What does a sustainable palm oil supply chain look like?

Ian Welsh: For each of you, what have been the principle challenges in developing this sustainable palm oil supply chain project? 

Emily Kunen: This project came out of our effort to be more inclusive of smallholders in our supply chain. We have historically done a lot of initiatives with smallholders that are really focused on livelihoods, on resiliency, and at the same time we’ve had a lot of initiatives in our palm oil responsible sourcing work around forests and making sure there’s no deforestation in our supply chain. 

More recently, we’ve been looking closer at the patterns of deforestation around our supply chains and seeing the link between smallholders and deforestation, or small clearance patterns, and realizing that we need to take a really integrated approach to addressing livelihoods issues and forest protection within the same project. This project in Indonesia, in Sumatra, is one example of where we’re working with our supplier, GAR, and with our partner, Earthworm Foundation, to try and tackle that complex issue.

Götz Martin: The key challenge for us was how to approach the project in terms of traceability. For us, it was important to understand where our supply comes from. Earthworm spent six months in the field, and identified all the farmers. What was very interesting was that the productivity of these people was very low and hardly enough to survive and therefore was a serious or a real threat that these people continued to expand their fields into forested areas, causing deforestation that would be associated with our supply chain. 

Secondly, it was interesting that the Indonesian land classification system classified some of these farmers to be located within the Indonesian forest estate, where they are not supposed to be. To be able to continue to have these people being part of our supply chain, we needed an approach on how to “legalise” these farmers.

 Land tenure challenge 

Róisín Mortimer: The challenges for us were around trying to clarify the land tenure on the ground and then look at land-use planning. We couldn’t really dive into some of the participatory land-use planning necessary without actually clarifying who owns which piece of land, what the government recognises as agricultural or forest. In addition, where there are people who maybe have been coming in from other areas, what land rights do they have? 

Now that we have actually gone through a lot of that, and a request for approval of the land ownership sits with quite a senior level of government. We’ve made a lot of progress developing this participatory land-use plan. 

One of the big challenges that remains is, how we can continue to ensure that that land-use plan is respected. Obviously, people may have all agreed to something and we really think that this project has been really involving the local community from the beginning. It’s really been based off what they’ve identified as what they want to do, which is fantastic, but then that can change, right? People sometimes want different things in five years, or they change their mind, or their son or their daughter takes over the land, or they marry into a different family. I think that’s a big challenge for the future of the project.

IW: Why is uncertainty over who owns what such a problem, Götz?

GM: This is a big issue that results in many conflicts. It will be very difficult to help people out of poverty if questions remain such as “who owns this land?” There are a lot of land trades going on, and to have that security for us that we are essentially investing into the right landowner is quite critical.

IW: From Nestlé’s perspective, why, again, is the land tenure issue so important? Is it because it’s not legal? If it’s not, you don’t know who owns it?

EK: It starts with the issue of legality. Of course, we’re looking for all actors in our supply chain to be legal. Then on top of that, a lot of the work that we’re looking to do to ensure more resilient livelihoods and better incomes for the people on our supply chain, is really dependent on being able to have access to services, or to be able to maybe get loans. And that comes back to: “Do you have legal right to the land that you’re on?”

Value chain incentives 

 IW: Getting incentives right is clearly important. From Nestlé’s perspective, how do you work to ensure that the incentives for everybody involved in supplying your products are right? 

EK: I think this is one of the most complex topics because there’s no one right incentive everywhere. Really critical is to actually know the supply chain, to know where the product is coming from, understand who is involved, what are their challenges, what is it that they’re looking for, and to be able to really develop solutions that are tailored to that context. This is, of course, challenging to do at scale. Increasingly we’re seeing that to really get this right, it takes having the right people on the ground and enough people on the ground to really build the relationships throughout the supply chain.

IW: From Earthworm’s perspective, what do you do to help your partners line the incentives up correctly, so they work for everybody.

RM: What’s important is that we’re identifying what people are trying to do. If they’re encroaching on forests, why is that? I don’t think it’s because they get a thrill out of going and cutting down trees. Maybe it is a traditional shifting agricultural practice. Maybe it’s because there’s low productivity in their fields and they’re trying to actually free land to establish a permanent system. Understanding that is a start. 

