By Emily Chow
KUALA LUMPUR (Reuters) - In 2004, Malaysian palm oil producer IOI Group became a founding member of the Roundtable on Sustainable Palm Oil (RSPO) and later an executive board member in what seemed like a cosy arrangement.
Twelve years later, IOI attempted to take legal action against RSPO over an environmental ruling that has cost the company sales in the United States and Europe.
In March, the RSPO withdrew its "sustainability certification" from IOI, based on a decision to uphold a complaint from Amsterdam-based group Aidenvironment.
The complaint alleged that IOI had illegally chopped down rainforests in the Indonesian province of West Kalimantan and planted oil palms on peatlands, which are drained and then highly flammable. Fires across Indonesia in recent years have led to a massive haze of dangerous pollution across large parts of Southeast Asia.
Certification of environmentally sound behavior is now required by some major palm oil buyers in the West, including major food and candy makers. The suspension of IOI's green credentials caused Nestle, Unilever, Mars and Kellogg to drop IOI Group as a supplier.
In response, IOI filed a lawsuit against the RSPO in Zurich, where RSPO is based, saying the move had "caused significant disruption" to its business in Europe and America.
IOI withdrew the suit on Monday in the face of a barrage of criticism from its customers and activists, and announced it was voluntarily adopting a more stringent certification system the RSPO is putting in place by the end of the year.
“Since the filing of the challenge proceeding, IOI has engaged with many of our stakeholders such as customers, NGOs and RSPO to resolve this matter," IOI said in a statement.
How the plantation firm and its overseer got into this situation may hold lessons for other companies in sensitive industries that are working with environmentalists to prevent deforestation and an increase in greenhouse gases, which most scientists say contribute to global warming.
"This is a call to all industries also to clean their operation and supply chain from deforestation," said Annisa Rahmawati, Greenpeace Indonesia's forest campaigner. "There will be no market for companies that are still destroying our people's life and planet."
IOI is not the only plantation under pressure.
Malaysia's government-linked Felda Global Ventures, the world's third-largest plantations company, voluntarily withdrew RSPO certifications from all of its 58 processing mills after what happened to IOI.
Felda said it needed to clean up its supply chain before seeking certification again.
The plantation industry appeared to get outmaneuvered on the RSPO, whose membership had evolved from 47 entities largely from the industry itself to 1,346 voting members, including 33 environmental and social activist groups and 612 consumer goods manufacturers, according to interviews with company executives, government officials, traders and activists.
CHEAP AND UBIQUITOUS
Palm oil is the most widely used edible oil in the world, found in everything from margarine to cookies and from soap to soups. One of the cheapest edible oils on the market, it is extracted from the pulp of the palm fruit that drops from trees in tropical plantations, most of them in Malaysia and Indonesia.
Between 1990 and 2010, up to 3.5 million hectares of forests were cut down for palm oil plantations in Indonesia, Malaysia and Papua New Guinea, according to the World Wildlife Fund (WWF). That's a land area the size of Germany.
The fastest and cheapest way to clear new land for plantations is by burning. Every year, hundreds of thousands of hectares go up in smoke before monsoon rains begin to fall, choking people as a haze spreads over the region.
Palm oil plantations operating in remote rainforests have come under unprecedented scrutiny the past few years, not only from the mounting influence of activists, but from their customers as well.
"The market itself said it was not good enough," said Eric Wakker, senior consultant at Jakarta-based Aidenvironment Asia which first brought the complaint against IOI to the roundtable six years ago. "The big manufacturers like Unilever had overtaken RSPO itself when it came to deforestation."
By 2013, the industry was on the defensive.
Environmentalists that year organised boycotts of palm oil products at supermarkets. Greenpeace and other activists made videos for YouTube about burning forests and stranded orangutans. Pollution from that year's forest fires reached record levels in Singapore and Malaysia.
That's when the RSPO itself decided it was time to change. At its annual general assembly in November 2013 in Medan, Indonesia, members voted overwhelming to beef up their standard and enforcement regime, and to commit to producing 100 percent certified sustainable palm oil.
More importantly, RSPO agreed to overhaul its complaints panel to make it more independent. Up until then, the RSPO executive board, dominated by the plantations, ruled on complaints. "It was filled with conflicts of interest," Wakker said.
"The IOI case cost us six years and I almost fired myself over the lack of progress in 2013, when I realized... the system was crooked," he said.
When RSPO finally adopted a resolution to make its complaints panel more transparent, "My response to bystanders was 'now finally Aidenvironment can become an RSPO member'. And we did."
NEW COMPLAINTS PANEL
RSPO Secretary-General Darrel Webber, who presided over the 2013 General Assembly, said in an interview the group's new complaints panel is now in place, while the system for monitoring plantations' compliance with sustainability standards should be fully operational by year's end.
"People said we lack bite and take so much time," he said. "The main point is to make (the system) independent, perceived to be independent, and efficient."
It was this new RSPO complaints panel that suspended IOI in April, based on Aidenvironment's complaint.
The complaint alleged that IOI had illegally chopped down rainforests in the Indonesian province of West Kalimantan and planted on peatlands, a rich storehouse of greenhouses gases, whose release into the atmosphere contributes to global warming.
IOI admitted to clearing peatlands, in a statement to the RSPO, but denied planting oil palm trees on them, saying it rehabilitated the area by planting "cuttings of an indigenous jungle species".
The company said it is also improving firefighting capabilities in the forests, engaging consultants on various Indonesian laws, and setting aside land in their concessions for conservation.
The share price of IOI's listed unit has lost 11 percent since the RSPO move, and analysts estimated it could see a 7 percent decline in net profit for the year.
Meanwhile, demand for palm keeps growing, notably from top consumers China and India, which do not demand RSPO sustainability certificates. The two countries alone account for 30 percent of global imports, according to the U.S. Department of Agriculture.
It's a frustrating issue for the growers, who say they incur extra costs to comply with RSPO standards, but often can't get the green premium on the market. Traders say around half the certified palm oil on the market is sold at uncertified prices because of low demand for it.
Nestle said in a statement to Reuters that the issue is not about premiums. "It is about choosing suppliers who share our commitment to sustainability and are willing to continuously improve their practices. Together, industry, suppliers, consumers, and the general public need to work together to further sustainability."
(Additional reporting by Joseph Sipalan; Editing by Bill Tarrant.)