Palm Oil Monitor: Investing in Palm Biofuels Gets a RED Card from Brussels

Investing in Palm Biofuels Gets a RED Card from Brussels

Last week the Commission released its ‘Climate Taxonomy’ document. Basically, this is a new set of regulations that determine whether an investment by an EU bank or institution can be considered ‘climate friendly’.

This regulation has been in train for some time, and is likely to have major ramifications going forward for palm oil, vegetable oil and other investments.

The regulations do two things. First, they separate out different types of investments (e.g. agriculture, manufacturing, etc.) into two categories: investments that ‘do no substantial harm’ and investments that make a ‘positive contribution’ to climate change.

For biofuels, the ‘positive contribution’ threshold for climate savings is set at 65 per cent. That means investments in palm-based biodiesel don’t qualify for the climate friendly designation. This isn’t surprising. However, what is surprising is that nearly all other crop-based biofuels don’t meet the threshold either, from rapeseed to soybean.

But, for the ‘no substantial harm’ designation, the regulations defer to existing regulations under the Renewable Energy Directive (RED). This means that Brussels now considers not just the use of palm based biofuels to be harmful, but also any investment in those biofuels to be harmful.

Think of it this way: if an EU-based investor is thinking of taking a stake in companies with biofuel refineries in Indonesia or Malaysia, Brussels will be telling them not to do it.

Mixed signals

When the RED was first introduced, we made a clear point to a number of officials and industry players in the region that the regulation – and ILUC – had the potential to creep into other parts of Brussels’ regulatory maze. This is just the first case.

As one commentator points out, this sends a series of mixed signals on where the EU is headed on biofuels. On one hand, the RED allows for crop-based biofuels (excluding palm oil) to remain within the RED – albeit at a reduced share – beyond 2030 based on sustainability criteria. On the other, this is a signal that biofuels currently qualifying for the RED can’t be considered ‘climate friendly’.

There is also another mixed signal. The investment taxonomy doesn’t address agriculture. This means there’s nothing to discourage investments in palm oil plantations. Any investor discouraged by the biofuels rule can simply invest in production under a sustainable system such as ISPO. But it is probably only a matter of time before agriculture comes under scrutiny as well.

What this really underlines is something astute observers have known all along: RED isn’t about sustainability, it’s about the politics of European farm subsidies. The process has revealed the politicisation of what are supposed to be objective criteria, with a European Commission spokesman saying that the rules “have to be science-based, usable and politically acceptable.” This is somewhat different to the EU’s fact sheet, which calls it “robust [and] science-based”.

Is Brussels backing palm divestment?

This can be translated as something else: EU political support for divestment from Indonesia’s palm sector.

This is not likely to mean that investors in Indonesian biodiesel will dry up any time soon. If EU investors drop out of the equation, there are plenty of investors across the globe willing to participate in the world’s highest growth markets.

Investors from elsewhere in the Asia-Pacific region – ASEAN members, China, Korea and the US – will be more than happy to pick up where European investors have ceded ground.

Brussels may argue that it is ‘leading the way’ on sustainable investment by pushing companies in a particular direction. But banks – even those in the EU – have already moved towards sustainable investments in palm oil, whether through requiring deforestation commitments, certification commitments or otherwise – and they are not likely to divest any time soon.

Brussels needs to understand that more yokes on outward investment by EU investors means lower rates of return from growth markets – such as those in Asia.

This situation with biofuels is qualitatively different to the broader diplomatic spat between the EU and China over their investment agreement. This is not a political disagreement; this is creeping regulation that occurs outside of existing or proposed trade agreements. Just as many parts of the region are encouraging more open investment, Brussels is putting the yoke on its own investors.

So, what are the dangers now? The taxonomy is to be used under the EU’s proposed Corporate Sustainability Reporting Directive. This will require companies to report on and disclose information about the sustainability of their investments. This will also likely mean that investors will have to disclose – publicly – the information on their investments across the globe. This will mean one thing: more activist pressure on European investors in Indonesia – and elsewhere across Southeast Asia.

Europe may think its desire to ‘export regulation’ across the globe will expand its influence. However, it’s looking more like it will to close it off from the rest of the world.  

Jokowi Wins Praise on Forests: When will Brussels Ever Stop Doing the Bidding of Greenpeace?

Indonesia’s success in reducing its deforestation rates has prompted praise from even broader quarters, with both The Economist newspaper and the former Unilever CEO Paul Polman hailing Indonesia’s successes.

The Economist, which has for many years been a critic of Indonesia’s forest management approach, wrote: “Following devastating fires in 2015 the Indonesian government issued a temporary moratorium on new licences for palm-oil plantations and made permanent one on clearing primary forests and peatlands. Though often honoured in the breach, they are clearly having some effect.”

Just months earlier in 2020, the newspaper had been highly critical of Indonesia’s approach to agricultural land-use planning.

Polman was more effusive in his praise for the approach, covering the government, plantation operators and smallholders:

“Indonesia, under President Jokowi’s leadership, has reduced deforestation for the fourth year running… This term implies a new model of economic development in which natural capital is preserved, and prosperity is built, not at the expense of these assets, but alongside them.

The reduction of the rate of deforestation in Indonesia has been delivered through hard and multi-faceted work from the Indonesian government. Permanent moratoriums on further loss of primary forest and peatlands are in place, in addition to a moratorium on new oil palm licences, initiated in 2018. The incidence of fires in peat and forest areas has fallen from 2.6 million hectares in 2015, to 296,000 hectares in 2020. 835,000 hectares of peatlands have been rewetted and reforested.

All of this has taken place while respecting Indonesia’s role in the global commodities market, including its status as one of the foremost producers of oil palm in the world. Indonesia’s continuing challenge is to produce more oil palm, more sustainably, within the existing footprint. Incomes and yields of poor smallholder farmers have to increase in exchange for their commitment not to deforest. Indonesian palm oil companies are increasingly committed to this people-based “produce and protect” approach.”

The praise from Polman and others puts the onus back on Indonesia’s detractors: governments seeking to penalise Indonesia’s commodities exports in the name of forest protection; and NGOs have deliberately demonised the country’s leadership.

Why is the onus on governments? If those countries continue to penalise Indonesia even after improvements have been made, it sends two signals.

First, it underlines that the penalties were never about the environment, and only about trade. For a bloc like the EU, it makes their ‘Green Deal’ ring hollow.

Second, it sends a signal to other countries – particularly developing countries – that there is no genuine incentive to improve sustainability if the punishment is going to take place regardless.

As for the NGOs, it needs to be asked what they are bringing to the table. Greenpeace, for example, has relentlessly attacked both Indonesia’s President and Ministry for the Environment and Forestry. It has also attempted to discredit Indonesia’s success with reducing deforestation rates and even implied their involvement in corruption

Given that Indonesia has achieved this through strong policy implementation and working with the private sector, has Greenpeace actually contributed anything at all?

EU Stalls for Time at WTO

Brussels has knocked back Malaysia’s request to take their WTO case against the Renewable Energy Directive to the next level. Although the move was predictable – it’s something that most countries do in WTO proceedings – it underlines the bad faith being exhibited by the bloc in its global trade dealings.

WTO disputes require the formation of a ‘Panel’, basically a group of experts. This requires a request from the plaintiff, which the defendant is permitted to knock back once. The EU did the same thing to Indonesia when it initiated its case against the EU.

However, the onus is now on Malaysia to ensure that it follows up with an additional request. Malaysia was somewhat late in filing its case in Geneva. When – or if – Malaysia puts in that request it will mean the EU is fighting a battle on two separate fronts.