Indonesia’s Palm Oil Industry Could Increase Profits by Embracing Climate Transitions

by | Feb 10, 2022

Palm oil is Indonesia’s main commodity and dynamic climate transitions will have a major impact on the country’s economy.

Indonesia’s palm oil industry holds the opportunity to increase its value by up to USD 9 billion or around IDR 130 trillion if it responds proactively to efforts to mitigate global climate change. Its ability to do so, however, depends on an ambitious response by banks and investors, national and local governments, companies and civil society to create a strategy that enables the sector to take advantage of the growing demand for palm oil while cutting greenhouse gas emissions and protecting forests and peatland.

This is the key finding that emerges from research by Orbitas, a Washington, DC-based initiative that focuses on analyzing climate transition risks for investors and financiers funding the production of tropical commodities. In its latest report – “Climate Transition Risk Analyst Brief, Indonesia Palm Oil” – Orbitas shows that the country’s palm oil industry will be well-positioned to benefit from climate transitions if it pursues sustainable production models.

The report finds that climate transitions will have a major impact on Indonesia’s economy as crude palm oil (CPO) is the country’s main commodity export. Whether this impact is positive or negative will depend on how quickly Indonesian stakeholders respond.

CEO of Climate Advisers UK and the Managing Director of Orbitas, Mark Kenber explained that there are several risks that palm oil companies may face due to the climate transition.

“Policy and legal reform, innovation and technology, and market changes will occur in response to the climate transition. All sectors connected in global trade will be affected including palm oil,” Mark said in a presentation session at the launch of the study in the annual Katadata sustainability action for the future economy (SAFE) forum series.

While the opportunity is significant, the risks of unsustainable production of palm oil business are likely to be equally large. The report suggests that up to 76 percent of unplanted concessions and 15 percent of already planted concessions are at risk of becoming stranded assets. The palm oil producers’ ability to manage this risk will be determined by; their ability to sustainably improve yields and adapt to change, hold access to capital, and improve operational efficiency.

However, Mark explained further that there are opportunities that can be utilized by Indonesia palm oil companies. These opportunities are achievable  by conducting massive forest conservation and restoration, intensification of land productivity, and applying bio-methane capture in CPO production as a substitution for the use of fossil fuels ranging from industrial sector to transportation.

In webinar forum entitled “New Opportunity for the Palm Oil Industry in Climate Transition“, Managing Director, Sustainability and Strategic Stakeholder Engagement, Sinar Mas Agribusiness & Food, Agus Purnomo also mentioned that up to now the company has been working to implement sustainable palm oil by adapting to the challenges of climate change.

“There are four strategies that we implement to survive from the impact of the climate transition, namely using high-yielding seeds to overcome productivity declines, improving the areas surrounding rivers through preventing drought and flooding, applying water footprint technology, namely fertigation through pipes dripping water in dry areas, and staving off forest and land fires,” he said at the same forum.

Agus also said that he had been involving 87 thousand self-subsistent farmers into the supply chain and introduced various efforts to support their productivity.

At the same forum, the VP Corporate Banking 6 Bank Mandiri, Nurulloh Priyo Sembodo mentioned that the agricultural sector, especially palm oil, has been the underpinning of the economy because this sector has recovered quickly during the COVID-19 pandemic.

Funding, inclusivity and access to financing are necessary to support sustainable palm oil industry practices. Nurulloh underscored the 3 pillars of sustainable financial management strategy.

“From Mandiri, we prioritize sustainable banking to manage the company’s sustainable portfolio, and also develop products and financial services such as sustainable bonds that we have issued in March this year. In terms of business operations, we also oversee the implementation of eco-friendly operations.”

He added, Bank Mandiri has been trying to help self-subsistent farmers to run self-entrepreneurial initiatives to encourage productivity increases. Bank Mandiri also provides access to capital in the form of people’s business loans (KUR) and plasma credit to oil palm farmers.

“In the palm oil sector, we create acceptance criteria as a prerequisite of whether we can finance the palm oil business. We assess a project’s sustainability impact,” he added.

Meanwhile, the government’s transition efforts to relieve climate risks are carried out through various policies such as the moratorium on palm oil, the expansion of the implementation of Indonesian Sustainable Palm Oil certification (ISPO), and the People’s Palm Oil Rejuvenation program (PSR).

The Director of Processing and Marketing of Plantation Products, Directorate General of Plantations Dedi Junaedi added in his presentation “Many regulations have been issued by the government, including a Sustainable Palm Oil National Action Plan (RAN) involving 14 ministries or central institutions, 26 governors and regents of palm oil centers, and we also assembled a multi-party forum”.

Ultimately, coherent efforts by all stakeholders involved in the industry in addressing climate transitions are indispensable. Orbitas’ analysis indicates that the palm oil industry will enter a new era as the result of climate change, with the following detailed findings:

  1. The extent of a company’s vulnerability to climate transition depends heavily on land-use strategies, emissions reductions, capital access and operational efficiency.
  2. Transformation to a sustainable business model is a profitable strategy.
  3. Land use restrictions are driving up land prices, increasing land competition, and necessitating higher productivity.
  4. Smallholder farmers will play an important role in increasing palm oil industry production and reducing future deforestation but need support from producers and financiers.
  5. Financiers should avoid investing in companies that have concession lands in areas of conservation value and have high carbon stocks, implement minimal NDPE policies, and/or whose business growth strategies depend on geographic expansion.
  6. The decisive efforts of all the actors involved in this climate transition are indispensable.

This article originally appeared on in Bahasa.