Whither the Debate on HCS?

Much of the rhetoric to date on the High Carbon Stock (HCS) issue has been concentrated on the origin of the phrase, and on the political and commercial motivations behind its introduction into the sustainability debate. But the bigger questions are: where will the debate head now, and how will it affect the global palm oil industry?

As the industry is aware, two initiatives are afoot. The first is led by Sinar Mas and Wilmar International Ltd in collaboration with The Forest Trust (TFT-HCS model), which Greenpeace has endorsed. The second is being undertaken by a large group of Malaysian palm oil producers as well as NGOs involved in the Sustainable Palm Oil Manifesto (SPOM-HCS model).

In determining where the debate will lead, three questions have to be asked:

• What is the HCS endgame?
• What are the key differences in the approaches by the two groups?
• How will these differences be exploited, and what are the implications for the industry?

 

What is the endgame?

Two main interests – commercial and environmental – drive the TFT-HCS approach. The aim is to enable Golden Agri Resources Ltd (GAR) to safeguard its relationship with purchasers, in particular Unilever NV and Nestlé SA, which have come under sustained pressure from NGO campaigns.

The GAR study on assessing HCS on its plantation land has yielded data that the company can use as a baseline in determining ‘forested’ and ‘non-forested’ areas. The methodology has been endorsed by Greenpeace, and GAR has derived considerable marketing mileage from this.

However, GAR has stated that using the same approach in different geographical areas would require additional work and reorientation of the methodology.

The environmental interest is relatively straightforward. NGOs do not want to see expansion of the oil palm sector. Their previous campaigns had concentrated solely on demand. The new focus is allowing them to foray into curbing supply.

Involvement in the TFT-HCS model has aligned the interests of two major producers, two key purchasers in the western market and two prominent NGOs. If it gains acceptance, the model could result in the two producers taking their main competitors out of the picture.

The approach is best described as a calculated gamble on the part of proponents. Holding land that is undeveloped carries a cost. Environmental compliance on top of existing sustainability schemes increases costs. The gamble is that these additional costs will be mitigated by the value of the commercial relationships and any premium on ‘greener’ oil.

But it is possible that the participants had not anticipated the establishment of a credible and transparent alternative – the SPOM-HCS.

 

What are the differences?

The differences between the TFT-HCS and SPOM-HCS approaches have not been well explained. There are three aspects to consider in the TFT-HCS model:

• Emergence of a new definition of ‘forest’
• Undermining of the smallholder approach
• Elimination of competition

This approach envisages a definition of ‘forest’ that dispenses with globally agreed definitions associated with types of forest (primary or secondary) and established forestry practices. Instead, it favours carbon methodology, which has not been recognised by the UN or its related subsidiary bodies.

It is apparent that the model is designed for oil palm players with significant land-holdings and which are therefore vertically integrated companies. It is significant that Sinar Mas’ plantation forestry operation – Asia Pulp and Paper Group, a subsidiary of PT Sinar Mas Group – has signed on to this initiative.

For such companies, setting aside a few thousand hectares for conservation would not have much impact on their financial turnover. For smaller companies or smallholders, however, this could mean serious loss of revenue and turn profitable businesses into marginal ones. Indeed, the socioeconomic impact of the model appears to be subordinated to environmental concerns.

The approach further favours companies that have a large, cleared land-bank and which can afford the cost of closely monitoring the supply chain. By appending the notion of ‘deforestation-free’ to companies that have already cleared substantial plots of land for development, the TFT-HCS approach undermines the credentials of new entrants that are in the process of clearing land.

The SPOM-HCS model has different objectives. It attempts to quantify greenhouse gas (GHG) emissions from both land conversion and plantation management. The approach is less about forests and more about measuring and potentially curbing GHG emissions.

The model also strives to measure the social and economic impact of blocking the expansion of plantations. It takes into account varying business models for oil palm harvesting and palm oil production by plantation companies, as well as independent smallholders and participants in government-backed land-development schemes.

The SPOM-HCS gives the same priority to the livelihood of small farmers and participants in a land-development scheme, as it does to environmental conservation. This approach would make a critical difference to Malaysia’s poverty-eradication goal, which covers both target-groups.

To date, the TFT-HCS model has been adopted by a relatively small number of large palm oil producers. Other major palm oil producers have backed the SPOM-HCS model.

It would appear that the larger palm oil purchasers and traders have merely adopted the terminology of ‘high carbon stock’ without adhering to any particular methodology on how this is to be determined. For such companies, differences between methodologies are likely to be academic in terms of sustainability commitments.

 

What are the implications?

In establishing their model, TFT and Greenpeace chose specifically to avoid a route that required a complicated set of standards, standard-setting procedures and other processes, mostly because of dissatisfaction that the Roundtable on Sustainable Palm Oil (RSPO) was not achieving the deforestation goals they sought.

At one point, this may have worked in their favour as they were addressing a particular concern that was being expressed by NGOs and a small number of consumers – the ‘removal’ of deforestation from supply chains, which has not been resolved by HCS. However, avoiding a standard per se, with all the robustness of its procedures, also meant that there was nothing to stop another definition of, or approach to, HCS.

SPOM HCS has yet to offer standards or procedures and is unlikely to; it is, rather, offering a methodological approach that companies can apply as necessary.

Supporters of one model will label the other as being politically or commercially-motivated. Indeed, this has already begun with the TFT-HCS group launching a series of politically pointed questions at the SPOM-HCS group.

The scenario that will likely be played out is one where each system and details of its methodology will be minutely analysed to spot the differences. This had previously occurred with the move towards forest certification, where the NGO-backed Forest Stewardship Council (FSC) pitted itself against the industry- and government-backed Programme for the Endorsement of Forest Certification (PEFC).

For a long time, the FSC waged a negative campaign against the PEFC, claiming that it was not strong enough and that it amounted to ‘greenwash’. The FSC lobbied to have its standards recognised by international organisations and development banks, and to exclude the PEFC. It has continued to work tirelessly with other NGOs to have its certification exclusively recognised in corporate procurement policies.

Has this been successful? Not particularly. The campaigns have resulted in both certification systems expending significant resources on public relations and communications. And the PEFC today outstrips FSC certification by about five to one.

More significantly, a third forest certification standard for chain of custody – traceability – has been launched by the International Standards Organisation. It will expose both systems to a higher and tougher level of competition.

Over the years, the PEFC and FSC have come to exist with other sustainability certifications. And this will be the likely outcome of the HCS debate. Any model will simply become another tool used by purchasers to demonstrate their sustainability credentials to western markets and NGOs, in an environment where the RSPO and the Malaysian Sustainable Palm Oil certification have set sustainability criteria for growers and millers.

 

New option?

Issues of palm oil production have undoubtedly been increasingly politicised over the past decade. Interestingly, however, there is now better understanding of the scientific, environmental, social and economic aspects of production among the community of users.

As this knowledge spreads in the market-place, the possibility of one group simply ‘arguing’ its way into a better trading position or persuading purchasers to buy its ‘credentials’ will diminish significantly.

What the HSC debate will not achieve is the exclusion of palm oil that is not produced according to the commands of a lobby-group. Healthy demand for palm oil is being recorded in many markets where concerns about deforestation are smaller than the dire need for improved nutrition and food security.

PT Astra Agro Lestari Tbk – among Indonesia’s largest palm oil producers without RSPO certification – has succeeded in side-stepping the standoff. This could well become the industry’s fearless response to absurd strong-arm tactics of campaigners.