Memo from Brussels
Delegations from Malaysia and Indonesia visited Brussels last week in order to make their positions clearer on the ban of palm oil from the European Union’s Renewable Energy Directive (RED).
The delegations were led by Indonesia’s Economic Coordinating Minister Darmin Nasution and Malaysian Secretary General for the Ministry of Primary Industries Dato’ Dr Tan Yew Chong.
Indonesia appeared to be much more aggressive at a press conference held in Brussels.
Minister Darmin Nasution stated unequivocally that it would challenge implementation of the Delegated Act at the WTO, citing its victory against EU antidumping duties on biodiesel.
Malaysia was much more conciliatory. Secretary General Dr Tan Yew Chong stated that “Malaysia will not retaliate hastily. We’re urging the EU to let vegetable oils trade be market driven. Let’s work together to let free and healthy competition prevail.”
This was, however, just a press conference. There were two other key moments: a letter from Prime Minister Mahathir Mohamad and President Jokowi, and the bilateral meetings themselves, which were much more revealing.
The letter followed a similar line to the one Malaysia presented to Norway and France earlier this year. But this paragraph stood out:
“Should this Delegated Regulation enter into force, our Governments shall review our relationship with the European Union as a whole, as well as its Member States. This may include the reviewing of our partnership negotiations, procurement contracts and key imports from the EU”.
What’s notable is that the Governments have said they will review the relationships, and they’ll do it together. This isn’t far off saying that ASEAN is going to unilaterally review its relationship with the EU.
The bilateral meetings between the EU and Indonesia were led by President Juncker’s Cabinet.
Indonesia’s aggressive stance yielded some results. Europe offered to broaden the scope of the RED Delegated Act review (due before 2021) to include certification, and particularly ISPO certification.
Europe asked Indonesia to remove any new barriers to alcohol importation; Indonesia responded by saying that any import clearances were undertaken on a ‘case by case basis’.
It appears that currently the Europeans did not offer similar bilateral talks with Malaysia – probably as Malaysia has not (yet) implemented any trade actions.
On certification, there is a broader backdrop. One of the key recommendations of the EU’s final Sustainability Impact Assessment of an Indonesia-EU FTA – released coincidentally last week — was for the EU to give greater support to certification schemes. It stated:
“in parallel to the FTA the Parties should consider cooperating in strengthening the RSPO certification scheme and the Indonesia Sustainable Palm Oil certification scheme’s protection of human rights, including the customary land rights of indigenous people.”
A question that Indonesian trade officials might ask is whether the EU was offering them anything new at all.
Although Juncker’s cabinet members are experienced, its composition indicates that Southeast Asia is not a major priority. No cabinet members appear to have significant experience or knowledge of the region. It’s also worth noting that Juncker does not appear to have visited ASEAN during his Presidency.
What does this mean? Malaysia and Indonesia need to compete for attention in the European trade policy space. Much of that space is currently being occupied by the United States, and to a lesser extent China.
The clearest evidence of this is US lobbying for greater soybean purchases via the RED, with the EU capitulating first on certification, and then on making soybean a low-ILUC risk feedstock. The EU did this in order to stop the US imposing steel and auto tariffs.
But in doing so, they gave Malaysia and Indonesia the clear message that they are ‘second class’.
The talks will no doubt continue, but the next few weeks are critical as the EU’s various arms decide whether they should or shouldn’t support the revised Delegated Act.
Will the EU reconsider soybean in its DA review?
Perhaps by coincidence, new deforestation figures for soybean also emerged last week from Brazil’s environment ministry. The data shows that 220,000km2 of deforestation took place in Brazil’s Amazon and Cerrado regions between 2006 and 2017.
Further, modelling by Stockholm University’s Trase program reckons that 22,000km2 – 2,200,000ha — was used for growing soy. It’s worth noting that the EU’s ‘scientific report’ for the Delegated Act reckoned that only 1.2 million ha of deforestation over a similar period was a result of soybean expansion globally, not just in Brazil.
The general understanding among Indonesian and Malaysian officials now is that soybean deforestation has been glossed over in the RED to keep the EU’s relationship with the US intact (see above). This has been underlined by the political deal between President Juncker and President Trump for the purchase of more US soybeans.
WWF opposes palm oil divestment
Norway’s sovereign wealth fund recently gained some attention for divesting from a number of palm oil firms.
Divestment also gained headlines last month when a number of US Democrat Senators wrote a joint letter to institutional investors asking them to explain their stance on palm oil. That initiative was led by Hawaii Senator Brian Schatz, a long-time colleague of former Congressman and anti-palm campaigner Henry Waxman.
However, it’s worth noting that WWF last week stated that it generally opposed palm oil divestment. WWF notes that when divestment takes place:
“the most committed financial institutions lose their considerable ability to influence and improve the sector’s sustainability. There is a high likelihood that divested companies become clients or portfolio companies of financial institutions with less stringent sustainability policies and criteria. As a result, divestment could lead to the erosion of sustainability in the sector, thereby enabling continued deforestation, peat degradation and abuses of human, labour and community rights”.
“Instead, WWF believes that financial institutions should not divest from palm oil, but instead remain engaged with their clients and portfolio companies in the sector to improve sustainability. Divestment should be a last resort, used when all avenues of engagement have been exhausted, and a company has demonstrably and consistently failed to progress against clear expectations for sustainability. WWF encourages financial institutions to disclose the process leading to such divestments”.
This is a particularly sensible approach. This is often already used by a number of financial institutions when requiring that new project finance adhere to sustainability certification or other lending criteria.
Despite this, it’s unlikely to cut any ice with those who continue to pressure investors to get out of the sector entirely.
Divestment as a strategy doesn’t make much financial sense to begin with. If an investor sells out of a plantation company that is profitable and low risk, any subsequent change to the share price will mean that the investment is underpriced – and therefore waiting to be snapped up by an investor that doesn’t have a divestment policy in place.