Changing behaviour through sustainable sourcing and responsible lending

written by Sachiko Suzuki

Sachiko Suzuki

Sachiko Suzuki

Increasing globalisation is making it increasingly harder to trace where and how goods are sourced and produced, or where your savings and superannuation are ultimately being invested.

This article was spurred by a recent Oxfam report on the linkages between Australian Big-Four banks and land grabbing in developing countries: Banking on Shaky Ground. The report reveals disturbing outcomes of lending practices – people denied access to land they used to own without proper compensation leading to a loss of livelihood and homelessness. Physical violence is often used. Capital accumulation is one of the contentious issues surrounding the plantation sector particularly after the Global Financial Crisis. The Oxfam report therefore argues that controlling capital flows in a responsible manner is crucial in ensuring a sustainable supply chain.

This article looks at the role of other key players in the plantation sector: traders, manufacturers and transnational self-regulatory bodies through an illustration of the palm oil supply chain. In the palm oil supply chain, traders are in a powerful position relative to other stakeholders, especially manufacturers (institutional consumers such as Unilever). The Roundable on Sustainable Palm Oil (RSPO) is a transnational voluntary initiative which aims to ensure the sustainable production of palm oil.

Vorley’s (2003) Supply Chain Bottleneck model shows that millions of farmers and labourers provide commodities to millions of individual consumers through a limited number of traders, where power concentrates. The model graphically looks like a pair of pyramids: an upside down pyramid on top of the apex of the other. The base of one pyramid represents producers and the other consumers and the connecting point of the two apexes represents traders. Vorley argues that traders, who have access to both producers and manufacturers, tend to be in the strongest position.

The Singapore-listed palm oil giant Wilmar International (which also owns the sugar company CSR) is referred to in the Oxfam report as a debtor of the National Australia Bank (NAB). It has total group assets of USD46.6 billion (Wilmar, 2014Wilmar, 2012). It is involved in the cultivation, processing, branding and trading of plantation crops. Vertically integrated supply chains of this nature are a growing trend in the plantation sector making it harder to hold companies accountable (Wakker, 2013). According to Vorley’s Bottleneck theory, Wilmar is in a powerful position, as it has access not only to upstream but also downstream of the supply chain, most crucially to the ‘Bottleneck’, i.e. the traders.

A case, which was investigated by Institute for Policy Analysis of Conflict (IPAC, 2014) on the unresolved land disputes in Sumatran oil palm plantations, demonstrates Wilmar’s powerful position. The protracted land disputes between PT. Asiatic Persada (owned by Wilmar between 2006 and 2013) and the local community began in 1986 when Asiatic obtained the concession from the government for developing the plantations for over 20,000 ha of land, which included customary land of 3,550 ha. Negotiations with the local community in the pre-Wilmar era were unsuccessful.

Although mediation was later attempted during Wilmar’s ownership, it did not bear fruits for either party. Two decades of disputes had increased the complexity of the issues and, generally speaking, the longer a conflict lasts the harder it is to resolve. The failure was partly due to the refusal of Asiatic/Wilmar to:

  1. accept the results of participatory remapping, even though it was conducted by a firm the company hired because the results were favourable to community’s claims.
  2. provide funds for re-measurement, which was ordered by National Land Agency as well as National Human Rights Commission (IPAC, 2014).

Without any sign of progress, Wilmar sold Asiatic’s shares in April 2013 due to ‘difficult social conditions’ which ‘led to an untenable situation for the Group’ (see IPAC, 2014, p.15).

This particular case underlines the strong position of a vertically integrated company. As pointed out by the IPAC report, ‘[t]he solution to conflict most often lies with the company’ (p.25). Rather than engaging in finding a solution to every party’s satisfaction, Wilmar opted to walk away. The loss of the plantations was probably trivial for a company who had 35% of global market share of palm oil processing.

So what are the implications for other palm oil stakeholders? Unilever, one of the largest manufacturers and palm oil consumers for its foods as well as consumer goods, pledges to use 100% traceable palm oil by 2020, according to its sustainable sourcing plan. As pointed out by Carol Adams in her article Towards integrated thinking at Unilever, Unilever’s Sustainable Living Plan shows its commitment to sustainability by integrating the six capitals framework as set out in the International Integrated Reporting Framework. It sees a link between responsible corporate behaviour and long-term financial returns. Such a move should be welcomed.

