Analysts are undervaluing the environmental, social, governance (ESG) performance of palm oil companies, because they lack a real understanding of the sector and are influenced by a “historical” narrative that shapes their commentary, a former company sustainability manager has said.
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Perpetua George, the director of Asia Pacific sustainability and biodiversity at PwC Malaysia and former general manager of group sustainability of palm oil company Wilmar, said she has observed a “one-sided view” among analysts, which has led to a “lack of balance” among investors in the sector.
“Analysts have largely responded to reporting developments [from palm oil companies] by relying on public discourse or third party sources – which are often historical in nature – as a framework for reference, influencing their commentary on the topic,” she said.
The palm oil sector has long suffered from a poor reputation associated with forest destruction, transboundary air pollution from burning peatlands and human rights violations.
George’s comments come in response to the publication of a study by the Centre for Governance and Sustainability (CGS) at the National University of Singapore Business School, which found that palm producers in Malaysia and Indonesia are struggling to balance ESG performance and profitability due to pushback from investors.
The more transparent palm oil companies are in declaring their ESG performance, the less they are valued by investors, a trend that contrasts other sectors where detailed sustainability reporting leads to higher valuations.
“It’s important to recognise that palm oil companies – especially the larger companies – have been on a sustainability trajectory since the early 2000s,” said George.
“For the most part and given the 20-year timeframe, sustainability practices are already operationalised, so it is not quite accurate to suggest that within these companies, there is a choice between what is good sustainability practice and what is not,” she said.
The findings of CGS’s study also suggested that investors in palm oil producers are “indirectly endorsing unsustainable practices” and therefore contributing to environmental degradation.
It analysed financial data from 36 publicly listed palm oil companies in countries including Malaysia, Indonesia, Japan and the United Kingdom against the Sustainability Policy Transparency Toolkit (SPOTT), an analysis of forest-risk commodity supply chains by Zoological Society of London.
Scores were assigned based on the transparency of the companies’ ESG disclosures. Thirty-one of the 36 companies referenced in the study have operations in Malaysia and Indonesia, the major markets for palm oil production globally.
George said aligning with current disclosure expectations poses a continuous challenge for producers, because many sustainability practices were defined and implemented before ESG disclosures were mainstream.
One example was the 2013 Roundtable on Sustainable Palm Oil (RSPO) certification standards that required the measurement of greenhouse gas emissions for palm oil mills and plantation sites, which were previously not referred to as Scope 1 and Scope 2 emissions.
Perpetua George, director of Asia Pacific sustainability and biodiversity, PwC Malaysia
“So, if a company has not been keeping up with the evolving disclosure requirements, they would potentially not be disclosing in a way that an investor expects, even if implementation is in place,” she said, adding that the lack of understanding of the palm sector amongst analysts, and appreciation for its complex sustainability journey and history, continues to shape narratives both locally and internationally.
Malaysian palm oil giant SD Guthrie Berhad said that there is a mismatch of priorities — pure financial returns versus sustainable value creation — among investors and producers as investors “incorporate the immediate short-term costs associated with implementing robust ESG practices into their valuation of the company while potentially overlooking the long-term benefits of sustainability.”
These benefits include risk mitigation, improved safety and operational efficiencies, and enhanced reputation that are typically subjective in nature.
A spokesperson for SD Guthrie Berhad said one of the main difficulties for companies in balancing profitability and ESG reporting is the substantial investments they make in sustainability practices, certification processes, and transparency mechanisms that do not yield immediate financial returns.
“It is therefore crucial for both investors and companies to align on the importance of ESG factors, recognising that they are integral to sustainable value creation,” the firm said, adding that shareholders should take a proactive approach to promote sustainability through their investment strategies.
“Investors should leverage their influence by demanding that all actors within the palm oil value chain uphold their responsibilities through a shared responsibility approach. This can be achieved by encouraging investee companies to source responsibly produced palm oil and supporting related activities through premiums,” the spokesperson said.
George added that the push towards more disclosure for climate and nature-related impacts by investors and financial institutions will start to balance profitability and ESG reporting transparency.
She said making ESG-related disclosure mandatory for non-listed companies, will have a major impact on the palm sector as this will create a level playing field where every company in the sector will disclosure their ESG performance.
“To better steer investment decisions towards a sustainable future, it is apt for the sector to be reviewed more accurately on its ESG performance to provide a more positive outcome on shared value, while also acknowledging that investors rely on multiple sources of information for decisions, beyond their own due diligence,” she said.
