Case study by CDC Group

CDC Group (UK) believe that understanding the business case for managing ESG risks and opportunities, helps companies to embrace it. CDC co-convened a study that found that although the costs of achieving compliance with a certification standard (in this case the Principles and Criteria of the Roundtable on Sustainable Palm Oil) could be significant, they were outweighed by the benefits of certification even though the benefits often came through unexpected and indirect channels.

“One of the most effective ways to get company management to focus on ESG issues is by demonstrating the potential financial reward. CDC, FMO and WWF’s palm oil study has shown that there is a financial payback for RSPO certification, but this may come through unexpected channels.”

Dr. Samantha Lacey, ESG Executive, CDC Group

Key takeaways

  • Companies will embrace ESG management when they understand the business case.
  • Where possible, work with like-minded investors when seeking to encourage investee companies to adopt ESG thinking.
  • The actual benefits of ESG integration to a company may be much wider than those initially expected.
  • Different companies, even within the same micro sector and geographical region, may gain different benefits from ESG integration.

Livestock in AustraliaAs a development finance institution, CDC Group seeks to invest in promising businesses that will create jobs and support the economic growth of the countries in which they operate. Ensuring that ESG issues are appropriately managed (frequently through our fund managers) is a core part of our investment strategy. We believe this not only ensures that our investments have a positive impact on the communities in which they operate, but also improves financial performance.

CDC has an Investment Code based on the ILO Core Labour Standards and the IFC Performance Standards. However, we have found that requiring compliance with a set of standards is generally not enough to inspire companies to fully embrace ESG thinking. In our experience, companies only truly integrate ESG management into their operational procedures when they understand the business case and discover that it makes their business more efficient and competitive.

Engaging with portfolio companies

Palm oil production is associated with a wide range of ESG risks, from impacts on biodiversity and the release of the greenhouse gas methane to labour issues and the rights of indigenous people. CDC currently invests in three companies that grow oil palm. These companies were approached (in some cases, in collaboration with other investors) and encouraged to work towards certification to the Principles and Criteria of the Roundtable for Sustainable Palm Oil (RSPO). All three companies agreed; however all three stated that they wanted to understand the financial implications of this commitment for their business.

Identifying the business case

CDC teamed up with FMO (the Dutch Development Bank) and WWF to explore the business case for sustainable palm oil. Together they identified over 70 economic, social and environmental Key Performance Indicators (KPIs) related to the operation and management of oil palm plantations and mills. The metrics were designed to identify those incremental costs and benefits primarily attributable to RSPO. Data was collected mainly through interviews, either in-person or by phone, held with company managers from plantations and mills in Malaysia, Indonesia and Singapore. These were complemented by on-site discussions with several smallholder groups (local community members).

The study found that although the costs of becoming compliant with the standards were often significant, they were outweighed by the benefits of certification – albeit that the benefits often came through unexpected and indirect channels.

Costs and benefits

The principal costs identified in the study include the identification and management of High Conservation Value (HCV) areas, the audit and certification process (including segregating the certified palm oil) and the cost of engaging with smallholders.

Generally, companies initially embarked on RSPO certification in expectation of earning higher premiums on the palm oil they produced. However, whilst many purchasers of palm oil are committed to 100% RSPO certified palm oil by 2015, few are using much today. This means that supply of certified oil currently outstrips demand and premiums have fallen to exceptionally low levels.

Nevertheless, all the companies interviewed could enthusiastically explain how working towards RSPO certification created a positive impact on their company. For some it was because workers were more motivated and staff retention was improved (therefore productivity was higher) in an industry where there is a labour shortage. For others it was the myriad of micro improvements that were made to systems and processes that made the company operate more efficiently. In Indonesia in particular, mitigating the risk of a protest and road block from disgruntled local communities that could have resulted in a four day shutdown and over $1million in lost revenues, was seen to be an extremely beneficial effect of following the RSPO criteria on stakeholder engagement. These are explored in greater depth in the full report which can be downloaded from CDC’s website.

Spreading the word

CDC is part of the PRI’s Investor Working Group on sustainable palm oil which aims to raise awareness of these issues among investors, provide a unified investor voice in support of sustainable palm oil and the RSPO, and engage with companies in support of more sustainable practices. In particular, the working group seeks to encourage purchasers to raise their usage of certified palm oil, to nurture certified production and avoid a supply squeeze which is predicted in 2015. In addition, CDC is hopeful that their study will help other producers to understand that the benefits of RSPO certification extend far beyond a premium price for their palm oil.