity conservation or carbon emissions. At the same time, this could also mean that
many producers that have typically had access to a market and demand would loss a consumer.
The loss of business could result in negative impacts in terms of loss of income or investment.
The differences in stakeholder perspectives present an opportunity for engagement and
collaboration to reconcile varying viewpoints and determine a strategy that balances both long
and short-‐term goals and priorities of groups. Additionally, strategies modeled in the causal
loops do not only need to be implemented by companies. There are opportunities for policies
to intervene. For example, if the objective is to reverse the balancing loops and turn it into a
reinforcing loop a government policy could target the portion of the loop in which more money
towards environmental projects detracts from product development.
TOOL 5. DECISION TREE SCENARIOS
A decision tree is a way to visually represent the decisions available to a firm and weigh
tradeoffs and objectives. A decision tree includes the decisions to be made, the possible
outcomes of chance events and the consequences of events. Different from other types of
modeling, such as influence diagrams, decision trees are also useful because they can model
sequential decisions and events. Decision trees also allow the modeling of uncertainty in
outcomes, where there is a range of risk. Within decision trees, Monte Carlo simulations can
also be used in areas of uncertainty. Monte Carlo simulation is a technique that provides a
range of possible outcomes and the probabilities that they will occur for a given choice. A
Monte Carlo incorporates the extreme possibilities along the distribution of outcomes, rather
than simply relying on a mean to be used as input in a calculation of expected values (Clemen &
Reilly, 2000).
Decision trees have a variety of applications, from business decisions to ecological management
strategies (Keeney & Raiffa, 1993) (Hanfield, 2002). There are three important principles in
interpreting decision tress: first a decision maker can only choose one option (branch) from each
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decision, second the branches from chance nodes must correspond with mutually exclusive and
collectively exhaustive outcomes and third the decision tree represents all of the possible paths
the decision maker may follow (Clemen & Reilly, 2000).
Using principles from decision analysis described by Robert Clemen in Making Hard Decisions,
an objectives hierarchy, Figure 9, was developed for firms that are involved in the purchasing of
palm oil (Clemen, 1997). An objectives hierarchy is a tool used to organize the objectives of a
group. The broader objectives are placed at the top, while the specific objectives that
contribute to them are listed below. The fundamental objective of a firm is to achieve and
preserve its viability over time. According to the model, there are three primary components
that help to achieve this objective, which also coincide with the sustainability legs discussed
earlier as known as business’s triple bottom line. Within each of the components there are a
variety of measureables that can be achieved, depending on the perspective and values of the
firm and the way in which the components are weighted. For example, one firm could achieve
the environmental services and stewardship component through consistent access to the inputs
and resources required to produce their goods and services. To another firm, this component
may be reached by reducing the company’s carbon footprint to align with environmental
regulations or for environmental reporting or by preserving biodiversity in the areas sourced
from.
OBJECTIVE: Viability of a firm over yme
Financial/Economic Profits
Revenue> Costs
Regulatory Fines Minimized
Employment & Infrastructure
Market Share
Increasing net present value
Environmental Services & Stewardship
Consistent access to inputs and resources
Biodiversity
Ecosystem Services
Small carbon footprint (regs pending)
Cultural/Non-‐use value
Social Acceptability
Customer loyalty
Brand differenyayon & image
Protecyon of human rights/ Reg. compliance
Responsiveness to market evoluyon
employment & economic growth (social impacts)
Figure 9: Objectives Hierarchy of a Firm
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Social acceptability, meaning that the public “allows the company to operate” with societal
approval, can be measured and achieved in several ways such as customer loyalty to the
company or compliance with human rights laws and standards. Financial health can be
measured in several ways as well. The most basic measurement would be profits, which
determine if a company has funds to pay employees and continue to operate. Another
measurement is maintenance of a net present value in order to satisfy shareholders and
investors.
