By Gabriel Thoumi, CFA, FRM, Director Capital Markets, Climate Advisers and Kyra Althaus, Climate Advisers
Among the highest performing soy and palm oil companies, this year was characterized by traceability and transparency. These two aspects separated those who outperformed from those who underwhelmed. Companies committing to demonstrating transparency and traceability ranked higher in the 2018 Green Cats update than those who lacked commitment, providing evidence towards which companies are making progress toward achieving globally-recognized policies to reduce their impact on deforestation–and which are not.
South American soy production is heavily concentrated among four companies – Archer Daniel Midlands, Bunge, Cargill and Louis Dreyfus. A fifth, Brazilian company Grupo André Maggi, is also a major player, as well as the Chinese agricultural giant COFCO that has recently entered the Brazilian market. Discordantly, the SE Asian palm oil market is significantly more fragmented with 30 companies managing a land bank of a hundred thousand to a million ha each.
In these markets, transparency and traceability provide authenticity that benefits both investors and consumers as well as providing companies with the ability to better monitor their assets and mitigate risks. They are necessary as industry tools, providing corporations with additional management capabilities in two areas: supply and demand.
Regarding demand, corporations with agriculture supply chains like Unilever and Nestlé are leading by publishing lists including locations online of their suppliers online. This leads to risk mitigation and returns enhancement as well as increased responsiveness and narrowing of focus within the supply chain itself. When companies transparently name their suppliers and their locations online, it is easier to hold companies accountable and reward the companies with the stronger supply chain networks and punish the companies with the weaker supply chain networks.
On the supply side, corporations are voluntarily transparent regarding their supply chain data, though a new RSPO policy provides incentives for these companies to do so. The new RSPO policy requiring members to publish their supplying mill lists is a step towards full transparency.
This transparency directly benefits suppliers by creating ease in confirmation, enabling them to be preferred by larger downstream buyers based on their visibility.
Companies are only capable of managing their deforestation, peatland conversion, and labor exploitation risks if they transparently measure and monitor their supply chains using traceability. This trend in increased visibility has spread quickly as corporations have realized just how beneficiary such policies are. In Brazil, 49 percent of the country’s soy trade is covered by some type of zero-deforestation commitment. In Indonesia and Malaysia, companies with deforestation-free policies operate a refining capacity of 53.2 million metric tons per year, which equals 74 percent total capacity in Indonesia and Malaysia.
Forest Heroes has now published its updated supply chain scoring of companies associated with deforestation. Deforestation reduction is a necessary part of any policy, as it is one of the greatest ongoing ways that companies can participate in conservation. Even if they are not directly involved, companies that are complacent in this aspect stunt the future of their own supply chains.
This years’ Green Cats update-- Green Tigers for palm oil production and Green Jaguars for soy production-- cultivated, scored, and evaluated key companies in the soy and palm oil industries. The Green Tigers update encompassed more companies than ever, adding one more company to our palm oil analysis for a total of 22 companies, and two more companies to our soy analysis for a total of 7 companies.
Three of the highest-scoring companies, Agropalma, Daabon and Musim Mas, are also members of the Palm Oil Innovation Group (POIG), a progressive multi-stakeholder initiative promoting responsible palm oil production practices that integrate business innovation with stakeholder engagement. POIG requires its member companies to have their policies and impacts audited by an independent third-party. This audit provides external experts that review a company’s policies and assess its impacts, an opportunity for a company to benchmark its own performance between auditing periods to show how it can decrease its negative environmental and social impacts.
The lowest scoring companies, Eagle High Plantations, Triputra Agro, Sampoerna Agro and Anglo-Eastern Plantations, scored less than one-fifth of the points of their high-scoring competitors because they lack normative NDPE business policies and insufficiently supply transparency and traceability. These lowest scoring companies remain behind their peers’ normative business practices.
The Green Jaguars 2018 update scored seven companies in 2018, with ADM taking the place as the highest scoring company as it significantly improved its profile since 2016. While Bunge made significant progress this year, the most improved company was Louis Dreyfus who announced ground-breaking supply chain sourcing policy.
For several important criteria, no soy company achieved full points. This included traceability of soy products from farms to mills. While ADM has made initial steps in reconciling this, it joins its competitors in failing to produce a public and timely plan to make its products traceable from all its farmers – whether direct or indirect – and from all mills it does business with. The soy market has an even larger gulf between policies, to which its companies have committed their implementation and transparency.
The development of sound NDPE policies within the soy industry lags far behind similar commitments in palm oil. Our assessment awarded the average palm oil company with 58 percent of the available points, while the average soy company scored one-third less than then the average palm oil company.
The reason for this discrepancy can be sourced to transparency and traceability. Soy companies have taken much longer to disclose their direct and indirect mills, suppliers, and farmers. This lack of disclosure has made it much more difficult for companies to transparently support their NDPE policies. But, on the other hand, the soy industry outperformed palm oil on support for smallholder producers and has had somewhat fewer instances of land-grabbing.
When it comes to actual impact on forests, climate and communities, corporate NDPE commitments are a great start – but only a partial step towards the reductions possible from broader and hard-enforced policies. Only through transparency and traceability can these companies be held accountable.
TABLE: PALM OIL SCORES
|IOI LODERS CROKLAAN||66.5||61.5|
|ASTRA AGRO LESTARI||66||58.5|
|EAGLE HIGH PLANTATIONS||9||12|
TABLE: SOY SCORES
|GRUPO ANDRE MAGGI||20||14|
The methodology used to calculate these scores is available here.