Why is IFC investing in the palm oil sector?
IFC believes that investing in the palm oil sector results in many development benefits for local communities. Oil palm can be readily cultivated in many developing countries and is highly efficient in producing a valued commodity with a variety of uses. Palm oil production can be the basis of a thriving local economy, producing jobs and other benefits for local population.
For example, in Indonesia the sector directly and indirectly employs between four and six million of the economically active rural population and supports up to 36 million rural population. The rural population constitutes the majority of the country’s poor. The sector has proven a powerful tool for poverty alleviation in Indonesia. Significant improvement in living standards, including income, education and health levels for millions of people are attributed to the economic development benefits of oil palm cultivation.
In addition, because IFC applies strict environmental and social standards to the projects it invests in, IFC believes that its participation in the palm oil sector helps promote the adoption of sustainable management practices that include avoiding development in critical habitat and avoiding the use of fire in preparing land for planting, among others.
Why support a sector that is known to pose social and environmental management challenges?
IFC recognizes that the palm oil industry poses a number of social and environmental challenges. These include the impacts of palm oil production on local communities, forests, wildlife habitat, and endangered species. IFC believes that these challenges can be managed within IFC’s sustainability framework, which provides guidelines on how to address and resolve issues related to community engagement, as well as protection of biodiversity and wildlife.
IFC pursues a policy of engaging with the private sector and other stakeholders to seek solutions to address the challenging environmental and social issues associated with the sector. IFC is a member of the Roundtable on Sustainable Palm Oil (RSPO), a multi-stakeholder association which includes palm oil producers, users and civil society groups such as the World Wildlife Fund, Oxfam, the Rainforest Alliance, and Conservation International, among others. RSPO is working on establishing sustainable practices in the sector (see below).
Sustainable palm oil production is a key sector generating jobs and income for millions of the rural poor. In addition, it is the least expensive oil used in food production and has the highest productivity ratio among oil seed crops. If palm oil were to be replaced by alternative and more expensive oils such as soy, canola, or coconut, there are environmental and social implications – more land would have to be brought into production, putting further pressure on sustainable use of resources, and the price of food would increase.
The production of palm oil has the highest efficiency ratio of yield per hectare among vegetable oils. To replace palm oil production with other oilseed crops would require up to five times more land. Palm oil will represent about 36% of all edible oils consumed in 2008-2009. Thus, to substitute palm oil with other oils, an additional 50 million hectares of land would be needed. That is twice the size of arable land in Argentina and about five percent of the world’s arable land.
The palm oil sector often is the only viable employment alternative for the rural poor in East Asia. Unemployed, farmers may resort to cutting down the forest to make a living by illegal logging or to clear land for subsistence farming. The enforcement of local laws in such situations is challenging.
Palm oil is currently the least expensive vegetable oil, in part due to the high efficiency of its production. Substitution of palm oil with other, more expensive oils would result in higher food prices, which would hurt the poor the most, particularly in Asia which is the major market for palm oil. Asia is home to 520 million hungry people and 600 million poor people who already spend two thirds of their income on food. This year’s high food prices resulted in increased malnutrition in Asia at the highest rates globally – 41 million new undernourished people added to already some of the world’s highest rates of malnutrition.
How Does IFC Apply its Environmental and Social Performance Standards?
IFC’s Environmental and Social Performance Standards lay out specific requirements for client companies. IFC reviews all its investments to ensure they are consistent with these standards, and does not finance new business activities that cannot be expected to meet them over a reasonable period of time.
The quality and management capabilities of the client are very important factors in IFC’s decision to invest. IFC develops financial relationships with companies that fully commit to meeting their social and environmental responsibilities, that are willing to work closely with IFC to integrate and respect IFC’s standards all throughout the life of the project and beyond, and that understand the long-term benefits of managing their social and environmental risks and impacts.
When IFC invests in palm oil production, how does it ensure that the client conducts its palm oil production operations in a sustainable way?
When a project is proposed for financing, IFC conducts a social and environmental review of the project as part of its overall due diligence. Palm oil production projects are always reviewed carefully to determine their level of environmental and social impacts. If significant potential environmental and social impacts are identified, IFC works with the client to determine mitigating measures, and helps the client build its capacity to manage these impacts.
