Open for business: World Bank to reinvest in palm oil amid criticism

14 April 2011

Early April saw the launch of the new World Bank Group strategy for engagement in the palm oil sector, which failed to resolve civil society concerns over several issues, including the rights of indigenous peoples and how performance standards will be applied across supply chains.

The strategy outlines the conditions and standards under which the Bank will invest in the controversial palm oil sector, and brings to an end the moratorium on investments in palm oil announced by Bank president Robert Zoellick in September 2009. The original suspension followed years of pressure from civil society and indigenous peoples groups over the negative social and environmental impacts of palm oil plantations, including in projects financed by the International Finance Corporation (IFC), the Bank’s private sector lending arm (see Update 72, 71, 67).

The strategy is based on four pillars, the first of which is contributing to a policy and regulatory environment that “can assist in protecting biodiversity, mitigating climate change, protecting rights of workers and local communities”. The second pillar is ensuring sustainable private sector investment, and the third is benefit sharing with smallholders and communities. This sharing will be achieved “by identifying and scaling up inclusive business models, investing in infrastructure that enables smallholders to access markets, strengthening services to improve the productivity of smallholder farmers and developing innovative financial mechanisms to provide access to finance”. Lastly, the strategy aims to achieve the development and application of specific sustainability standards and codes of practice for palm oil.

In practice this requires the Bank to systematically assess the adequacy of national legal and governance frameworks. The implication is that if these are judged too weak to ensure sustainable production and governments do not take up Bank assistance to reform their regulatory provisions, the Bank will be more cautious in choosing whether to invest. The strategy also explicitly requires companies requesting IFC investment to seek credible certification, for example through the Roundtable on Sustainable Palm Oil (RSPO), an industry-wide group of stakeholders that promotes sustainable agriculture and positive environmental impacts. However, NGOs have repeatedly pointed out that RSPO standards are weakly enforced (see Update 71).

Staff will also be provided with a good practice note to guide investment decisions, and IFC staff will have a new Risk Screening and Assessment Tool specifically designed for national, sector and project levels. It remains to be seen whether these tools will be enough to genuinely change incentive structures in the Bank and discourage the kind of damaging investments that led to the suspension. There is a lack of detail in the strategy about how these policies will be implemented, monitored and evaluated.

Outstanding concerns

Marcus Colchester, director of UK NGO Forest Peoples Programme, which led the original complaint to the World Bank Group that triggered the suspension, said of the new strategy: “Although it is clear that the new policy has taken on board some of the comments made by NGOs and government agencies during the consultations, some provisions remain weak. The policy as adopted would discourage but still allow the takeover of indigenous peoples’ and local communities’ lands without their Free, Prior and Informed Consent. The policy has weaker provisions on the clearance of peatlands and forests than industry best practice. Nor are the IFC and World Bank offering to make reparations for harms caused by previous investments, something indigenous peoples and local communities in Indonesia have strongly demanded. They are still demanding that the World Bank Group keeps out of further investment in palm oil in Indonesia until national legal reforms secure rural people’s land rights and until past abuses are redressed.”

The new strategy refers only to Free, Prior and Informed Consultation, despite continuing demands from indigenous peoples that only by adopting Free, Prior and Informed (FPI) Consent will fair and non-coercive negotiations between investors and affected communities be possible. The strategy argues that FPIConsent is currently under consideration in the ongoing formulation of the IFC Performance Standards strategy, and cannot be part of the palm oil strategy until this process is completed. Norman Jiwan of Indonesian NGO SawitWatch points out that “the IFC is a member of the RSPO, which recognises FPIConsent, but the new strategy only refers only to FPIConsultation. This is effectively a breach of the RSPO code of conduct by the IFC, and means there will be far less incentive for IFC-backed companies to comply with the principles and criteria of FPIConsent.”

For investments channelled through financial intermediaries (FIs), the strategy states that the IFC will ensure FIs “have the ability to assess the environmental and social risks associated with their investments and that they commit to meeting IFC‘s performance standards for financial intermediaries”. However, civil society groups have highlighted that in delegating assessment, categorisation, monitoring and oversight responsibilities of social and environmental effects to FIs, the IFC cannot ensure that performance standards are effectively applied (see Update 74, 73, 71, and briefing). Moreover, there has been repeated criticism by civil society groups that the performance standards employed by the IFC are themselves inadequate in guaranteeing developmental benefits, mitigating environmental damage and ensuring human and labour rights (see Update 74, 72, 71).

In a response to fierce criticism from NGOs and indigenous peoples groups, the strategy has guidelines on how IFC clients should ensure performance standards apply to the full supply chain, meaning that downstream investments in palm oil trading and processing facilities must take into account the social and environmental impacts of the oil palm estates and smallholdings from which the product is sourced. This application of performance standards may be more achievable for vertically integrated companies which source from their own plantations, but the strategy acknowledges that where supply chains are more fragmented it is unclear how clients will be able to mitigate social and environmental risks. “The complexity comes when the client does not have control over the supply chain — or when the client is positioned in the value chain after the commodities are comingled, making it impossible to identify the suppliers. In such cases, if the risk is considered high and non-mitigatable, IFC may not invest.”

The ambiguity on whether the IFC will invest under these circumstances, and if it does how it will ensure sustainable production, is causing concern amongst civil society groups. Jiwan said that, “One of the key weaknesses of the new strategy is the lack of clarity on how performance standards will be applied across the entire supply chain. The social and environmental impacts of subsidiary companies and other actors in the supply chain are often very high, including significant conflict with indigenous peoples. The new strategy does not go far enough in detailing how the IFC will ensure these impacts do not continue.”