1st April 2021
Often times, supply chains are deeply complex, large, opaque, and risk-prone networks. However, they also serve as a critical leverage point for companies to scale their sustainability impacts.
For the palm oil and palm kernel oil-based derivatives supply chain, the story is no different.
It is widely known that the production and distribution of palm oil present significant environmental and social challenges. Despite increasing ‘no deforestation, no peat, no exploitation’ (NDPE) commitments in the industry – estimated 74% of refinery capacity in Indonesia and Malaysia are governed by NDPE policies1 – palm-driven deforestation and human rights abuses persist throughout the sector.
While 2020 was expected to be catalytic year where many consumer goods companies were supposed to report zero deforestation in their supply chains, many struggled and failed to meet this commitment.
This sense of urgency is being further heightened by publicly-released grievances that connect specific companies and/or their supply chain partners to irresponsible supply chain practices; rising pressure from NGOs, civil society organizations, consumers and investors; and increased regulation in both production and consumer countries addressing deforestation and human rights issues.
Challenges in the Palm Derivatives Supply Chain
Key downstream buyers of palm oil and palm kernel oil derivatives – personal care, cosmetics, healthcare and oleochemical companies, representing multiple unique industries – are all looking to comply with deforestation-free and responsible supply chain practices, yet face significant barriers navigating and influencing the supply chain.
First, there is limited transparency down the palm derivatives supply chain. Downstream end-users are not directly sourcing palm oil from refineries, but rather looking for derivatives – raw materials that are chemically transformed to obtain surfactants and oleochemicals.
This supply chain is long and ramified, with many processing steps and fragmented players at each of these steps; on average, generally four to ten intermediaries stand between end users and the mills in the field (see Infographic 1). Spot sourcing practices and trading add even more opacity to the process. Due to all of this, end users have limited to no information on the mills and plantations where their palm derivatives are coming from. Mapping their supply chains would be highly resource intensive. And yet transparency is an increasing global expectation, especially as global supply chain disruptions that occurred as a result of COVID-19 heightened the need for better transparency and assessment of risk to build future resilience.
Infographic 1: Complex Palm Derivatives Supply Chain
Second, buyers of palm derivatives have relatively small purchasing volumes compared to other companies and sectors such as the food and biofuel markets. This means that even if they did have the needed information to map their supply chains, downstream buyers have very limited leverage when negotiating with upstream suppliers.
Third, there is significant duplication of supplier engagement efforts among palm derivatives players. Many have designed and implemented their own approaches to supplier code of conducts, audits, and due diligence. Each approach is comparable with similar end goals, but not harmonized. This means suppliers need to respond to multiple disparate assessments, which is inefficient and time-consuming and results in inconsistent sustainability goals and slowed progress.
How Collaboration Scales Impact
Considering all of this, it would require overwhelming resources and investment for an individual player in the large, complex, global palm derivatives supply chain to transform practices within the supply chain. The quest towards deforestation-free and responsible palm derivative supply chain becomes much more feasible when we consider a group of downstream palm derivatives buyers. This is where the weight and power of collaboration proves key to approaching supply chains and creating systemic change.
A collaboration of downstream palm derivatives buyers can pool resources to achieve transparency to source and monitor supply chain risks without duplicating efforts from overlapping, unharmonized bilateral approaches. This means aligning on requests, timelines, frequency, scope and tools for data collection and defining a common strategy to approach opaque suppliers, in order to streamline and save time for suppliers. This can also allow companies to pilot innovations that improve traceability, reducing the risk of individual investment.
A collaboration can also leverage the collective purchasing volume to engage and influence upstream supply chain players, and have a positive impact in production zones. This means defining joint mitigation plans for geographies and players at high risk of deforestation or other irresponsible practices. It can also entail pooling funding to implement on-the-ground interventions, such as supporting empowerment and sustainable palm certification of smallholders, or improving access to forest resources through community-based forestry management.
It is proving to be a timely moment for collective action: there is a global shift in expectations from opacity to transparency; existing tools and methodologies have proven their robustness; many upstream, multilateral alliances are emerging; and the market is mature enough to move beyond competition to address issues together. Fundamental system change and deep impact on sustainability challenges are only feasible if stakeholders across sectors coordinate actions and investments across a system of policies, power structures, behaviors, and/or norms.
Post-text: Action for Sustainable Derivatives (ASD) was launched to serve as that collaborative initiative that can influence the palm derivatives supply chain towards deforestation-free and responsible supply chain practices. ASD, facilitated by BSR and Transitions, is a cross-industry initiative whose ambition is to see a palm kernel oil derivatives supply chain that upholds NDPE (no deforestation) principles, respects human rights, and supports local livelihoods. ASD aims to serve as a collective voice of influence for responsible palm production, unlocking resources for supply chain engagement to drive compliant, responsible supply and impact-on-the-ground. ASD’s Year One Update on Progress is linked; as ASD grows, the focus is shifting from supply chain transparency to transformation of practices in priority regions.
ASD operates in strict adherence to anti-trust regulations and procedures. Members are collaborating on pre-competitive sustainability issues.
Footnote
- Greenpeace, Countdown to Extinction, 2019