Leadership and Democracy LabWestern Social Science

The Political Risks of Palm Oil

Primary Contributor: Matthew Mcintosh

Team Leader: Nick Dang

3/3/2017

The palm oil industry is an essential part of Indonesia’s economy, representing $18.6 billion USD in Indonesian exports in 2016.[1] Although some may believe that this product is only used in food products such as Nutella, it is also used as a form of biofuel and biodiesel energy, making it an important part of Indonesia’s energy sector. Moreover, the high demand to extract this product has provided the Indonesian labour force with a great deal of employment and has been cited as a major contributing factor to the decrease of poverty in many of the country’s regions.[2] Considering this information, it would be feasible for businesses to invest in Indonesian palm oil as there is clearly a market for the product as well as people that can work to harvest it.[3]  

However, the extraction of this energy product is highly controversial. There have been concerns over whether appropriate labour is being used to acquire the oil with many reports indicating the use of child labour by palm oil companies in Indonesia. Amnesty International explained how many popular food companies that use palm oil within their products have used child labour in their Indonesian divisions. Some of these companies include, Magnum, Colgate, Nestlé.[4]

The direct repercussions of a company being connected in some way to the use of illegitimate labour is epitomized by the recent attention HSBC Bank has received for its links to palm oil issues in Indonesia. The connection can be traced back to 2013 when HSBC arranged two loans for the Salim Group.[5]  Indofood, one of the Salim Group’s companies, was accused earlier this year of worker exploitation and using child labour, resulting in HSBC receiving unwanted media attention.[6]

At the same time, there have been many growing concerns that the palm oil industry is destroying Indonesia’s environment as media sources and interest groups have reported that palm oil extraction has caused the deforestation of vast amounts of Indonesian forestry.[7] HSBC have also been accused of destroying many areas of the Indonesian rainforest in their ambitions to profit from their palm oil plantations,[8] angering activist groups like Greenpeace who have denounced these actions.[9] Although the backlash from environmental groups has contributed to HSBC no longer providing companies with deforestation funds, this initiative has yet to be fully implemented since one of HSBC’s customer companies, POSCO Daewoo, was planning to still destroy huge areas of forest for its palm oil subsidiary.[10]

These issues surrounding Indonesian palm oil are concerning for any company that is interested in opening a palm oil facility in Indonesia for two immediate reasons. Firstly, the use of child labour means that companies run the risk of not having a legitimate workforce, thereby creating an issue as to how a company can extract palm oil legitimately. As such, companies will be increasingly examined as to whether they are engaging in proper labour practices, which will undoubtedly slow down their business endeavours. Moreover, with the greater public being aware that oil is extracted using child labour, people will be less willing to purchase products that include palm oil from big companies such as Colgate and Nestlé. 

Secondly, the deforestation of the Indonesian rainforest has upset environmental activists. Establishing a presence in the Indonesian palm oil industry will only increase the backlash from environmentalists and will continue to bring negative media attention to these companies, resulting in customers turning their backs on companies that destroy Indonesian forestry. This will further tarnish the reputation of any company that invests in Indonesian palm oil.      

With the controversies surrounding Indonesian palm oil, customers may boycott many products that use palm oil, ultimately discrediting a business that wishes to invest in Indonesian palm oil. Furthermore, the palm oil industry will suffer as the value of this product may potentially drop significantly on the market. Due to the amount of negative risk that has arisen from the controversial use of child labour and deforestation, investing in palm oil companies or establishing a palm oil plantation in Indonesia is simply a risk that is not worth taking.

 

[1] http://www.indonesia-investments.com/business/commodities/palm-oil/item166

[2] http://worldgrowth.org/site/wp-content/uploads/2012/06/WG_Indonesian_Palm_Oil_Benefits_Report-2_11.pdf

[3] http://worldgrowth.org/site/wp-content/uploads/2012/06/WG_Indonesian_Palm_Oil_Benefits_Report-2_11.pdf

[4] https://www.amnesty.org/en/latest/news/2016/11/palm-oil-global-brands-profiting-from-child-and-forced-labour/

[5]http://www.greenpeace.org/international/Global/international/briefings/forests/2017/GP_DirtyBankers_MediaBriefing_ENG.pdf

[6] http://www.independent.co.uk/news/world/asia/hsbc-rainforest-deforestation-indonesia-funding-claims-report-a7529761.html

[7]https://www.scientificamerican.com/article/harvesting-palm-oil-and-rainforests/  http://www.aljazeera.com/indepth/features/2014/04/palm-oil-fuels-indonesia-deforestation-indigenous-displa-201443145636809366.html

[8] http://www.independent.co.uk/news/world/asia/hsbc-rainforest-deforestation-indonesia-funding-claims-report-a7529761.html

[9] http://www.reuters.com/article/us-indonesia-palmoil-hsbc-idUSKBN1511AX

[10] http://www.greenpeace.org/international/en/news/Blogs/makingwaves/hsbc-palm-oil-deforestation-indonesia-new-policy/blog/58787/