On occasion, Emerging Markets ESG publishes a special interview with an academic, expert or practitioner about a specific topic with relevance to environmental, social and/or governance (ESG) issues.
This month’s interview, the 20th in the special interview series, is about sustainable palm oil and is with Gabriel Thoumi, CFA, Senior Fellow for Climate Finance, Climate Advisers, Washington, DC, United States of America.
Climate Advisers is a mission-driven policy and politics shop working to deliver a strong low-carbon economy. In the United States and around the world, we create and implement large-scale, cost-effective strategies to strengthen climate action and improve lives. Climate Advisers brings together globally recognized thought leaders on climate and energy, forests and lands, and sustainable development. We specialize in breakthrough ideas informed by a deep understanding of complex policy and political challenges. More information on sustainability and tropical commodities can be found at www.chainreactionresearch.com
Gabriel Thoumi, CFA is a Senior Fellow at Climate Advisers where he provides global financial analysis for mitigating systemic climate risk while advising on “greening” capital markets for clients and coalitions. He has 15 years of experience managing and deploying frameworks to improve global capital markets sustainability through risk mitigation and return enhancement. Previously, for Calvert Investment Management, he valued global equity, index, and fixed income portfolios and their component positions in the utilities, energy, materials, chemicals, and financial sectors. He worked on quantitative index construction and asset allocation strategies. He engaged Fortune 500 CEOs on approaches to mitigating climate risk using financial risk management tools. He led initiatives to improve financial accounting of exchange-listed products and incorporated natural capital into financial tools. He wrote the winning Agriculture Supply Chain Adaptation Facility for the Global Innovation Lab for Climate Finance. His research on capital markets has been cited by Forbes Magazine and the Guardian as key reasons why markets can improve our societies’ collective ability to mitigate climate change.
Formerly, for the U.S. Government, as Senior Director Finance and Carbon Markets, he led a team publishing confidential analysis on Latin American REDD+ financial readiness. At Morgan Stanley’s climate change mitigation company, he conducted due diligence on derivatives and financed infrastructure projects. At Wells Fargo, he managed $4 billion daily in commercial bank lending and priced financial risks for over 2,000 financial counterparties while managing a $16 billion fixed income portfolio to protect public deposit accounts, and he sold financial products while supporting fixed income trading. At American Express, he consulted on behavior finance modeling. At Intel Corporation, he forecasted Asia-Pacific market demand. His career began in art history and natural resources management.
He sits on the board of the Network for Sustainable Financial Markets and 2 Degrees Investing Initiative. He has an MBA and MSc from the University of Michigan where he was a Consortium and Erb Institute fellow. He is a frequent speaker, author, and lecturer for various universities. He also is a Certified Ecologist by the Ecological Society of America and LEED AP (BD+C) and LEED AP (O+M). Finally, he sits on the Metropolitan Washington Council of Governments Air and Climate Public Advisory Committee advising regional clean air policy.
Emerging Markets ESG: How would you define sustainable palm oil?
Gabriel Thoumi: Palm oil is in half of the consumer products we buy yet the impacts from the production of palm oil, when linked to deforestation, can be disastrous for communities and for our planet. Palm oil is sold in business-two-business transactions either as crude palm oil (CPO) – and its associated derivatives – or as certified sustainable palm oil (CSPO) – and its associated derivatives. Palm oil plantations and refiners can certify palm oil production according to various independent NGO-led third-party principles and criteria. The main certification mechanisms are the Roundtable on Sustainable Palm Oil (RSPO) and the International Sustainability and Carbon Certification (ISCC) mechanisms.
Emerging Markets ESG: What distinguishes sustainable palm oil from conventional palm oil?
Gabriel Thoumi: CSPO is distinguished from CPO by achieving a set of criteria determined by RSPO and / or ISCC or other similar mechanisms. Margins on CSPO are generally higher than on CPO, demonstrating that greater profit can be achieved at times by meeting business-to-business demand for reliable, palm oil that supports the hundreds of corporate buyers who have made zero-deforestation commitments. Yet CSPO is in itself does not always equate to zero-deforestation.
This matters when we consider that the only way to achieve a 1.5 or 2 degrees Celsius scenario, society must immediately end tropical deforestation. To achieve this end, with increasing population demands, industry and government must work together to improve efficiencies of tropical agriculture production.
Emerging Markets ESG: Which standards are used to certify sustainable palm oil?
Gabriel Thoumi: As noted above, the two most widely used criteria are Sustainable Palm Oil (RSPO) and the International Sustainability and Carbon Certification (ISCC) mechanisms. Other mechanisms include the Indonesian Sustainable Palm Oil Standard (ISPO).
The RSPO is the main certification standard used in the palm oil production industry. It uses a multi-stakeholder, business-to-business model to encourage the adoption of sustainable practices by members (particularly producers) and promotes the uptake of certified sustainable palm oil internationally.
The ISCC is based on the European Union’s Renewable Energy Directive and German sustainability ordinances (BioNachV). The ISCC is the predominant certification scheme for palm oil used as a feedstock for biofuels. It includes a rigorous carbon accounting mechanism, which documents energy inputs and greenhouse gas outputs to ensure that biofuels are truly sustainable.
The Indonesian Government launched the Indonesian Sustainable Palm Oil (ISPO) standard is designed to ensure that all Indonesian oil palm growers conform to a set of agricultural practices. It is applicable to Indonesian domestic consumption and international export.
Other standards include the Sustainable Agriculture Network (SAN) and the Roundtable on Sustainable Biofuels (RSB). Fairtrade, Global GAP and Organic are all commonly used for agricultural commodities and may be used.
In summary, the key standards are RSPO for food products and ISCC for biofuels.
Emerging Markets ESG: Is sustainable palm oil largely characterized by environmental indicators, or do social and governance issues also play a role?
Gabriel Thoumi: Sustainable palm oil needs to address environmental, social, and governance (ESG) issues. From a corporate perspective, when applying an enterprise risk management (ERM) lens, setting and achieving zero-deforestation commitments is a business strategy decision. The implementation of this zero-deforestation decision functions within the framework of operational risk, led by senior management and the corporation’s board of directors, realized at the line manager level.
As a result, business groups and individuals, from the line manager to the board room, need to internalize market risks (e.g. commodity risk) associated with CSPO vs. CPO and operational risks (e.g. production and refining) associated with plantations that achieve zero-deforestation commitments.
Emerging Markets ESG: What are the current challenges and future trends of sustainable palm oil?
Gabriel Thoumi: The future of sustainable palm oil includes some market actors falling out of favor given their negligent approaches to operational risk management while other actors fully embrace sustainability as a core of their approach operational risk management from the board room to the line manager.