The UK’s proposed Due Diligence Regulation has re-kindled the idea of a VPA-FLEGT arrangement for Indonesian palm oil.
A VPA-FLEGT Arrangement For Indonesian Palm Oil
Is such an arrangement possible?
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
As we’ve discussed previously, the VPA (Voluntary Partnership Agreement) between Indonesia and the European Union was an arrangement that verified the legality of timber products leaving Indonesia and being sold in the EU. The bilateral development of an Indonesian standard – SVLK – gave Indonesian timber and paper exporters a ‘green light’ past the EU’s Timber Regulation, which required due diligence on timber products being sold in the EU.
In simple terms, the SVLK system required verification of the timber and timber products as legal domestically, and attached this verification to an export licensing system. The verification of the legality and export licensing also took place at the importing end in the EU.
The development of the standard and the system was lengthy, but it managed to provide a legal basis for many of Indonesia’s timber exports.
Would a system work for Indonesian palm oil exports?
The UK has stated in its communications with Indonesia that it wishes to strengthen ISPO; this has already happened. The revisions of the ISPO standard have expanded the scope of the standard. They have also strengthened the independence of the accreditation body, which is particularly important.
The ‘strengthening’ process, i.e. the standard revision, took place over a number of years with a number of stakeholder consultations across the country, according to a domestic process.
The ISPO Legality Standard
It would be very unlikely that the UK would seek to completely overhaul this process and ultimately repeat a process that has already taken place. The UK has also stated in its preferences for strengthening ISPO that it was seeking outcomes on peatland emissions and primary forests. These appear to be covered by the forest moratorium – and therefore will be covered in the ISPO legality standard.
The next question would be whether the UK would wish to see an export licensing system for palm oil going to the UK. The UK does not import significant amounts of palm oil; roughly one-third to one-quarter of its palm oil imports come from Indonesia, with a portion of that going through the Netherlands.
Roughly USD50 million goes from Indonesia to the UK directly. The cost of implementing a complex export licensing and verification system for Indonesian exporters may come close to such a figure. Would the UK wish to spend this much given that there are other significant ‘imported deforestation’ products, such as soybean or beef, also entering the UK?
What it may seek to do instead is push for a stronger chain of custody system for the Indonesia-UK bilateral arrangement under ISPO.
This would circumvent the need for redefining the standard, but it would instead provide an additional layer of verification for purchasers in the United Kingdom.
It’s worth noting that this approach is used by timber certification systems such as PEFC and FSC, both of which are present in Indonesia.
Producing Timber Products
There’s a good reason that this approach could work just as well for Indonesian palm oil. Producing timber products is complicated. It’s not possible to always verify the timber origins of a timber product that is based on a ‘mixed’ product such as paper or fiberboard.
What FSC and PEFC’s systems do instead, is provide an assurance of legality – by minimizing the risk of illegality and providing a chain of custody – i.e. ownership of the products – throughout the supply chain.
A similar approach could work with palm oil and ISPO. After all, this is what due diligence is supposed to do. It cannot provide a complete failsafe for ‘deforestation free’ supply chains for any product, but it can significantly reduce the risk, and provide avenues for traceability and recourse when problems do arise.
These types of systems have parallels with quality assurance (QA) systems. They are not perfect, but they allow for ongoing improvement of the system and the ability to pick up errors in the system.
What many NGOs in the Western world are calling for is a completely failsafe system, or a system that allows for too many interventions. In an ideal world these systems would exist. But they simply do not.
In this regard, the UK’s push for a VPA on palm oil should consider this stronger chain of custody model. It should not be aiming to reinvent the wheel, but it can help the wheel drive straighter.