Courts, controversy and CSR – the palm oil story

By David Burrows

- Last updated on GMT

Photo: iStock
Photo: iStock

Related tags Ioi

There were more twists and turns this week in the controversy surrounding the IOI group, which was suspended by the Roundtable on Sustainable Palm Oil (RSPO) last month.

IOI believes the decision is “highly disproportionate” and is now going to sue the RSPO as a result.

Meanwhile, Nestlé has concluded that IOI’s plans to address issues such as deforestation and burning on peatland are not good enough and is therefore cutting ties with the group.

Here’s our take on the story so far…

On April 1, the RSPO announced the suspension of Malaysia-based group IOI for non-compliance of certain principles and criteria within the palm oil certification scheme.

Satellite images and on-the-ground investigations by NGOs in Indonesia showed extensive deforestation and fires in peatland areas of high importance in terms of conservation or carbon storage. Some land was also illegally occupied, according to reports filed to the RSPO.

What did this mean?

The RSPO suspended the company’s certification status, which meant it couldn’t sell it’s own stock of Certified Sustainable Palm Oil (CSPO). Its plantations would no longer be certified under the scheme, either, which was a major headache.

At first, IOI attempted to play down the issue. In an interview at the end of March, one senior manager suggested that “the only effect is that IOI will not be able to earn CSPO premium on our oil which represents only a very small percentage (less than 0.5%) of our revenue”.

Small percentage but big problems

But IOI didn’t bargain for what happened next. Within 24 hours, three of its major customers moved to distance themselves from the group. Unilever, Mars and Kellogg all said that IOI had not only fallen foul of RSPO guidelines, but were in breach of their internal supplier policies too.

Nestlé also confirmed that it would cease sourcing from the specific plantations where concerns had been raised. “We will keep a close eye on progress,”​ said its corporate spokesperson Meike Schmidt, “and if we are not satisfied with the situation at the end of June 2016 we will move additional volumes from IOI to other suppliers”.

Share price falls

This knocked IOI’s share price. And Moody’s vice president and senior analyst this week highlighted the “uncertainty​” the suspension has created, particularly on IOI’s downstream business.

"While potential sales losses from IOI's inability to supply certified palm oil are not quantifiable at this point due to ongoing developments with RSPO and its customers, we note that the company's earnings could deteriorate significantly, which could in turn pressure its financial metrics, if the suspension is not resolved within a year,"​ Jacintha Poh explained.

WWF expert Adam Harrison put it rather more bluntly: “The certificate suspension has lit a fire under them​.”

Desperate measures

Indeed, in a letter dated May 3, 2016, the group’s head of sustainability, Dr Surina Ismail, asked the RSPO to lift the suspension. “Every day’s delay represents a substantial disruption and loss, not only to IOI, but also the non-IOI suppliers to our downstream operations some of whom are smallholders,” ​he explained.

Dr Ismail also reacted to criticisms of the company, claiming that IOI has “always been serious and proactive in fulfilling our sustainability commitments since joining RSPO about 10 years ago”.

But was it serious enough?

IOI had to submit an action plan to the RSPO, outlining how it would deliver on the group’s commitment to no-forestation in its operations and address the issues that led to its suspension. Dr Ismail said the proposals were “just a continuation of the positive actions which we have been taking in the past”.

However, proposals offered up by the RSPO appear to have fallen on deaf ears. They were “administratively and logistically cumbersome​” and therefore “mostly not commercially viable”​, said Dr Ismail. They would also affect the quality of the product and increase prices, he argued.

The plan had been revised and is currently “under review”​ by the RSPO, which last week wrote to IOI asking for a quarterly update on progress by June 25.

Fight fire with fire

A few days later and everything had changed, as IOI’s CEO Dato’ Lee Teow Chor announced plans to sue the RSPO. In a statement on the company’s website, dated May 9, he explained why he’d had to take this “painful​” decision:

“On the one hand, we have great commitment and attachment to RSPO, an organisation of which we are a founding member and on whose Board we have been actively contributing since ten years ago; on the other hand, we feel that we have been unfairly affected by the extent and scope of the suspension decision which was recommended by the Complaints Panel and subsequently endorsed by the Board of RSPO.​”

He said the scope and effect of the suspension decision is “highly disproportionate​” to the findings by the Panel, “and the decision has not duly taken into account the corrective actions taken by us”.

How did the RSPO react?

The RSPO can’t really say anything on the litigation, but a spokesperson confirmed that it had come “out of the blue”​. The roundtable is no stranger to criticism itself, having dragged its feet​ on deforestation in particular.

IOI’s suspension could well have been intended to show that the organisation has teeth. “The move shows that the RSPO is imposing significant sanctions on its members if they fail to keep to its rules and then fail to address the issues,”​ said WWF’s Harrison.

Has IOI done enough?

IOI obviously feels that it has. But is the action plan it has submitted good enough? The RSPO is holding out on answering that until the update it has asked for next month. The fact that IOI has rejected IOI’s suggestions on how to mitigate the effects of the suspension decision doesn’t bode well.

And neither does the fact that Nestlé has just concluded the proposals are up to scratch.

Nestlé’s not happy

Nestlé immediately ceased sourcing from the plantations at the centre of the concerns. But it also asked The Forest Trust (TFT) to look into how IOI responds to the issues raised.

“We have now carried out an assessment of IOI’s action plan, which it claims is designed to deliver on the group’s commitment to no-deforestation in its operations,”​ explained Nina Caren Kruchten, the company’s senior corporate spokesperson, in an email to FoodNavigator today, May 12.

“Our conclusion is that it does not go far enough in tackling the issues raised by IOI’s RSPO suspension and that Nestlé will therefore not award any new business to IOI group with immediate effect. We will also phase out all existing contracts with an expected completion date of August 31st 2016.”

Surprising, stupid – or both?

Unilever, Mars and Kellogg also made moves to distance themselves from IOI and its products when the suspension was announced. None would offer any further comment on IOI’s legal action, but it’s unlikely to have gone down well.

In its reasoning for taking legal action IOI noted how the suspension has “caused significant disruptions to certain segments of the European and American food manufacturing sector”.

This may well be true, but the brands have moved swiftly to find other suppliers and are unlikely to come running back if there’s a long, drawn out court battle hanging overhead.

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