The purpose of having multiple factors to gauge the achievement of broader fundamental
objectives is to reflect that individual companies may weigh factors differently. Having multiple
factors is also useful because different combinations of them will be most impacted in different
scenarios and situational levers. In different situations a select few of the factors will be the
most relevant, but all will continue to be important to the company in the long run. Ideally, the
most appropriate way to consider all of the objectives in the objectives hierarchy using a
decision tree. However, incorporating all of these factors would result in a very complex
decision tree that would not be practical or useful for interpretation. A possible alternative tool
to model the context in which companies are to make decisions is an influence diagram. An
influence diagram would allow a company to map the interactions among its objectives,
alternatives and areas of uncertainty. However, decision trees can be useful when looking at
specific scenarios. To show how different objectives are impacted, several decision trees have
been developed under three scenarios of potential futures. The three decision trees developed
are titled “Business As Usual”, “Carbon Regulation” and “Biodiversity Management”. Exploring
possible scenarios can help managers recognize and adapt to changing aspects of the
environment in which their business is operating.
Scenario 1: Business As Usual
In this scenario, firms are operating under business as usual; there are no new changes to
legislation or consumer preferences. A firm is seeking to maintain a given net present value.
Access to resources and employment are used as the primary metrics from the fundamental
objectives hierarchy.
Firms can chose between different approaches to sustainability. A firm must choose whether to
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implement a sustainable sourcing strategy, and if so, which type. In this paper the three main
sustainability options are Roundtable on Sustainable Palm Oil certification, International
Organization for Standardization or internal management. In order to construct a decision tree
the firm must determine the cost of the different management approaches in terms of profit per
unit of oil. To increase the accuracy of the decision tree, a more thorough study of the costs of
each certification program should be performed and tailored to the costs required for each firm
to achieve the sustainability strategy.
One outcome of the decision whether or not to pursue sustainability strategies is the change in
access to resources needed to manufacture its portfolio of products. This component entails a
large amount of uncertainty. For example, by sustainably managing a resource, the firm will
benefit from greater long-‐term security of its supply. On the contrary, by implementing strict
purchasing requirements and standards, the stock of resources that meet those requirements
may also decrease. For example, if a company chooses to only purchase RSPO sustainable palm
oil, which in in 2008 was 4% of the global supply, the price of the product will be higher and
there will be a smaller volume available as demand increases from competition from other firms
(RSPO, 2008). This assumes that the volume of RSPO certified oil does not change, other
companies have the same demand for RSPO oil and consumers are willing to pay a premium. In
reality, if there is increased emphasis on RSPO certification and signaling from companies then
more plantations may transition into this program, increasing the amount of certified palm oil
available. The probability node for access to resources contains a large amount of uncertainty
and cannot simply be denoted as high and low access. An available solution to the firm is
implementation of a Monte Carlo assessment to utilize the distribution of the possible outcomes
of access to resources.
The next metric employment and economic growth, is a factor of social acceptability. Given
higher access to resources, a company is then able to manufacture and sell its products at a
lower cost per unit, increasing company revenues. Employment and economic growth, for the
purposes of the decision tree, can be expressed as low, medium or high. It is assumed that
employment and economic growth is connected to the net present value of the company. An
increase in employment is connected to maintenance of the desired net present value. Net
present value is then projected in the decision tree using the categories of negative, zero,
positive.
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Building a Decision Tree
A compressed decision tree developed for Scenario 1 (Figure 10) combines the metrics,
decisions and areas of uncertainty of the situation. The portion of the decision tree that has
been completed fully is highlighted in grey. As with all of the scenarios modeled in this paper,
the decision tree begins with a firm’s decision of whether or not to pursue sustainable palm oil
practices or to continue under the status quo. From there, a firm that has chosen to prioritize
sustainable palm oil must choose among the different approaches available. When complete,
this decision tree will also include the costs of each approach. For example, internal
management may require hiring of employees while RSPO membership and certification will
require annual fees as well as premium prices to ensure that all requirements of the standard
are met. The decision tree will incorporate the price consumers will pay for the product. Next,
each approach has an associated change to access to resources from the status quo, but is not a
discrete value but instead is a distribution of possible changes unique to each approach. For
example, the distribution could be a normal curve ranging from a 25 percent decline in access to
a 60 percent increase in access. Next, employment and economic growth of the company are
uncertainty nodes with three branches, low, medium and high. For each of the possible
SCENARIO 1: Business As Usual
SCENARIO COMPONENTS & SUMMARY Financial Profits: Increasing net present value
Environmental Services: Access to Resources
Social Acceptability: Employment & Economic Growth
BUILDING A DECISION TREE Decisions to Make Areas of Uncertainty Consequences of Decisions
- Purchase sustainable palm oil or not - What type of sustainability strategy to implement
- Impact of sustainability strategies on resource size and access
- Long vs. short term variation and stability - Size of sustainability premium market - Correlation between employment and net present value
- Access to resources (probability range) - Employment and Economic Growth (Low-‐Med-‐High) - Change in net present value (Negative-‐Zero-‐Positive Low-‐Positive High)
46
outcomes of employment and economic growth, the net present value of the company is then
considered. For example, if employment and economic growth is “high” then the probability
that the change in net present value is “positive” will be high, such as 75%. On the other hand,
if employment and economic growth is predicted to be low, then the probability that net
present value is “positive” will be much smaller, such as 10%. The company can then compare
the expected net present value changes resulting from different sustainability strategies choices.
