Fidelity International has joined other investors in pledging to work to eliminate commodity-driven deforestation from its investments by 2025. But how to make this commitment a reality? Our sector analysts and sustainable investing team have long engaged with companies on the issue, especially in relation to palm oil, and support the use of satellites to spot where natural forest is being destroyed so that it can be stopped.
Palm oil is efficient but can be deadly
Elaeis guineensis, the fruit of palm trees, releases a pale, odourless oil that has a high evaporation point and a long shelf life. Palm oil’s very blandness makes it the ideal additive. It is in almost half of all consumer products and demand is set to double by 2050.[1]
But palm oil can have a devastating environmental cost. Swathes of tropical rainforests from Asia to Latin America have been felled to make room for plantations, pushing species like orangutans and pygmy elephants towards extinction. Because forests absorb a third of global CO2 emissions, the deforestation caused by palm oil plantations also exacerbates climate change.[2]
There are alternatives to palm oil, but none share its unique characteristics and productive efficiency. Its fruit yields at least four times more oil than other plant sources (see chart 1). This makes it hard to replace. Alternatives such as soya are also linked to deforestation, but their lower yield per hectare mean that even more trees are at risk.
Governments and companies are waking up to the scale of the damage inflicted by palm oil growers, among others. More than 110 country leaders at the UN’s November climate conference in Glasgow (COP26) committed to end and reverse deforestation by the end of the decade. While this is promising, progress is not guaranteed. A previous deal signed in 2014 failed to dent the pace at which trees were being cut down.
In this context, the role of investors remains critical and Fidelity International, alongside more than 30 other financial companies, has agreed to strive to eliminate agricultural commodity-driven deforestation in its investment portfolio and financing activities by 2025, through various measures including engagement with the most exposed firms, disclosing that activity and increasing investment in nature-based solutions.
Satellite use can slow pace of destruction
Making palm oil sustainable won’t be easy. Palm oil supply chains are notoriously long, spanning millions of smallholder farmers, large plantation owners, oil refiners, commodity traders, and eventually consumer and industrials companies. Every part of the chain needs to act to end deforestation.
Help is at hand from satellite technology. Buyers of palm oil are deploying ‘spies in the sky’ to scan for evidence of deforestation that they can then use to compel suppliers to change their practices. These detailed satellite images require on-the-ground verification to be truly effective. And they don’t automatically prevent further deforestation or the selling of oil to markets where price is more important than provenance. Nonetheless, they are an important tool in trying to arrest the pace of destruction.
A recent study[3] found that tree loss had been reduced by half after Global Forest Watch, a monitoring body run by the not-for-profit World Resources Institute, provided indigenous communities in the Peruvian Amazon with satellite evidence of commercial deforestation on their land. The evidence was later confirmed by community forest patrols.
Collaboration is key
Moreover, collaborative deforestation engagements using satellites have shown results. Fidelity’s sustainable investing team participated in the Satellite-based Engagement Towards Deforestation, a group initiative led by Dutch asset manager ACTIAM. The group used analytics provided by Dutch start-up Satelligence to push companies sourcing palm oil from Malaysia to end deforestation in their supply chains. Many firms responded proactively and investigated the cases we shared with them.
While this kind of monitoring is not a silver bullet for ending tree felling, the innovation around the engagement was recognised at the UK’s Environmental Finance Awards 2021, where it won ‘ESG Engagement Initiative of the Year’. And we used our experience from it to share best practice across different industries that use or produce palm oil.
Engaging down the supply chain
One example was our sector analyst’s engagement with AAK, a Swedish oils and fats company, on the use of satellite technology. Palm oil is one of AAK’s most important raw materials and it purchases 80 per cent of it from refiners, with a fifth sourced directly from mills in Mexico and Colombia.
During our engagement with the company earlier this year, we asked CEO Johan Westman how AAK was ensuring its palm oil was on track to become entirely deforestation-free by 2025, a key target set by the company. Just under 70 per cent of its palm oil met this criterion in 2021, up from 50 per cent the year before.[4]
AAK told us that it was scaling up its satellite monitoring programme to improve traceability throughout its palm oil supply chain. Since our engagement, it has partnered with Satelligence and environmental consultancy Earthqualizer to use satellites to identify deforestation, logging cases as grievances with suppliers and engaging with them to improve their practices. If engagement yields no results, AAK will consider suspending the relationship.
Today, AAK’s entire supply base is covered by satellite monitoring.[5] We were encouraged that our discussion with the company was followed by concrete action and will continue to monitor AAK’s progress towards its target. Other firms are also expanding how they use the technology. Singaporean agricultural firm Wilmar now uses NASA data daily to identify fires and improve early detection of forest destruction.
A colossal challenge requires everyone to act
Ending palm oil deforestation is a mammoth task that cannot be undertaken alone. The collective commitments made at COP26 are steps in the right direction. But the size and complexity of palm oil supply chains mean that high level pledges will only be met if every link works together to root out the underlying causes of deforestation. In turn, investors have a role to play in encouraging companies to make use of tools like satellite monitoring, act on the information it provides, and work with peers and NGOs to create a palm oil industry that is free from deforestation and allows nature to flourish.
With contributions from Emma Cunningham.
[1] ‘Investors turning up the heat on Asia’s palm oil buyers,’ UNPRI, March 2020.
[2] 'Financial sector commitment letter on eliminating commodity-driven deforestation,’ UNFCC, 2 November 2021.
[3] ‘Satellite-based deforestation alerts with training and incentives for patrolling facilitate community monitoring in the Peruvian Amazon’, PNAS, 20 July 2021.
[4] ‘All about better sourcing of palm,’ AAK, 2021.
[5] Ibid.
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