This article first appeared in Corporate, The Edge Malaysia Weekly, on May 16 - 22, 2016.

IOI Corp Bhd’s legal challenge last Monday against the Roundtable on Sustainable Palm Oil’s (RSPO) suspension of its certification effective April 4 may be seen as a setback for the not-for-profit organisation, although some choose to see it differently. 

IOI Corp says it is taking legal action against the RSPO board of governors over the suspension of the certification for the entire IOI group. The company is contending that the suspension should not take effect against its downstream operation and its existing certified palm oil purchase and sales contracts prior to the suspension. 

Recall that the suspension came about after Aidenvironment, a consultancy providing services and research in sustainable production and trade, filed complaints with RSPO in relation to IOI Group’s Indonesian plantations — PT Sukses Karya Sawit, PT Berkat Nabati Sawit and PT Bumi Sawit Sejahtera. The offences include non-compliance with the RSPO Certification Systems regulations, failing to submit necessary documentation and non-adherence to RSPO principles and criteria.

In a statement last Monday, IOI Corp CEO Datuk Lee Yow Chor calls the decision to challenge the RSPO suspension “difficult and painful”. 

The legal action is independent of the remedial steps IOI Corp is taking to comply with the RSPO agenda but some claim that this undermines the impact of RSPO’s work. 

Eric Wakker, director at Aidenvironment Asia, says the legal action “has undermined trust in the company’s management”.

“What does this tell the world? It tells the world that IOI expects RSPO to green stamp its palm oil whilst it refuses to be held accountable against the formal rules, to which it had voluntarily subscribed through its membership. That impression will be extremely difficult for IOI’s management to correct now and this means that IOI’s buyers will likely sustain their suspensions well beyond the point where RSPO might lift it.

“We were making fair progress. In fact, the discussions were of a kind completely unthinkable prior to the suspension. Then, IOI’s management files this lawsuit. This suggests that everything that we have achieved with IOI’s staff may be undone,” he says.

According to IOI Corp, the three affected plantations produce only 2% of the company’s palm oil. In an earlier statement warning investors of the suspension, IOI Group claimed that the only effect is that the company will not be able to earn the certified sustainable palm oil (CSPO) premium, which represents less than 0.5% of the group’s revenue.

Yet, the damage done to IOI Corp could be far greater, given that the suspension was on the entire group.

In his statement last Monday, Lee says the suspension has caused “significant disruptions to certain segments of the European and American food manufacturing sector” and affected the group’s many stakeholders. 

“We, therefore, believe the scope and effect of the suspension decision is highly disproportionate to the findings by the panel, and the decision has not duly taken into account the corrective actions taken by us and verified by an RSPO–accredited auditor during the one-year period between the complaint and the decision dates,” he says. 

The company’s share price has fallen over 6% since its RSPO certification was suspended. IOI Corp’s bonds are at risk of being downgraded by Moody’s Investors Services due to uncertainty regarding the company’s operating performance, particularly the downstream business.

Meanwhile, long-standing customers like Unilever, Kellogg, Mars and Nestlé have announced that they would cease to source from IOI Corp. Customers with “beyond RSPO” purchasing policies that are stricter and more ambitious than the basic requirements of RSPO are demanding more from their suppliers. So, IOI Corp’s action plan to push itself back within the perimeters of RSPO certification may not be sufficient to win purchasers back.

For instance, Unilever says it wants IOI “to address and remediate the proven complaints and to demonstrate its commitment to fundamentally and transparently change the way it drives sustainable palm oil development to meet the highest social and environmental standards”.

Nestlé, in an email to The Edge, says, “We have now carried out an assessment of IOI’s action plan, which it claims is designed to deliver on the group’s commitment to non-deforestation in its operations.

“Our conclusion is that it does not go far enough in tackling the issues raised by IOI’s RSPO suspension and that Nestlé will, therefore, not award any new business to IOI group with immediate effect. We will also phase out all existing contracts with an expected completion date of Aug 31, 2016.”

Another setback to the RSPO agenda is Felda Global Ventures Holdings Bhd (FGV) and the Felda group’s request for an immediate withdrawal of RSPO Principles and Criteria certificates of its 58 mills located throughout Malaysia, effective May 3. With that, existing CSPO in stock with FGV will be deemed uncertified. Its kernel crushing plants and downstream refineries are not affected.

FGV says its withdrawal allows it to roll out sustainable practices programmes with 102,100 smallholders throughout the country. A report by Chain Reaction Research alleged that the RSPO credentials were already in doubt because of the clearing of 880ha of high conservation value peat land. CIMB Research, in a May 3 note, says, “The decision could be linked partly to the alleged breach of labour conditions at their plantations in the treatment of workers, which has led to the suspension of their Pasoh palm oil mill.” Others speculate that a withdrawal before suspension by RSPO is a kind of damage limitation move.

The RSPO certification process is lengthy, complicated and costly. That FGV chose to withdraw and give up the premium CSPO commands while it is still in compliance with the RSPO standards raises eyebrows. Some are worried that FGV could be setting an example for other non-complying firms to withdraw before they are hit by sanctions, diminishing the effect of RSPO’s work. 

However, RSPO says the impact of its work is found in the numbers. It has certified 2.72 million ha of palm oil production area. A total of 12.9 million tonnes or 21% of global palm oil is certified by RSPO — 51% from Indonesia and 42% from Malaysia. Removing IOI and FGV (the world’s largest crude palm oil producer and third largest oil palm plantation operator respectively) from the loop will present RSPO with a “volume problem”. 

That, though, is the natural result of RSPO’s work. RSPO CEO Datuk Darrel Webber explains, “Although suspension of a member is never a desirable outcome, it is also a part of the accountability process that grants credibility to the RSPO certification system and keeps the RSPO accountable to all stakeholders, including consumers.”

In that sense, the suspension of the IOI group and everything that has flowed from it is “proof of a system that is working”, he says.

 While it remains to be seen how the Swiss court will decide, what is certain is that IOI Corp’s and the Felda group’s actions have raised questions that will likely dominate discussions at the European Roundtable meeting in Milan next month.

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