Scenario 2: Carbon Regulation
In this scenario, carbon regulations have been implemented and impact the palm oil industry
through limits on carbon emissions from deforestation. This regulation can be at either the
country level (ie. exporting country or importing country) or internationally in the form of
carbon credits, cap and trade or command and control.
In this decision tree, as with the previous scenario, the firm can choose whether or not to
choose to source sustainable palm oil and then which type of sustainable approach. The way in
which each approach impacts the carbon intensity of production varies. For example, the
carbon footprint of conventional palm oil is likely to be greater than palm oil sourced according
to internal metrics that are beyond RSPO standards. To express this, the carbon footprint of
each approach is rated as either high or low and the cost of each approach is considered. When
adapting the decision tree for its own production, a firm can research the actual impacts each
strategy would have depending on the suppliers and demand of the firm and the categories of
low, medium and high could be better defined. Business as usual would be the least expensive
strategy, while RSPO and internal management would be more expensive. In this scenario, the
amount of carbon regulation fines imposed on a firm depends on the carbon footprint of a
strategy. For example, with a low carbon footprint, the outcomes could be estimated to be 98
percent low fines and 2 percent high fines.
To arrive at the final component of the fundamental objective, social acceptability, a step is
added to the decision tree to measure consumer loyalty. It is assumed that consumer loyalty is
influenced by the amount of fines a company faces. For example, if it is well publicized that a
company is being heavily fined for violation of climate regulations consumer loyalty will
decrease.
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Building A Decision Tree
A decision tree was constructed for the carbon regulation scenario, Figure 11. This decision tree
was fully developed by expanding the probability nodes (which are compressed in Scenario 1
and 3). The different probabilities and costs of each node are denoted with Px and Cx. It should
be noted, however, that in reality differently labeled probabilities and costs could actually be
the same but at this point that is an area of uncertainty. For example, the probability of
detection of regulation violation is likely to be consistent across the entire scenario but for this
purpose have been labeled as different probabilities. The cost of decreased customer loyalty
could also potentially be the same no matter the sustainability strategy chosen.
The decision tree begins with a firm’s choice to purchase palm oil under a sustainability plan or
not. Next, the way in which each approach impacts the carbon footprint of palm oil production
is added as an uncertainty node. From each outcome, the amount of fines a company faces as a
result of violations of carbon regulations are added as an uncertainty node, as the capacity for
regulators to detect violations is unknown. Lastly, the ways in which consumers will respond to
fines being imposed on the company are added. This incorporates how public the issue
becomes and how much the consumer base engages in sustainability issues as they make
choices about loyalty.
