Employing better technology to trace emissions within supply chains may prove most effective for Malaysian palm oil companies and smallholders involved to decarbonise in the short and long term amid increasingly stringent global regulations, according to industry watchers.
Palm oil, for one, is a major commodity and economic driver in Southeast Asia. In Indonesia, it contributes roughly 3.5 per cent to the national gross domestic product and around 3 per cent to Malaysia’s GDP. Both nations are responsible for around 84 per cent of the world’s palm oil, with Indonesia alone generating 43.5 million metric tons and Malaysia producing more than 19 million metric tons in 2020.
Despite being a source of economic growth, palm oil cultivation has been linked to deforestation for years, and blamed for environmental degradation, threats to biodiversity, and a contributor to climate change since forests are key carbon sinks.
The palm oil supply chain involves five key stages – production, where oil palm trees are grown on large-scale plantations owned by companies and by smallholder farmers; processing, where fresh fruit bunches are processed into crude palm oil and crude palm kernel oil at mills located near the plantations; and refining, where the oils are transported to refineries to be processed into refined oils, fats, and oleochemicals.
The last two stages involve manufacturing, where refined palm oil is used as an ingredient in a wide range of food, cosmetic, and biofuel products by consumer goods manufacturers; and consumption, where end products containing palm oil are sold to consumers through retailers and brands.
Because the palm oil supply chain involves different stakeholders, including smallholder farmers and large companies, many companies struggle to track and measure their emissions – as well as the source of the palm oil itself – making it challenging to improve sustainable practices.
Implementing initiatives to measure Scope 3 emissions and ensure traceability of palm oil – requirements that have become increasingly mandatory – have become more complex due to supply chain fragmentation, said Tan Boon Hien, the head of sustainability in the APAC region for global technology company HCLTech.
Tan was speaking at a series of talks on the Malaysian palm oil industry, which gathered experts to discuss how technology can be leveraged for effective ESG compliance and sustainability reporting in the sector. The half-day event was jointly organised by Eco-Business and HCLTech, and was joined by palm oil industry professionals, as well as stakeholders from banks and certification bodies.
Increasing regulatory pressure
Pressure has been mounting on the industry from customers and stakeholders, Tan said, especially as the sector races to meet regulatory deadlines following the full implementation of the European Union’s Deforestation Regulation (EUDR) at the end of 2024.
First proposed in November 2021, the EUDR prohibits the import and export of products linked to deforestation, requiring companies to ensure their supply chains are free from deforestation and forest degradation. The regulation was adopted by the European Parliament and Council on 31 May 2023 and entered into force on 29 June 2023, with the main prohibitions and obligations outlined in the regulation to take effect on 30 December 2024.
To address these challenges, companies in the palm oil industry must prioritise the digital integration of their supply chains to ensure the success of such sustainability initiatives, Tan noted.
“By leveraging digital transformation alongside sustainability initiatives, businesses can enhance their operational efficiency and drive down costs,” he said.
A holistic, data-driven approach to sustainability may also result in companies building strong data architecture and integration, which can support both business growth and sustainability goals, Tan added.
However, to meet EUDR requirements, suppliers would need to provide real-time traceability and deforestation data for each consignment, which may strain many companies’ resources, especially smallholders, warned Unnikrishnan Unnithan, co-founder and chief executive officer of DIBIZ, a digital platform that provides authenticated real-time traceability and deforestation metrics to comply with sustainability regulations.
“Current industry approaches use satellite data and the supplier’s internal supply chain, which are insufficient to meet EUDR requirements as this information must be linked to specific shipments,” Unnithan explained.
The palm oil industry’s emissions can indeed be grouped under 15 different Scope 3 emission categories, pointed out Kingsley Tam, director of client operations for Hong Kong-based software provider MioTech, highlighting the impact of indirect emissions that result from operations within the palm oil supply chain.
Within Scope 3, this includes emissions such as purchased goods and services; capital goods; fuel- and energy-related activities; upstream and downstream transportation and distribution; waste generated in operations; business travel; employee commutes; as well as the processing and purchase of sold products, to name a few.
Tam also touched on how tools such as MioTech’s software could help clients to track and reduce such emissions and meet targets such as those set by the Science Based Targets initiative’s (SBTi) Forest, Land and Agriculture Guidance (FLAG), which is a framework that aims to help companies in land-intensive sectors set science-based emissions reduction targets for their land-related emissions.
Looking beyond EUDR
Joseph D’Cruz, chief executive officer of the Roundtable on Sustainable Palm Oil (RSPO), noted that Malaysia’s palm oil industry, for example, was quickly able to shift to more sustainable practices and prove it. The RSPO is a global certification body that promotes the production and use of sustainable palm oil through environmental and social standards.
“With a robust national system of land use and tenure reports, Malaysia is in a good position relative to other markets. There’s also reporting with RSPO and the Malaysia Sustainable Palm Oil (MSPO) certification, which provides a lot of data through a well-regulated national system, [which helps us] to oversee legality,” said D’Cruz.
Sustainability trends are also going beyond emission reductions in the palm oil sector, D’Cruz added.
“Beyond just climate change, emissions and deforestation, sustainability is also moving to focus on labour and social conditions, biodiversity, water usage and voluntary efforts by the industry,” he noted, adding that governments and even banks are increasingly imposing sustainability regulations and disclosure requirements.
In turn, this is piling pressure on palm oil producers and other stakeholders in the supply chain to disclose more granular data on their operations.
“The EUDR has accelerated some development, such as building and redesigning the palm oil’s reporting and digital data management,” D’Cruz said. “But there is a definite need for credible, fine-grained data on sustainability across the [palm oil] supply chain to meet evolving regulations and consumer expectations.”
Long term value investing in tracking platforms
Speakers also discussed the role of smallholders and how digital tools could be employed to trace supply chain emissions to reduce them over time.
With over 300,000 smallholders – each owning 100 acres or less across the country – smallholders’ are responsible for roughly 40 per cent of Malaysia’s palm oil output, making the segment a key component for any discussion in achieving decarbonisation in Malaysia’s palm oil industry.
Digital tracking technologies, Unnithan noted, have the potential to organise emissions data and tracing across the entire smallholder palm oil supply chain, which could help them – and companies that rely on smallholders – comply with impending EUDR regulation, as well as meet long-term targets.
“Once you have data visibility, it becomes clear that this data mining is vital to improving the long-term yields of these companies, such as their greenhouse gas emission levels and their decarbonisation routes,” Unnithan concluded.
“So while these companies have set net zero goals, they stand a chance at bringing forward their long-term targets with this technology.”