IFC is a member of the Roundtable on Sustainable Palm Oil (RSPO), which is currently working on establishing sustainable practices in the sector. The RSPO is a multi-stakeholder association which includes palm oil producers, users and civil society groups such as the World Wildlife Fund, Oxfam, the Rainforest Alliance, and Conservation International, among others. In November 2007, the Roundtable launched a certification process to validate and certify claims by palm oil companies of compliance with RSPO principles and criteria. Certifications under this system are now underway. These will allow certified palm oil companies to market their palm oil products as “sustainable”. IFC strongly supports this initiative. RSPO’s criteria for sustainable palm oil production include a variety of factors, including use of best practices by growers on their estates, protection of high conservation value habitat, appropriate waste management, attention to workers health and safety, and commitment to continuous improvement.
When IFC invests in oil palm plantations, how does it ensure the protection of forests, of wildlife habitat and endangered species that could potentially be affected?
IFC understands the environmental challenges associated with oil palm plantations. As part of its policy on environmental sustainability, IFC is firmly committed to protecting and conserving biodiversity.
When an oil palm plantation project is believed to have potential adverse effects on forests, wildlife habitat or endangered species, IFC requires the company to assess those impacts and establish and maintain an effective system to manage potential impacts. In practice, this means having a plan in place to avoid illegal or unsustainable deforestation, to refrain from using fire to clear land, to respect national and international laws protecting biodiversity, and to take all necessary measures to avoid further threats to endangered species and their habitat.
IFC requires that the company manages the environmental impacts of its oil palm plantation throughout the life of the project. The conditions imposed by IFC will be proportionate to the level of vulnerability and conservation value of the biodiversity potentially affected.
When IFC invests in oil palm plantations, how does it ensure there is local community support for a client’s plantation, and that Indigenous Peoples’ rights are protected?
IFC understands that the support and involvement of communities affected by an IFC-funded project is key to its sustainability and success.
IFC requires its clients to engage in an on-going process of effective consultation with affected communities and disclosure of relevant information. The consultation process must allow affected communities to express their views on the project’s risks, impacts and mitigating measures.
IFC recognizes that Indigenous Peoples are social groups with identities that are distinct from the dominant groups in national societies, and that these peoples can be among the most marginalized and vulnerable segments of the population.
If Indigenous Peoples are affected by a project, IFC requires the company to take measures to guarantee their engagement in the project, to respect and preserve their culture and way of life, to allow them to continue to have access to the resources on which they depend, and to allow them to continue to flourish freely as a community.
How does IFC deal with alleged or demonstrated violations of the performance standards by a client?
After IFC financing is committed, IFC monitors its investments as part of its portfolio supervision. This supervision involves the review of monitoring reports prepared by the client, independent audits, and supervision visits by IFC.
If any non-compliance is identified, IFC works with the client to bring them back into compliance. If this fails, IFC can exercise other remedies, such as withdrawing from the project.
Accountability is highly important to IFC. Individuals and communities adversely affected by an IFC-funded project have the opportunity to address their concerns and grievances to the Compliance Advisor/Ombudsman (CAO) office, an oversight authority independent from IFC which reports directly to the President of the World Bank Group.
What is IFC’s stance on the expansion of oil palm cultivation in East Asia?
IFC supports the sustainable and socially responsible development of the palm oil industry in East Asia. IFC believes that the expansion of oil palm cultivation can be done sustainably and responsibly as long as strict guidelines are followed.
IFC expects the Roundtable on Sustainable Palm Oil (RSPO) to lead in implementing guidelines for sustainable and responsible palm oil production across the industry. These will include strict criteria for the sustainable and responsible expansion of oil palm cultivation.
What is IFC’s Position on Using Palm Oil to Produce Biofuel?
IFC recognizes that biofuel production is a contentious issue. In the past, IFC has supported ethanol projects from sugar cane in low production cost countries (Brazil, Central America, India) that don’t compete with food production. As with all other projects, biofuel projects must be consistent with IFC’s Environmental and Social Performance Standards and must be economically viable without subsidies, tax rebates or mandated blending.
To date, most palm oil has been used for edible oil and other chemical products, with relatively little being used for biodiesel production.