Scenario 2: Carbon Regulation
SCENARIO COMPONENTS Financial Profits: Regulatory Fines
Environmental Services: Minimized Carbon Footprint
Social Acceptability: Consumer Loyalty
BUILDING A DECISION TREE Decisions to Make Areas of Uncertainty Consequences of Decisions
- Purchase sustainable palm oil or not - What type of sustainability strategy to implement - How strategy will impact carbon footprint - Impact of carbon regulation - Timeline of regulation implementation - Measurement of carbon against standard, how will be fined
- Cost of fines - Public Awareness of fines - Public concern about fines, connection to purchasing
- Size of carbon footprint (Low-‐Medium-‐High) - Size of fine faced (Low-‐High) - Consumer Loyalty (Low-‐High)
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Scenario 3: Biodiversity Management
Biodiversity management is the focus of this scenario. The relationship between biodiversity,
ecosystem services and human well being has been well studied and established (e.g. (MEA,
2005)(Nelson et al., 2009)(Daily, 1997). In “Ecosystems and Human Well-‐Being” the authors,
including Diaz, Tilman, Fargione, Daily and Naylor wrote that, with high certainty, “biodiversity,
including the number, abundance and composition of genotypes, populations, species,
functional types, communities and landscape units, strongly influences the provision of
ecosystem services and therefor human well-‐being” (Diaz et al. 2005). Different sustainability
management strategies will have different impacts on ecosystem services.
In this scenario, changes to biodiversity management goals caused by external forces are
studied. Such changes that influence firms can come from international regulations, such as the
UN’s Convention on Biodiversity, domestic environmental policies in producing countries or
energy mandate standards set by importing regions like the European Union. All of these
factors could impact the firms involved. The objectives within the objectives hierarchy that are
selected in this scenario are ecosystem services, market share and human rights. The different
management strategies available to a firm will impact ecosystem services differently. For
example, most would argue that pursuing conventional materials would degrade ecosystem
services more than plantations managed under RSPO certification. Ecosystem services have a
direct correlation with the well being and rights of the communities surrounding palm oil
production, either through loss of land tenure, water pollution or degradation of habitat for
important species. The final factor is the way in which human rights impact a firm’s market
share. For example, the way in which human rights violations gain attention and are shared by
the media will influence the firm’s market share, depending upon consumer perception. If a
firm gets a bad reputation in the media for its impacts on human rights then it is expected that,
with an engaged consumer base, the business will suffer and the market share will either
stagnate or decrease.
Building a Decision Tree
A compressed decision tree was constructed to model Scenario 3 (Figure 12) and similar to the
previous models that incorporate the metrics, decisions and areas of uncertainty in the
situation. The portion of the decision tree that has been fully expanded is highlighted in grey.
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Working off of the choice among sustainability practices, there is a chance node for how
ecosystem services will be impacted. In the decision tree ecosystem services can either be
degraded, improved or experience no change. Next, the way in which the ecosystem services
impacts human rights is considered. For example, if a management approach degrades
ecosystem services then the probability that human rights would be violated is higher than if
ecosystem services were improved. Next, the way in which human rights violations impact
consumer preferences is considered using market share as a metric. For example, if consumers
are upset by the company’s actions and negative impacts on human rights then they may shift
to purchase from the company’s competitor. An important consideration is that the different
sustainability programs will have different costs to implement, and the funds devoted to this
program may mean that less money is devoted to other aspects of the business that also effect
market share. These are important considerations to take into account as the firm builds a
decision tree.
SCENARIO 3: Biodiversity Management
SCENARIO COMPONENTS & SUMMARY Financial Profits: Market Share
Environmental Services: Ecosystem Services
Social Acceptability: Human Rights
BUILDING A DECISION TREE Decisions to Make Areas of Uncertainty Consequences of Decisions
- Purchase sustainable palm oil or not - What type of sustainability strategy to implement
- Impact of sustainability strategy on ecosystem services - Scope and scale of ecosystem service changes - Community and NGO reactions to ecosystem change - Capacity to communicate to broader audience - Consumer engagement in human rights issues and impact on purchasing habits
- Delays in impacts
- Ecosystem services (improved, degraded, no change) - Human rights (improved, harmed, no change) - Market Share (increase, decrease, no change)
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General Principles in Creating a Decision Tree
There are several principles that can be taken from the process used to develop the three
scenarios used in this paper in order to enhance ongoing use of decision trees. In each of these
scenarios there are several decisions that the firm can make, either at once or sequentially. If all
of these decisions were incorporated into the decision trees modeled for each of the three
scenarios they would become much more involved and limited in their ability to illustrate their
basic concept. As a result, the additional considerations a firm faces are not modeled but are
still important to discuss. See the table “Developing a Decision Tree” for a summary of the
factors to consider when building a decision tree, including the decisions available, areas of
uncertainty, and consequences. The table can be utilized in further refining the business as
usual, carbon regulation and biodiversity regulation scenarios and to inform ongoing
development of additional scenarios.
