Singapore, 6 June 2024 — 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.
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 Indonesia, Malaysia, Japan, and the United Kingdom 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 Indonesia and Malaysia, the major markets for palm oil production.
Recommendations for Governments, Investors, and Companies in the Palm Oil Sector
Globally, palm oil is a US$70.4 billion industry, making it the most produced, consumed, and traded vegetable oil (source: Grand View Research). Indonesia and Malaysia dominate production, with Indonesia producing 59% (44.7 million tonnes) and Malaysia 24% (18.1 million tonnes) of global palm oil. In Indonesia, the palm oil sector provides direct and indirect employment for around 17 million people (source: International Labour Organisation) and spans more than 14 million hectares of plantations (source: Statista). The Indonesian palm oil market was valued at US$10.5 billion in 2023 and is expected to reach US$13.2 billion by 2032, growing at a rate (CAGR) of 2.6% during 2024-2032 (source: IMARC Group).
Recent regulations in Indonesia required publicly listed companies and financial institutions to submit sustainability reports, with 88% of listed companies complying in 2022. A 2023 study by NUS Business School revealed that the percentage of Indonesian companies disclosing their sustainability governance structure increased from 52% in 2021 to 84% 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. To read the full research paper, please refer to this link.
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