Unilever, Cargill push to green their palm oil chain

He turned to palm oil, which now is the most widely used vegetable oil in the world. The company was a major trader in the commodity used in everything from cooking oil to dish soap to ice cream. Business was booming, but so were complaints that palm oil plantations had become one of the biggest threats to the dwindling tropical forests in Indonesia and Malaysia where much of the trade is based.

This summer, the Minnesota-based commodities trader rolled out a far-reaching policy promising that the palm oil that it produces, trades or processes will no longer come from deforested lands, carbon-rich peat lands or be linked to “exploitation of rights of indigenous peoples and local communities.”

And then at the U.N. climate summit in September, Cargill joined three of the world’s biggest palm oil producers to sign the Indonesian Palm Oil Pledge. They committed to “sustainable palm oil that is deforestation free, respects human and community rights and delivers shareholder value.”

“We want to be visible and a leader in terms of progressing the improvement of the industry relative to sustainability and deforestation,” MacLennan told Fortune of the company’s commitment that dates back to 2004, when it became a founding member of the Roundtable on Sustainable Palm Oil. “There are a lot of companies that will just kind of go along for the ride. We don’t want be along for the ride. We want to be in front.”

The push to green the palm oil supply chain comes at a time when the demand for the commodity is set to double by 2030 and triple by 2050. Environmentalists have warned that failure to direct the expansion of plantations away from forest and into grasslands and other degraded land could lead to the extinction of endangered tigers, elephants, rhinos and orangutans. They are also are concerned that tearing down forest will contribute to global warming, since more than 10% of greenhouse gas emissions now come from deforestation.

Campaigns led by Greenpeace and Rainforest Action Network have over the past decade targeted multinational consumer goods companies which are among the biggest buyers of palm oil. However, those efforts made little headway on the ground. Indonesia, for example, overtook Brazil in 2012 as the No. 1 deforester.

But as more sustainable oil reached the market and the technology for tracing commodities improved, Unilever, Cargill and Nestlé among strengthened their pledges in the past two years to use only green palm oil.

They were joined this year by more than 20 consumer goods companies—including Kellogg (K), Mars, Procter & Gamble (PG) and Johnson & Johnson (JNJ)—which adopted zero deforestation policies. And in September at the U.N. climate summit, more than 30 companies including McDonald’s (MCD) and Wal-Mart Stores (WMT) committed to eliminate deforestation from their supply chain by no later than 2020.

It was part of a larger pledge at the summit by governments to half deforestation by 2020 and strive to end it by 2030. If fulfilled, the measure would eliminate between 4.5 million and 8.8 billion tons of carbon dioxide each year by 2030—the equivalent to removing carbon emissions produced by one billion cars.

“The last few months have seen a welcome race to the top,” Paul Polman, Unilever’s chief executive officer, said at the summit. “Consumers have sent companies a clear signal that they do not want their purchasing habits to drive deforestation and companies are responding.”

A less publicized but significant change has come further down the supply chain, with promises this year from many of the biggest plantation companies to change their ways.

Along with the Indonesian Palm Oil Pledge, five producers this summer joined Cargill in signing the Sustainable Palm Oil Manifesto. The companies have signed onto a no-deforestation pledge and the establishment of a system to create a “traceable and transparent supply chain.” The companies, most of them based in Malaysia, also agreed to a moratorium on converting the most environmentally important high carbon stock forests until a study can be done to determine where those stocks are located.

“Our efforts towards sustainable produced palm oil is an ongoing journey, one for which we are continuously learning and being challenged in,” one of the companies Kuala Lumpur Kepong Berhad (KLK) said in a statement to Fortune. “As our business, it is our responsibility to be part of the solution and we are proud of our efforts thus far. Our journey does not end here. KLK will continue to strive towards higher standards.”

These companies are also feeling pressure from buyers such as Unilever which want assurances they will be able to “source all of our palm oil traceable to known and certified sources by 2020.”

Unilever, an Anglo-Dutch multinational with 400 brands including Hellmann’s and Dove, will be opening the Sei Mangkei Oleochemical Plant in Indonesia later this year to better source green palm oil. It also has teamed up with the global research organization World Resources Institute, which operates a monitoring system called the Global Forest Watch. Using satellite data overlaid with a range of other information including locations of national parks and agriculture concessions, the system allows buyers and the public at large to identify threats to forest nearly in real time. For now, updates are now monthly but eventually will be more frequent.