Developing a Decision Tree Decisions to make and alternatives available to the firm
-‐ Payment of Premium -‐ Type of Premium -‐ Communication Strategy -‐ Regulatory Compliance
Areas of Uncertainty - Effectiveness of certification programs - Stakeholder and Consumer Reactions - Policy Changes
How to Resolve Uncertainty - Consumer interviews and market studies - Case studies and observations of competitors - Establish a working group with relevant stakeholders - Implement pilot programs
Potential Consequences of Decisions - Consumer willingness or unwillingness to pay price premium - Backlash or support from NGO’s and Media - Regulatory violation or compliance - Legislation implemented to the benefit/detriment of the firm - Availability of supply changes (increase/decrease)
A firm can decide whether or not it elects to pay a premium for palm oil that is certified as
sustainable for its total volume, a set proportion or specific products. Further, the firm must
choose which certification program to pursue, such as the Roundtable on Sustainable Palm,
International Organization for Standardization, new standard certification programs with third
parties or implementation of internal standards. A firm can also decide to pay a premium to
51
purchase palm oil, or instead base purchasing decisions on other needs of the company such as
contract volumes, relationship with vendor, oil quality and price. Lastly, a firm can decide to
phase out of palm oil purchasing, utilizing alternative materials.
An additional decision a firm faces is in regards to its communication strategy about palm oil.
The firm can implement a communication strategy about palm oil sourcing to explain and
promote the approach chosen to consumers and customers. A firm may also choose to not
devote resources towards a communication strategy and discuss approaches only as needed.
Firms must then decide what information and message to communicate, whether it is to seek to
demonstrate it is ahead of its competitors or has had a certain impact on the environment.
In regards to regulatory compliance a firm must decide whether or not to invest resources and
staff in ensuring compliance with palm oil relevant country level and international regulations
such as those related to lifecycle analysis, environmental impact and social welfare. A company
can also decide against devoting resources to ensure compliance, trusting sub suppliers are in
compliance. Lastly, a firm can choose to knowingly violate regulations upon consideration of the
consequences.
Uncertainty is an important component of decision-‐making and there are many areas in which
firms will not have all of the information but still must make a decision. One large question is if
certification programs should be trusted to actually ensure sustainability. Given the criticism of
the RSPO, despite all of the stakeholders involved, there is a valid concern that different
sustainability approaches still may not be effective in meeting sustainability criteria such as
reduced carbon footprint, increased biodiversity and fair wages. There is uncertainty about the
way in which stakeholder groups will react to the choice a firm makes among the different
sustainability certifications. An additional area of uncertainty related to stakeholder reaction is
how that will influence consumer behavior and preferences towards paying for sustainability
premiums. This may also vary across different sectors, such as personal care and food and
depending on this position of the firm in the supply chain, such as retail or manufacturer. The
policy and governance context can also be unknown. For example, there is uncertainty about
the chances that a violation of a country specific or international law would be noticed and the
fines associated with that violation as well as loss of brand loyalty? There is also uncertainty
52
about what will happen in the future, such as demand for biofuels or changing preferences
among other importing countries.
Firms have different options available to attempt to resolve uncertainty. Tactics to better
understand consumer reactions include focus groups, interviews and surveys about the
participants’ engagement with the issue and opinion of the company. Firms can also assess case
studies and monitor the behavior of their competitors. Another option is to establish a working
group with relevant stakeholders to better understand positions or Implement pilot programs to
observe consumer/supply chain behavior. A modeling tool available to firms when developing
decision trees with a large amount of uncertainty is a Monte Carlo assessment, as utilized in
Scenario 1. The use of this approach allows a firm to model outcomes and choices where it is
not appropriate to use and average or discrete values, but instead a distribution across the
probabilities from zero to one.
