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Leading CPG (Consumer Packaged Goods) companies have pledged to only use deforestation-free palm oil; however, new reports indicate that deforestation-linked palm oil may still be finding its way into their products as embedded palm oil. Given the centrality of palm oil to CPG product development and production, board directors will have to understand the current operational, greenwashing risks to their sourcing of the critical raw material. Moreover, board members will have to guide companies on EUDR (European Union Deforestation Regulation) to report on deforestation-free products.
Key takeaways:
- Leading CPG companies will have to consider embedded palm oil in their deforestation-free policies, in a similar fashion to how the Consumers Good Forum (CGF) has a policy for accounting for embedded soy
- Board directors must look to evaluate and adopt the NDPE (No Deforestation, No Expansion on Peat and No Exploitation) reporting framework policies, which indicate that palm oil imports are not particularly high risk of being associated with deforestation and human rights abuses
- Similarly, board directors should bolster company participation in the Palm Oil Collaboration Group, and other industry associations that bring together companies from every stage in the palm oil supply chain to accelerate effective implementation of NDPE commitments and collaborative action
- With more regulatory pressures from the EU, starting next year palm oil will be required to undertake greater due diligence, alongst trading in cattle, coffee, rubber, soya, and wood as part of the EU Deforestation Regulation (EUDR)
Palm oil’s prolific use in CPG and food companies
Consumers in the U.S. and globally mostly do not realize the extent to which they are unknowingly exposed to palm oil products that come from deforestation, even with major consumer goods producers adopting zero-deforestation pledges. A recent report highlights how some of the biggest CPG brands, including Snickers, Kit Kat, Nutella, don’t properly account for the significant role that palm-based animal feed plays in their supply chains.
With its low price and versatility, palm oil has become the most widely used vegetable oil in the world. In the U.S., palm oil can be found in roughly half of all packaged goods in the average grocery store, from shampoo to cookies and crackers. In 2022, 55% of palm oil-linked products imported to the U.S. originated in Indonesia, compared to 20% from Malaysia, 9.5% from India, and 5.5% from Spain.
What is embedded palm oil?
What’s even less known to consumers is that palm oil is also increasingly being used as an additive in livestock feed, specifically with dairy cows. Given its indirect consumption (for consumers), it has become “embedded” in consumer goods products deriving from dairy, such as milk, cheese, ice cream, and chocolate.
Currently, indirect use of palm oil is overlooked by the zero-deforestation accounting process, despite its growing use, according to Rainforest Action Network (RAN), a US-based advocacy group. By analyzing more than 30,000 shipments entering the U.S. in 2022, RAN’s research found that palm oil-based animal feed is now the single largest palm oil product category in the U.S. Also, it demonstrates that the world’s ten largest dairy processing companies and many CPG companies are not currently accounting for palm oil-based animal feed in their supply chains.
Despite millions of tons of palm oil entering global supply chains, major brands like Mondelez, Nestlé, and Ferrero and dairy companies like Danone, Fonterra, and Lactalis, are not taking action to ensure that embedded palm oil used to manufacture their milk, cheese, chocolate, or ice cream products is not Conflict Palm Oil.
This may even expose these companies to potential risks for greenwashing, as many of these companies claim that 100%, or nearly 100%, of their supply chains are deforestation-free.
The EU’s push for greater deforestation transparency
With the rise of criticism around false deforestation– free claims, the EU has passed rules in 2023 that guarantee that the products EU citizens consume do not contribute to deforestation or fest degradation worldwide. Additionally, the new EUDR will is also expected to bring down greenhouse gas emissions and biodiversity loss. Palm oil, cattle, soy, coffee, cocoa, timber, rubber, and products derived from the listed commodities (such as beef, furniture, or chocolate) will be covered.
Starting December 30, 2024, companies doing business in the EU will need to comply with the requirements of the EU Deforestation Regulation (EUDR). This new regulation brings particularly significant implications and requires businesses dealing with certain products to conduct even more extensive due diligence on their supply chains.
Actions boards should take:
- Conduct a risk assessment of current exposure to embedded palm oil and palm oil for all products
- Require largest partners to submit their risk assessments of current exposure to embedded palm oil
- Establish internal due diligence policies in alignment with EUDR and anticipate increased reporting and disclosure requirements
- Train all board members on the emerging regulatory and industry association activities related to disclosing palm oil imports
Questions for the boardroom:
- What claims are we making about deforestation-free status in our supply chain and in consumption of palm oil? How have we backed up those claims?
- What were the findings from our last NDPE evaluation and reporting cycle?
- How are other companies mitigating embedded palm oil from animal feed? What are collaborative, industry-wide solutions that we can support?
- Have we begun understanding our EUDR reporting requirements? If so, what are they across commodity types? If not, what’s the timeline to do so? Do we have internal capability and expertise to meet EUDR timelines and disclosure requirements?
- What supplier support measures exist to improve supply chain visibility from where we import feedstock or other products with embedded palm oil?
Additional Telesto resources:
Telesto Strategy supports Corporate Directors in CPG to mitigate ESG and climate risks, stay ahead of changing regulatory regimes, and enhance disclosures and reporting in the face of increasingly complex environments. See additional resources to equip Corporate Directors:
- The audit committee’s evolution: Now on the front lines of ESG
- Pressing ESG questions for the boardroom
- Adapting to new trade realities: The impact of USMCA on CPG company board’s priorities
- Atlas, our sustainability and ESG training for boards, equips corporate directors and leaders with the insights and knowledge necessary to stay up to date, mitigate risks, and seize business opportunities associated with sustainability, climate, and ESG
