Cover Story / May 2018

Balancing Profit and Sustainability

Managing almost 500,000 hectares of palm oil plantations, Singapore-listed Golden Agri-Resources (GAR), the holding company of Indonesian conglomerate Sinar Mas Group, needs to ensure that its integrated palm oil business meets the best industry practices and is environmentally friendly.

By Muhammad Al Azhari

Running a business that provides more than 170,000 jobs in Indonesia, including nearly 70,000 plasma stakeholders, and whose products are sold in more than 70 countries worldwide, Golden Agri-Resources (GAR) has a major interest in dealing with the often-negative stigma about the palm oil industry. Issues like deforestation, climate change, the threat to biodiversity, child labor and indigenous rights abuses often plague the image of the industry in the eye of international consumers.

Agus Purnomo, managing director for sustainability and strategic stakeholder engagement at GAR and a director at operating company SMART, told GlobeAsia how the largest palm oil grower in Indonesia balances profit-making activities with environmental protection and sustainable practices.

GAR, owned by the Widjaja family and listed on the Singapore Stock Exchange since 1999, runs an integrated operation based on the production of palm-based edible oil and fat in Indonesia. Apart from cultivating and harvesting oil palm trees, GAR, through its subsidiary SMART, also processes fresh fruit bunches into crude palm oil (CPO) and palm kernel and refines CPO into industrial and consumer products such as margarine, shortening, cooking oil and biodiesel.

Image is Important

At the end of 2017, SMART was producing 2.88 million tons per annum (tpa) of CPO from its four refineries, 810,000 tpa of palm kernel from five kernel crushing plants, 240,000 tpa of oleo-chemical products from one plant, and 600,000 tpa from two other plants.

India is the biggest market for the company’s exports by country of origin (19%), followed by China (18%). Europe, Africa and other markets contribute 21% and the rest of Asia 31%.

Agus joined GAR in October 2014 and is responsible for the company’s sustainability strategy, implementing and communicating sustainable palm oil commitments throughout the entire value chain in collaboration with key stakeholders.

He came to his current job after holding many positions in the government, multilateral institutions and international and national NGOs, mostly dealing with sustainable development issues.

“Consumer concern about sustainability is strong in Europe and the US,” he explained. “In general, they look for sustainably produced agricultural products. GAR can meet the requirements of most consumer goods companies, who source sustainably produced palm oil.”

Image is important for companies as big as GAR and SMART and they have to work with a number of nationally and internationally recognized sustainability standards and certifications to convince their consumers that they are acting responsibly.

Palm oil has enjoyed a gradual recovery in its price this year in global markets, as it tracks strength in crude oil prices and trails movements in rival edible oils. The commodity now dominates the global vegetable oils markets. However, black campaigns that continually remind consumers of issues with the environmental, child labor and forest fires continue to impede production expansion.

Since 2011, Indonesia has applied a moratorium on the issuance of licenses to open new plantations on concerns over environmental degradation, especially to its already damaged forests. Companies producing the commodity need to meet nationally and internationally recognized sustainability standards and secure certification to convince increasingly concerned consumers that they are not behaving irresponsibly.

For GAR, which last year recorded total revenue of $7.9 billion and underlying profit of $254 million, certification is not a problem, although it does involve quite a significant amount of spending in many aspects of its operations.

Agus added that certification is only one aspect of the company’s sustainability journey. His role is also to provide useful information about the company’s performance and to advise where the management can improve to increase efficiency, productivity as well as sustainability.

GAR works closely with a number of standard systems and certification bodies that seek to reduce deforestation, greenhouse gas emissions and biodiversity loss, said Agus. They include the Indonesian Sustainable Palm Oil (ISPO) scheme, which was initiated by the Ministry of Agriculture to improve the competitiveness of Indonesian palm oil in world markets.

The company also complies with the Roundtable on Sustainable Palm Oil (RSPO), a certification scheme with the objective of promoting the growth and use of sustainable oil palm products, and International Sustainability and Carbon Certification (ISCC), a sustainability certification system which reviews the entire supply chain and all kinds of bio-based feedstocks and renewables.

GAR, said Agus, offers full traceability for more than 420 suppliers to its CPO mills and its nearly 50 mills in Indonesia. Traceability is important as these mills are fed by its own nucleus estates, third-party estates and thousands of individual farmers, be it from plasma or independent operations. GAR also takes feed stock from brokers and agents who buy from farmers.

Black Campaign

Agus said the industry is fighting an uphill battle to deal with the increasing negative sentiment about palm oil in Europe. “The European Union should not take unilateral action and discriminate against palm oil. There should a process in which buying and producing countries agree on joint action based on facts and research, not emotions,” he said.

In January, the European Parliament released a resolution that seeks to prohibit the use of palm oil in its renewable energy by 2021, after reviewing various reports that linked the commodity to deforestation.

The EU also plans to ban vegetable oil altogether from its renewable energy program by 2030. In April, British supermarket chain Iceland announced it decided to remove palm oil from its own-brand food products. At the moment, there is no impact on GAR’s business from these threats, since the company sells globally and doesn’t rely on a single destination market.

Agus stated that one of the challenges to implement responsible palm oil production is spreading responsible practices across the whole industry, from the downstream side, including refining activities, to the raw material. At the same time, producers are challenged to improve their yields to meet globally increasing demand.

Agus, who prior to his current job worked as a special assistant to the President of Indonesia for Climate Change (2010-2014), special assistant to the Minister of Environment (2004-2009), the World Bank (2002-2004) and executive director of WWF Indonesia, said that in the palm oil industry, where an oil palm tree has a life cycle of up to 25 years, it is essential to demonstrate respect for indigenous and local communities.

“We ensure that our principle of ‘Free Prior Inform and Consent’ must be met. In short, we won’t do any business without voluntary approval from the indigenous people, we have zero tolerance for land grabbing, or anything that takes over the people’s rights unlawfully.”

Of the 500,000 hectares of palm oil plantation under its care, about 44% is owned by independent smallholder farmers. Agus said GAR is committed to improve their livelihood and ensure their products have the same quality as products from its main nucleus estate. The company offers high-quality seeds, advanced agronomic practices and precision agriculture techniques for the estate management of its smallholder farmers.

“Smallholders have always been the company’s key focus. We started several programs with smallholders. In 2013, we started a pilot project called Plasma Swadaya Partnership in East Kalimantan and today we are partnering with more than 7,700 hectares under 13 cooperatives. In this program the company provides expert support from agriculture specialists, crop management, high-quality seeds and support on fertilizer and herbicides,” he said.

”Inefficient production is a concern because of its negative impact on a farmer’s livelihood, which can lead to increased pressure to clear more forest for agriculture in the hope of boosting earnings,” Agus added.

On environmental protection, GAR was the first Indonesian palm producer to establish a zero-burning policy, way back in 1997. Today, the company has a long list of sustainability milestones to measure.

These include its forest conservation policy, membership of RSPO, publication of the first sustainability report, zero development on peat land regardless of depth, traceability to plantation plan, implementing a high-carbon stock forest conservation pilot program, and launching Desa Siaga Api, later renamed Desa Makmur Peduli Api, which gives incentives to farmers in villages near its plantations to ensure their villages stay fire-free.

GAR and the Sinar Mas Group, said Agus, remain upbeat over the business prospects of palm oil. The company, he said, will continue to enhance vertically integrated operational capability to become “a world-class producer of diversified value-added, high-quality and sustainable palm products.”