Nurturing plantations with ESG

WHILE the world has firmly relegated the “New Normal” narrative that loomed during the lockdowns five years ago to the realm of distant memory, environmental, social and governance (ESG) policy appears to be a lasting agenda.

Whether embraced or resisted, companies globally are integrating ESG into their business frameworks, though many corporate analysts suggest that larger firms, particularly those beyond the small and medium enterprise (SME) bracket, are better positioned to navigate its implications due to their more substantial cash reserves.

The plantation sector is no exception, as Joseph Tek Choon Yee, a seasoned expert and former chief executive of the Malaysian Palm Oil Association and past president of the Malaysian Estate Owners Association, highlights how the scale advantage of larger firms has become increasingly evident.

ESG: scale a boon or a bane?

Tek identifies the winners in the coming years as planters who view ESG not as a superficial label but as a well-designed operating system – one that is cost-conscious and aligned with how organisations genuinely evolve, rather than an ideal imposed at a pace that overwhelms balance sheets and people.

He notes that while scale remains important, today’s focus extends beyond merely reducing unit costs to include compliance capacity.

“Large organisations are better equipped to invest in ESG infrastructure – such as traceability platforms, dedicated teams, supplier onboarding systems, grievance mechanisms and audits – and to distribute these costs across higher volumes.

“Moreover, they are better positioned to meet buyer demands for deforestation-free and traceable supply chains, which increasingly govern market access, not just pricing,” he tells StarBiz 7.

On the flipside, he observes that sizeable landbanks would also mean that replanting is never episodic, but rather a permanent rolling programme.

When replanting accelerates across a large portfolio, Tek points out that the near-term production and earnings impact becomes more visible, and that managing extensive third-party supplier networks and lifting all suppliers to ESG-ready standards is also operationally demanding.

“While scale remains an advantage, it is crucial that industry players match it with disciplined execution. Without it, scale risks becoming a large ship that struggles to turn quickly,” he cautions.

Rakuten Trade head of equity sales and analyst Vincent Lau concurs with Tek that the economies of scale help larger companies adopt ESG initiatives better, but it has also become a necessary business cost.

“ESG compliance is now something companies need to fulfill, but more notably the bigger players. They would need to negotiate around it,” he says.

Are costs recoverable?

Of course, the million-dollar question on the minds of investors is always going to be to what extent will ESG initiatives cut into the bottom line, and whether these costs are recoverable.

Tek explains that compliance to ESG preserves access to regulated and premium markets, and reduces exposure to shipment disruptions, customer suspensions and reputational shocks.

“Explicit price premiums are often limited, but ESG increasingly manifests as the ability to continue selling, secure longer-term contracts and maintain commercial stability.

“Regulatory timelines may shift, but the direction of the shift is unmistakable,” he says.

At the same time, ongoing audit costs, monitoring, digital traceability systems, supplier engagement, segregation and internal governance overheads are becoming a new baseline cost of operating, with Tek acknowledging that these form part of ESG expenditure that represents a structural margin haircut, particularly where markets do not reward compliance with visible premiums.

However, he insists that producers who embed ESG as an operating discipline – rather than a compliance ritual – can recover part of that cost through better agronomy, tighter controls, reduced leakage and more disciplined execution.

“Ultimately, outcomes depend less on frameworks and checklists, and more on management vigilance and effective leadership willing to do the unglamorous execution work on the ground,” notes the plantation sector expert.

Having mentioned that ESG costs are “part and parcel of business” these days, Lau says adherence provides continuous market access for plantation players, before pointing out that in a nutshell, it comes back to adapting well to a constantly changing environment.

Global demand drivers and shakers

The market had earlier speculated on a near-term move from by Indonesia from B40 to B50, which would have materially increased domestic palm oil usage and sharply reduced exportable surplus.

However, with the latest confirmation (Jan 14) that Indonesia will maintain B40 this year, the immediate tightening effect has been moderated. Export availability is therefore less constrained in the near term than a B50 scenario would imply.

Tek elaborates: “China restocking can move prices, but tends to be episodic rather than structural. By contrast, Indonesia’s biodiesel policy – even when held steady – continues to function as implicit supply discipline, shaping expectations and anchoring the market over time.”

Essentially, he adds that the quiet but persistent impact of Indonesia’s domestic policy is the factor least appreciated by the market, pointing to the fact that markets tend to watch China shipments loudly, even as Indonesia’s policy tightens supply quietly.

Adding to this supply-side complexity is Indonesia’s recent move to seize large tracts of oil palm land deemed to be operating illegally, says Tek.

“In 2024, the Indonesian government reclaimed an estimated four million ha, with indications that a further four to five million ha could follow.

“While the policy is framed as governance and legal enforcement, the immediate effect is heightened uncertainty over estate management, investment continuity and near-term output,” he explains.

Even if these lands are eventually regularised or transferred to state-linked entities, the transition risks – disrupted operations, delayed replanting and cautious capital spending – could tighten effective supply.

This is another example of how policy-driven interventions, rather than demand surges alone, can quietly influence palm oil prices, says Tek.

Lau is of the opinion that CPO prices could stay range-bound around the RM4,000 per tonne level if buying countries do not restock, on top of the fact that the product is also competing with other resources such as soy.

“However, we still see decent demand worldwide, and the current price is healthy. This is also not discounting the climate factor, which could impact the production of CPO, thereby possibly driving prices up,” he says.