Palm oil is a widely used commodity oil that is sometimes implicated in production practices that are unsustainable in terms of their impact on the environment and people. Palm oil producers' operations are increasingly scrutinized by regulators, investors, communities, and customers. Poor practices risk impairing the ability of these companies to deliver durable, long-term financial returns.
BlackRock Investment Stewardship (BIS) encourages companies to have sound corporate governance and business practices that support the long-term financial value creation that our clients depend on to achieve their financial goals. As part of our fiduciary responsibilities as an asset manager to act in our clients’ best interests, we assess a range of risks and opportunities that can affect the financial performance of the companies in which we invest on their behalf. We engage companies to understand their approach to the material drivers of risk and value in their business models, provide feedback, as appropriate, and raise any concerns. We may signal continuing concerns through our voting, where clients have authorized us to vote on their behalf. We vote to advance the long-term financial interests of our clients as shareholders.
BIS’ approach to engagement with companies in the palm oil industry
Palm oil is the world’s most widely used oil crop, utilized in products ranging from cooking oil and dairy substitutes to cosmetics and biofuels.1 However, its production is associated with several potential risks, including those related to deforestation, climate change and biodiversity loss, as well as disputed land use, labor-related issues, bribery and corruption. These risks have the potential to impact companies’ ability to deliver strong, long-term performance. Dynamics impacting the industry in the near term include public scrutiny of and enhanced regulations targeting irresponsible production practices,2 as well as divergence in customer demand, with increasing demand, particularly in the West, for sustainable palm oil production3 while the largest buyers seek conventional products.
The BIS team conducts ongoing, multi-year engagements with palm oil companies, which are based primarily in the Asia ex-Japan region (Indonesia and Malaysia account for approximately 84% of global output).4 We engage to further our understanding of palm oil producing companies’ long-term strategies and how they manage the material risks and opportunities in their business models that can impact their ability to create durable, long-term financial value. In the 2021-22 proxy year, BIS met with more than a dozen palm oil producing companies based in Asia ex-Japan, representing over 75% of BlackRock’s clients’ total exposure to palm oil companies in the region. 5,6
As part of our assessment of these companies, BIS considers how they manage risks and opportunities, any remediation and grievance mechanisms, and governance and oversight structures, amongst other things.
As discussed in the BIS Global Principles, in our experience, well-managed companies will effectively evaluate and manage material sustainability-related risks and opportunities relevant to their businesses.7 Appropriate risk oversight of business-relevant and material sustainability-related considerations is a component of a sound governance framework. These issues have the potential to significantly impact the economic viability of some palm oil-dependent business models.8
Key Takeaways from our engagement with palm oil producers
BIS has identified four key dynamics impacting the industry in the medium term:
1. Despite controlling ownership structures, companies may benefit from understanding the perspectives of minority shareholders
Controlling shareholder structures are widespread in the palm oil industry. In our experience, a diversity of feedback and perspective from minority shareholders, who are unaffiliated with the controlling shareholder, has the potential to better inform management and board decision making. This is why BIS continues to engage extensively with companies in the industry to encourage a focus on company-specific issues that can have a material impact on long-term financial value creation.
2. Investor understanding would be enhanced by improved company disclosures
Through our research and engagements, BIS has come to the view that companies across the industry could improve their disclosures on how they manage and remediate grievances. The lack of sufficient disclosure on this topic can hamper investors’ understanding of how company leadership is managing material risks.
3. Key challenges remain for certified sustainable palm oil demand
In our engagements, we have learned the most significant challenges for sustainable palm oil demand include consumer price sensitivities, as well as higher production costs such as obtaining relevant certifications.
4. Labor and community-related risks are more in focus
While most palm oil companies have publicly committed to principles that aim to address material sustainability-related risks, we have observed that some companies continue to be implicated in controversies that may materially impact their financial performance. More recently, companies’ management of labor issues, community relations, and land-grabbing have increasingly come into focus.
BIS will continue to engage with palm oil producing companies to encourage the development of strategies that aim to manage the material risks and opportunities in their business models that can impact their ability to create long-term, durable financial value.
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