While this is a positive in the long run, it does create some added costs in the short term.
A 2018 European Commission study on the environmental impact of palm oil consumption found there was a $30/tonne premium for segregated certified palm oil, which can have a negative impact on gross margins.
There are opportunities for companies to mitigate this cost through vertically integrating their supply chain and sourcing their own palm oil sustainably.
This means they can better integrate smallholder farmers into their value chain, shorten supply chains and improve traceability, in the process reducing operational costs and improving margins.
Lastly, investors have a duty to engage with companies and encourage them to disclose both the impact they are having on deforestation throughout their supply chain, and the measures they are taking to address. This will allow investors to understand the true implications of their portfolio holdings and encourage the spread of more sustainable palm oil sourcing practices.
Case Studies
Below are some case study examples of how these themes can be considered within ESG analysis:
Colgate Palmolive is a US consumer products company and a global leader in oral care. Palm oil is an input into a number of their consumer products and they use 173,753 tonnes annually (2019). The business estimates it spends $11m extra annually on acquiring physically certified palm oil, not associated with deforestation. During our engagement meeting in August 2021. the business explained that sustainable sourcing contributed to lower gross margins over the last year, but they saw this as a necessity for their sustainable strategy.
Unilever, a consumer goods business, estimates that they have made between €99m-€160m in annual sales and reduced costs from vertically integrating their palm oil supply chain, which shortens the supply chain and improves traceability. We see more upside potential in the long-term for consumer products businesses that vertically integrate their palm oil supply chain and strive for 100% certified palm oil.5
Procter and Gamble is a US consumer goods company that uses 188,034 tonnes of palm oil annually (2019). On 13th October 2020, we voted against management in favour of an annual deforestation report so the market could better understand the business’s strategy on managing its supply chain's impact on deforestation.
Conclusion
Overall, we believe investors should look for and encourage best practice in relation to sourcing sustainable palm oil, while remaining mindful of the financial implications of these best practices.
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