There are a variety of ways in which consequences can be measured and evaluated. For
examples, consumers may not be willing to pay a higher price for products with sustainable
palm oil. On the other hand, consumers may be highly responsive to the sustainability efforts
and seek to support the firm. This could be measured by sales or consumer approval ratings,
depending on the firm’s decision. A consequence that firms must consider in regards to other
stakeholders is how they will react, for example if NGO’s launch campaigns or if the media
begins to cover the issue and the firm. Another consequence is a regulatory violation and
proceedings or finding that the firm is in compliance. Lastly, consequences related to business
operations such as availability of supply chain components, cost of goods, employment and
market share must also be considered.
As demonstrated, the construction of decision trees to examine sustainability practices available
to a firm is involved and can help to remove subjectivity, but estimates of costs and probability
could be dependent upon the opinion of the experts. However, this is an important component
of the Sustainability Decision Making Protocol, because with other tools implemented, it
provides a basis for identifying assumptions, firm priorities and looking at the issue
comprehensively in terms of its short and long-‐term impacts company objectives. This also
provides an opportunity to model financial gains and losses associated with different options
while also incorporating non-‐financial criteria such as carbon footprint of consume reactions.
53
VII. DISCUSSION
This paper has created a new approach, the Sustainability Decision Making Protocol that firms
can utilize to evaluate the alternatives available to address a sustainability issue. By using this
approach firms can elect to continue business as usual or implement action, and if so which one.
This approach is useful for several reasons, it provides a structure for firms to address complex
issues, whose oversight may have been held by one person or team’s tacit knowledge. This
approach allows a step-‐wise approach to be implemented and communicated across teams.
Additionally, this approach requires assumptions and values to be explicitly stated. This is useful
for sustainability issues where deeply rooted values may exist. Heuristics tells us that people
utilize experience-‐based techniques for problem solving and development of decision trees
forces a more deliberative consideration of the situation where perspectives can be clarified and
discussed. This process also creates a benchmark that can be used as a template for when
decisions are revisited and evaluated or when new information is gained. For example, if the
cost of carbon regulation fines were to increase or decrease that can be modified in the decision
tree and a new estimated payoff will be calculated. A firm can also measure its decisions over
time, for example plotting different priorities and initiatives on the tradeoffs taxonomy or
adding the consequences of new regulations or actors to a mind map. While the different
components have been discussed in a linear fashion, it should be noted that in implementation
the tools would be used in an iterative process. For example, the output of the stakeholder
analysis would provide input to inform the development model causal loops in the systems
feedbacks component. In addition, these components can also be implemented as a tool for
stakeholder collaboration. It would inappropriate and unsustainable to utilize the decision
making protocol as an approach that can be implemented in isolation stakeholders and only
from the perspective and priorities of the given “client” seeking a sustainability strategy. For
example, it is likely that different stakeholders, such as smallholders or managers of large
privately held plantations, would hold different perspectives. Engaging with stakeholders to
complete these tools would present an opportunity to reconcile the different interests and
opinions held as well as enhance trust and communication.
54
The objective of this analysis is to develop a new process to consider a complex sustainability
issue like palm, rather than provide a prescriptive decision for industry or a given firm. There are
differences within each sector, and this tool will not be useful without understanding that there
are variations by individual firms. There are variations from the base scenario used, such as size
of the firm, role of the firm in the global value chain, and consumer engagement and each would
require a modification of the decision analysis. For example, for a company with a highly
engaged consumer base, it would necessarily to modify the financial consequences of media
attention to a sustainability issue, as more consumers would likely react and change their
behavior. Similarly, if the firm utilizing the decision protocol does not have a consumer-‐facing
product, but instead is a processor that sells to companies like Nestle or General Mills, then the
threat from consumer engagement is much smaller because there is already less visibility to
their practices.
Limitations
There are several areas of limitation within the Sustainability Development Process Protocol as
applied to palm oil. The components of the mind map were developed based upon literature
reviewed in this paper. A more thorough step, with more resources, would be to conduct semi-‐
structured interviews and a more in depth study of stakeholder publications and materials to
understand the relationships and interactions among the metrics, actors and regulations. The
firm could also engage stakeholders in the process of co-‐developing the mind map. An
1. Mind Map
2. Stakeholder Analysis
3. Tradeoffs Taxonomy
4. System Feedbacks
5. Decision Tree
Scenarios
Sustainability Decision Making Protocol
55
additional step would be to add weight to the different lines connecting the items on the map.
