Investing in palm oil: opportunities and risks

Author: Neil Brown, Investment Manager .  Date:  1 November 2016

Article tags:  Investment insight , Making food production sustainable , Safer and more resilient  

Neil Brown, Investment Manager, looks at the risks and opportunities of investing in sustainable palm oil and the work we are doing to help bring the negative aspects of palm oil cultivation to an end.

At ATI we engage with companies to find the investment opportunities in sustainable palm oil and to bring unsustainable practices to an end.  We believe that the negative aspects of palm oil cultivation will continue to drive changes in consumer demand. These changes will continue to create opportunities for the best companies and risks for the worst, all the way through the supply chain, from our local supermarkets to far flung plantations.

Our investment in New Britain Palm Oil (NBPO) delivered strong investment returns for our clients over many years before being acquired at a significant premium in 2015. In regular meetings with the company we tested and were impressed by their commitment to producing a fully segregated certified sustainable oil with full traceability from plantation to refinery. We do not accept non segregated oils as sustainable because they are either blended with a range of unknown oils under the Mass Balance system or attached to credits under the Book and Claim system. These issues are too critical and too local to be glossed over with a credit system and we believe consumers will turn away from these solutions.

NBPO were acquired by Sime Darby who hold a mix of certified and non-certified plantations. This made the enlarged group an unsuitable investment for our funds and drove us to look for exposure to fully certified segregated oil elsewhere. At the same time we increased our engagement with these large plantation groups to move them to fully certified and make them better investments in our view.

As part of these efforts we visited companies in Jakarta and Singapore and their plantations in Sumatra in September. The visit included company headquarter, plantation and mill visits of four companies over five days. We also met with local independent smallholders, monitoring organisations, government representatives and environmental groups. Finally we were able to witness the dangers of encroachment first hand by visiting a National Park bordered by villages and plantations.

The trip was facilitated by the Principles for Responsible Investment (PRI) working group on sustainable palm oil. This impressive group has been active for several years engaging with a range of food and household goods producers and now extending this all the way down to the palm oil growers.

The key message from the trip was one of positive company responses and improving practices against a backdrop of too little too late.  We were left in no doubt about the complexity of an issue that cuts to the core of local livelihoods, social and economic development, deforestation, air pollution, climate change and loss of biodiversity.

Transparency is key here and we welcome the companies’ willingness to meet with international investors and talk openly and frankly about the issues they face. We are also greatly appreciative of the commitment to transparency shown by the WWF and the Zoological Society of London’s SPOTT tool.

We believe that it is usually more productive to keep individual conversations with companies private while they are ongoing. We were very pleased to see promising steps forward from several of those we met and look forward to updating on those in the near future. We were also very pleased to see that key personnel from NBPO have been given the support to continue to drive significant change within Sime Darby.  Performance was not impressive across the board and we remain committed to the hunt for investment opportunities in the very best practices and working with companies to drive out the worst.

Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It is not a recommendation to buy or sell and the view of the Investment Manager may have changed.