To give a few quick tangible examples of what we’ve done in this project around incentivisation: once we understood these issues from spending six months intensively on the ground, we then addressed them. We improved productivity through agricultural training, working with farmers to build knowledge around organic fertilisers and their application, addressing supply chain inefficiencies and turning them into supply chain efficiencies. We identified what markets are out there for alternative products, and then conducting training to support locals to be able to access those markets.

IW: Sure. I think it’s a good point that’s for the smallholder’s perspective, you don’t find a smallholder who is wealthy from deforesting. They’re doing that because there’s no other option for them. It’s, again, a key issue that if they’ve got the incentives, if the value is coming to them, then they won’t deforest – because their farm is working properly. 

The issue of contracts keeps coming up. Traditionally the view is that long term contracts are definitely far better, but is it more complicated than that, Götz?

GM: It is complicated! If you see this landscape in Indonesia, it’s not that our mill is the only mill there. Independent smallholders are rightly independent, and they have multiple choices to whom they can sell their products. Therefore, I don’t think that kind of [long-term] contract arrangement would necessarily help the smallholders to become more prosperous. Also, in Indonesia, in the case of palm oil, the price is relatively transparent. It’s published by the government on a bi-weekly basis and published in local newspapers and through radio broadcasts. I think it’s potentially different in other commodities where this price transparency does not exist. [In that case] long-term contracts would be beneficial for the smallholders.

 IW: Bringing the smallholder into conversations is another big challenge. For Nestlé, how do you ensure that smallholders are not just passive beneficiaries in the process?

EK: It comes down to trying to select the right partners to work with, because, of course, as Nestlé, as people sitting in Europe or wherever, we’re not the right ones to go and understand them. That’s why we work with partners such as Earthworm, who have a presence on the ground, who are employing people who are from the smallholder communities themselves, to really have them be co-developers of whatever the initiatives are. 

GM: We see the same. If you work with your local communities, you need to be close to them, you understand them, you hear them, you understand their language. This is very beneficial for whatever you are planning to do. This, however, I think that is one of the big challenges that we are facing in scaling up because it really requires to have lots of people on the ground, getting to know them. There are no, or very few, quick wins. It’s an investment of time and money, to be able to scale up and to gain the trust of the people.

EK: Actually, I think we have to rethink how supply chains work and what level of presence is necessary on-the-ground to actually build a relationship between the different tiers of the supply chain. [The challenge is making this the] ongoing way of how the supply chain works, and not just one-off projects here and there that we hope will inspire scale-up somewhere else.

IW: Roisin, for you, what are the key scalability challenges? How can we take this from one mill to thousands of mills?

RM: I think the challenges are endless. It just takes a long time to understand and build trust, to understand the issues and what’s going on and co-create an action plan or solutions with that community. Having companies willing to sign up to that long-term work is obviously a big challenge when it may only impact 500 farmers out of 50,000 or 500,000. That’s a pretty hard sell to anybody. I

What helps is when we do all this intensive work for 500 farmers, we make sure that we really capture those lessons that we’ve learned and apply them to the next project so that hopefully we can speed up the process in the next project or at least reduce the cost. 

GM: We are working obviously with a lot of brands and Nestlé is one of the rare companies that co-invests in projects on the ground. I don’t think we see enough investment. There are not many companies like GAR who have the financial strength and also the people and the skills and the capabilities to engage. Therefore, other organisations who have funds need to come in, make a similar investment like Nestlé does in these landscapes and implement it so we can scale up. I think the key is really that companies work with their local mills, and plantation owners work with their local communities, which they are very close with. That’s who they know, and who they can impact. I think that is the only model to roll out.

IW: Clearly these projects have a cost. It seems that Nestlé is providing a lot of the funds to implement it this project. Is it because, in fact, this is a security of supplying issue? If you don’t implement these plans, ultimately, you’re going to lose access to the supply chains that you require for your products.

EK: I think it comes down to our sustainability commitments and our commitments to responsible palm oil. This is the only way that we think we’ll get there. This isn’t the only solution, but we have to really use a combination of tools, these types of projects, satellite monitoring, certification. All have to come together to really transform the supply chains, transform the industry. I think that’s the key driver.

 This interview was originally published as a podcast and took place at the 2019 sustainable landscapes and commodities forum. For more information about the 2020 event, click here.