The question is, will it be a driver to influence the behaviour of companies who stand at the ‘Bottleneck’ such as Wilmar?

By imposing sustainability criteria on its suppliers Unilever has the potential to change corporate behaviour further upstream of the supply chain. In such cases vertical integration can be an advantage in that advocacy activities at the top of the supply chain, may potentially influence all the way down (Wakker, 2013).

This is where a transnational force, such as the Round Table on Sustainable Palm Oil (RSPO) can play a part. It has a diverse range of membership across the supply chain: producers, processors, traders, retailers, financers as well as NGOs. Both Wilmar and Unilever are members of the RSPO.

In December 2013, Wilmar released its No Deforestation, No Peat, No Exploitation Policy in response to the pressure from the RSPO, NGOs, Office of the Compliance Advisor/Ombudsman of the International Finance Corporation (IFC CAO) as well as investors (Oxfam, 2014). The actual implementation of the policy by Wilmar is another issue and needs to be monitored. Nevertheless, this indicates what is possible through a collective advocacy.

To sum up, in the Sumatran plantation case, Wilmar had a powerful position in the supply chain and did not listen to the local community or to the government but instead walked away. How can we hold such a company socially and environmentally responsible?

Whilst Unilever’s pledge to purchase 100% traceable palm oil is laudable, keeping a track on the entire supply chain will be a challenge. Nevertheless, it is important for such an influential institutional customer to be assertive. As the example of Wilmar’s adoption of its No Deforestation, No Peat, No Exploitation Policy shows, a collective advocacy to change corporate behaviours can be effective. Therefore, strengthening the coordination capacity of a transnational body such as the RSPO is becoming an even more pressing issue.

References

Organisation Websites:

Office of the Compliance Advisor/Ombudsman, the International Finance Corporation (IFC CAO)  http://www.cao-ombudsman.org/about/ourroles/

Round Table on Sustainable Palm Oil (RSPO) http://www.rspo.org/

Unilever – Sustainable Sourcing. http://www.unilever.com.au/sustainable-living-2014/sustainable-sourcing/index.aspx#72-386203

Wilmar International Ltd – Ho, K. (2012). Investor Presentation. Retrieved from http://media.corporate-ir.net/media_files/irol/16/164878/Presentation/Wilmar%20Investor%20Presentation.pdf
2013. No Deforestation, No Peat, No Exploitation Policy.  http://www.wilmar-international.com/sustainability/
2014. Annual Report 2013. http://ir-media.wilmar-international.com/phoenix.zhtml?c=164878&p=irol-reportsAnnual

Other publications:

Institute for Policy Analysis of Conflict (IPAC) (2014)

Indigenous Rights VS Agrarian Reform in Indonesia: A Case Study from Jambi. IPAC Report, 9. Retrieved from: http://file.understandingconflict.org/file/2014/04/IPAC_Report_9_Case_Study_from_Jambi_web.pdf

 Oxfam Australia. (2014). Banking on Shaky Ground: Australia’s Big Four Banks and Land Grabs. Retrieved from https://www.oxfam.org.au/wp-content/uploads/site-media/pdf/2014-47%20australia’s%20big%204%20banks%20and%20land%20grabs_fa_web.pdf

Vorley, B. (2003). Food, Inc. Corporate Concentration from Farm to Consumer. UK Food Group and International Institute for Environment and Development. Retrieved from http://www.ukfg.org.uk/docs/UKFG-Foodinc-Nov03.pdf

Wakker, E. (2013). Leveraging Products and Capital Flows to Promote Sustainability in the Palm Oil Industry. In Pye, O. & Bhattacharya, J. (Eds). Palm Oil Controversy in Southeast Asia: A Transnational Perspective (pp. 220-243). Singapore: Institute of South East Asian Studies (ISEAS).

Related articles on this website

How stakeholders drive accountability in corporate sustainability reporting

Towards integrated thinking at Unilever

Additional resource: Learning and Teaching Sustainability

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