And Unilever has started meeting regularly with its 200 suppliers to make the case that sustainability is good for the economy and its bottom line. One of those meetings took place last year in Singapore, just as haze from forest fires in neighboring Indonesia blanketed the city-state. The fires have become an annual headache across Southeast Asia – spreading as far as Thailand and the Philippines. They are blamed mostly on plantation owners and small-scale farmers burning virgin forest or clearing other land.

“We couldn’t actually go into the street. The haze coming into Singapore was simply was unbelievable,” said Pier Luigi Sigismondi, Unilever’s chief supply chain officer.

“The growers were there and we were discussing what else we could do to make a difference in the planet,” he said. “That was sort of like a wake-up call at the time for the growers to say, well, we are directly or indirectly burning these palm oil trees. It was clear for them, as much for us and many other companies, that the air is changing.”

Unilever and Cargill are also investing heavily in training farmers in sustainable agriculture practices, be that more efficient water use, reduction of pesticides or better land use practices. Cargill, for example, has trained more than 100,000 cocoa farmers in West Africa in sustainable practices and pays them a higher rate for implementing those measures—enough to cover the cost of a new school and hospital in one village. Similar programs have been launched with its coops of oil palm farmers in Indonesia and Malaysia.

Taken together, the share of palm oil under zero deforestation commitments has grown from 0 to about 60% in the last year. Plantations under commitments cover an area the size of Portugal and the resulting savings to the planet is an estimated reduction of 400-450 million tons of carbon dioxide by 2020.

“This is a watershed moment on palm oil because enough of the building blocks for shifting the market are in the process of coming into place,” said Craig Hanson, the WRI’s global director of food, forests, and water programs. “You have buyers making commitments. You have got now suppliers and traders making commitments,” he said. “You also have greater transparency which is critical for people following through on commitments and for holding folks accountable to those commitments.”

Kit Batten, USAID’s Global Climate change coordinator, called the growing commitments “exciting.” She credited the shift to increased consumer awareness as well as the use of hi-tech tools to keep suppliers honest. “For the first time eve,r thanks to satellite technology and a lot of other new innovations, there is the ability to have that kind of traceability and transparency in supply chains that just didn’t really exist before,” said Batten, whose agency has provided $5.5 million to the Global Forest Watch as part of a campaign to eliminate deforestation from palm oil production.

But Batten and others acknowledge there is plenty to be “untangled” in a supply chain that still excludes 40% of the players and doesn’t do enough to separate legal and illegal oil palm when it is refined, processed and then shipped.

Two investigations—one released in September by a coalition of environmental groups called Eyes on the Forest and another by Rainforest Action Network—illustrate the challenge ahead. The Eyes on the Forest investigation found scores of palm oil producers in Indonesia who have signed sustainability commitments caught sourcing oil palm from illegal plantations. Illegal produced palm oil from forests favored by endangered Sumatran tigers ended up in facilities of four producers as well as at ports these producers use to ship their products.

The RAN investigation implicated 40 palm oil growers operating in an Indonesia conservation area that his home to endangered orangutans as well as Sumatran tigers, rhinos and elephants. One major crude palm oil mill was caught sourcing from these growers and three large traders also sourced from them.

“At the moment, there is no traceability at the plantation level in the global palm oil supply chain,” said Gemma Tillack, RAN’s agribusiness campaign director.

“It stems from the fact that palm oil is a commodity. The very nature of a commodity is that it is bought and sold in large quantities all over the world,” she said. “In order for it to be cheap, these systems have not been put in place. The system-wide transformation that we are hoping to achieve is essentially changing the very nature of how this commodity is produced, traded and sold onto the global market.”

Recognizing the system gaps, Cargill and Unilever are both set to roll out measures aimed at shoring up the traceability of their supply chain in the coming weeks. Cargill, in its first palm oil progress report, plans to announce that suppliers will be monitored and subjected to field assessments, that a grievance process will be set up to deal with potential violations of its palm oil policy and a third party mediator hired to deal with any issues.

“We are undertaking this effort in a smart, deliberate and technical way,” MacLennan told reporters at the U.N. summit.

“We want to do this the right way, and we understand that this sort of commitment can’t be limited to just select commodities or supply chains,” he said. “This is bigger than anyone one company, group or country. It will take years of cooperation between government, civil society and the private sector along with farmers, local peoples and consumers.”

Unilever also unveiled similar plans to Cargill at a Roundtable for Sustainable Palm Oil meeting last month in Malaysia. It promised to trace the palm oil used all the way down to the mills and require its suppliers to do the same. It also plans to map out plantations located within 30 to 50 kilometers of those mills to ensure they are complying with sustainable standards.