For example, a company could emphasize relationships of high importance or high risk by using
a thicker line.
The stakeholder analysis could also be enhanced. More in-‐depth research, such as semi
structured interviews would have been helpful in better understanding first who is a stakeholder
and what their interest, influence, and involvement is. This practice would also be useful
beyond the initial development of a decision. For example, conducting a stakeholder analysis
periodically after a decision is making would help the firm understand the way these actors
were perceived and how they influenced the perceptions and actions of others.
The paper is also limited in scope in terms of the areas of palm oil production, as only Indonesia
and Malaysia were discussed. Palm oil is produced around the world, but the two countries
represent 80% of the production and the area with the greatest controversy. However, there
sustainability issues relevant to the other areas that produce oil found in the supply chain of the
company’s mentioned so it would be prudent for this work to be expanded to study these issues
and incorporate them into the decision making protocol.
In summary, this decision making process protocol was developed to address the need for a
more comprehensive way for companies to both internally determine a best strategy for their
business and externally communicate this approach with stakeholders. As demonstrated in this
paper, palm oil is a complex sustainability issue with a wide web of stakeholders around the
world, significant environmental impacts and complicated economic and social implications for
producing countries. As a result, a more comprehensive and holistic approach to finding a
solution to meeting the growing demand for palm oil while also protecting communities and the
environment and adhering to laws is required. This protocol can provide a template to begin
communication and collaboration across stakeholders and make the process more transparent.
This will increase the buy in and commitment to solving this issue and can lead to the
development of a sound management approach of palm oil.
56
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Figure 4: Mind Map of Palm Oil
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Figure 5: Mind Map of Palm Oil with components shown
61
Stakeholder Groups
Stakeholder
Involvement Interest Influence Position / Attitude
NGO Environmental Conservation Intl Medium Medium Medium RSPO Member
Oxfam Medium Medium High RSPO/SAN Standards
Greenpeace High High Medium Habitat, GHG
Rainforest Alliance High High Low Markets, Certification
Rainforest Action Network High Medium Medium Consumer campaign
The Forest Trust Low Low Medium RSPO Member/ Nestle Human Rights WRI Low Medium Medium POTICO
Solidaridad Network Medium Low Low Labor rights
WWF Medium High High RSPO Member GOVERNMENT
Importing US/EU High High Medium LCA, Consumers China/ India Low Low High In development
Exporting Malaysia High High High Support industry, international regulations, protect natural resources
Indonesia High High High Courts Medium Low Uphold constitution,
protect human rights INDUSTRY
Food Manufacturer
Cargill, ADM, Bunge, Nestle, Danisco, Ferrero, Kellogg, KAO, Heinz, PepsiCo, Cadbury, Mars, Nestle, P&G
High Medium-‐High
Medium-‐High
Variable by company, consumer base, transparency and reputation
Retailer Marks & Spencer, Tesco, Walmart, Sainsbury’s, AB Foods
High High Medium
Personal Care Aveda, L’Oreal, Johnson & Johnson, The Body Shop, Colgate Palmolive
Medium Variable Medium
Biofuels Shell, Neste Oil Corporation Medium Medium Medium LCA, sourcing OTHER
Media Specialist High High Medium Variable
Mainstream Medium-‐Low Low High Variable
RSPO 500+ members High Medium Medium Increased membership and influence,
Institutions World Bank, IMF Medium Low High Responsible investment
Academia Medium Low Low Varied Communities /Producers
Smallholders, employees High High Low Well being, livelihood
Figure 6: Stakeholder Analysis Matrix
62
Figure 10: Scenario 1 Decision Tree
Net Present Value
Net Present Value
Net Present Value
Net Present Value
Net Present Value
Net Present Value
63
Figure 11: Scenario 2 Decision Tree
64
Figure 12: Scenario 3 Decision Tree
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