Palm oil companies not adhering to global ESG standards due to investors, Singapore study says

With palm oil industries in Malaysia and Indonesia facing the biggest challenge in balancing environmental, social, and governance (ESG) and profitability, a study by the Centre for Governance and Sustainability (CGS) at the National University of Singapore (NUS) Business School found that palm oil companies that are transparent in their ESG reporting are facing pushbacks from investors. The study revealed that the more transparent these companies are about their ESG initiatives, the less they are valued by investors.

Thus, the study says that investors need to support palm oil companies in meeting ESG standards and mitigating environmental degradation.

This finding contrasts with other sectors where detailed sustainability reporting usually results in higher valuations by investors and stakeholders. It also highlights how investors in the palm oil sector are indirectly endorsing unsustainable practices and contributing to environmental degradation. Despite efforts to move towards sustainable palm oil production and regulatory compliance, companies face the challenge of balancing shareholder demands and prioritising price-to-earnings ratio (P/E) over ESG.

The study analysed financial data from 36 publicly listed palm oil companies in countries including Malaysia, Indonesia, Japan, and the UK against the Sustainability Policy Transparency Toolkit (SPOTT). Aligned with the United Nations Sustainable Development Goals, the toolkit includes 182 indicators across ten categories. Scores were assigned based on the transparency of the companies’ ESG disclosures. Notably, 31 of the 36 companies have operations in Malaysia and Indonesia, the major markets for palm oil production.

Globally, palm oil is a US$70.4 billion industry, making it the most produced, consumed, and traded vegetable oil (source: Grand View Research). Malaysia and Indonesia dominate production, with Malaysia producing 24% (18.1 million tonnes) and Indonesia producing 59% (44.7 million tonnes) of global palm oil.

In Malaysia, palm oil remains one of the significant sectors in Malaysia’s economy, providing direct and indirect employment to over 3 million people (source: MPOC). In 2023, the industry contributed approximately 2.97% to Malaysia’s GDP, translating to around US$10.3 billion (source: New Straits Times). The export value of palm oil and palm-based products is projected to hit RM110 billion in 2024, from RM 105 billion last year (source: New Straits Times).

In 2022, the local stock exchange Bursa Malaysia introduced enhanced sustainability disclosure requirements to encourage publicly listed Malaysian companies to adopt and communicate sustainability practices. These regulations mandated listed companies to disclose their sustainability practices and governance structures more comprehensively, in an effort to promote better ESG practices across the corporate sector​ (source: EY)​.

A 2023 study by NUS Business School revealed that the percentage of Malaysian companies disclosing their sustainability governance structure was 100% in 2022. Unfortunately, this trend is lacking in the palm oil sector.

Professor Lawrence Loh, Director of the Centre for Governance and Sustainability at NUS Business School, said, “Investors need to be mindful of the impact of ESG responsibility not only on corporate financial performance and value, but also on non-financial performance. The ultimate goal of ESG responsibilities is to incorporate socially acceptable norms into business activities to achieve sustainable goals for the greater societal good. We must do more to show that sustainability and profitability are not mutually exclusive. This requires collaborative efforts from the governments, palm oil companies and especially the investors who are integral in driving change towards more sustainability practices.”

Governments from producing and importing countries can strengthen legislation and policies to provide incentives for companies to innovate and employ sustainable practices. Investing in technologies that help firms improve ESG reporting, especially for smaller firms that lack resources, can also encourage positive investor perceptions regarding sustainability initiatives in the sector.

“Investors may not fully understand the long term financial returns of sustainability governance. Hence, to encourage the adoption of ‘ESG’ as a metric, companies can make greater efforts to communicate and educate stakeholders on their ESG efforts and address concerns raised. By doing so, they can show their commitment to sustainability, improve the sector’s reputation, and restore investor confidence,” added Professor Loh.

Titled ‘Innovating ESG Integration as Sustainable Strategy: ESG Transparency and Firm Valuation in the Palm Oil Sector,’ the study was published in Issue 22, Volume 15, of the Journal of Sustainability under MDPI, an Open Access Journal.