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Why the Paris Agreement poses major stranded asset risk to Indonesian palm oil

Research lays bare scale of stranded asset risk facing Indonesia's palm oil sector if Paris Agreement climate goals are met.

Workers on oil palm plantations are harvesting palm fruit, for further processing delivered to palm oil mills.

Indonesia is responsible for almost 72 percent of global palm oil production, and producers in the country have faced repeated criticism.

More than 22 million acres of land earmarked for potential palm oil cultivation in Indonesia risks becoming stranded assets if investments and regulations shift towards supporting the global climate goals set out in the Paris Agreement, new research suggests.

Should the world respond to deforestation's role in fueling climate change, through both regulation and financial markets, climate risk research specialist Orbitas warns the threat to Indonesian palm oil producers and investors pursuing unsustainable production are likely to be severe.

Indonesia is responsible for almost 72 percent of global palm oil production, and producers in the country have faced repeated criticism over links to the destruction of critical tropical rainforests in the country in order to make way for palm oil plantations, which leads to increased greenhouse gas emissions and reduced carbon sinks.

Yet Orbitas estimates more than three quarters — 76 percent — of unplanted palm oil concessions in Indonesia, as well as 15 percent of the country's currently operating plantations, could become stranded assets as regulatory and investment shifts combine to make unsustainable production unprofitable in the coming years.

The research warns that under a 1.5 degree Celsius global warming scenario — the more ambitious goal in the Paris Agreement — palm oil prices could rise by 29 percent and the cost of undeveloped plantation land could rise by 52 percent, presenting significant challenges for Indonesia's palm oil industry.

At the same time, however, it would also drive a $9 billion increase in market value as global demand for palm oil — used an a vast array of food, drink and other consumer goods worldwide — is simultaneously expected to increase in the coming years.

Deforestation from agriculture is already triggering many climate transition responses that will make growth in the palm oil sector from clearing land uncompetitive.

But the Indonesian palm oil industry's ability to realize its market value potential depends on an ambitious climate response from banks and investors, national and local governments, companies and civil society to create a strategy for cutting emissions and protecting forests and peatland from unsustainable production, according to Orbitas.

Mark Kenber, managing director of Orbitas, said the research demonstrated that the risks and consequent opportunities relating to actions from governments, businesses and consumers in response to the climate crisis are as significant in the agricultural sector as they are for energy and transport.

Indeed, any palm oil producers and investors pursuing growth strategies relying on converting forests into palm oil plantations would likely have no future, he warned.

"Deforestation from agriculture is already triggering many climate transition responses that will make growth in the palm oil sector from clearing land uncompetitive," said Kenber. "However, for stakeholders who address climate transition risks seriously there are lucrative new opportunities to diversify revenues, intensify output sustainably, and continue to see growth."

The destruction of rainforests to make way for palm oil plantations is a major contributor to climate change and nature loss, due to the crucial role of richly biodiverse tropical forests in sequestering carbon dioxide, absorbing rainfall and releasing water into rivers.

But while many food companies, including consumer goods giants such as Mars, have pledged to reduce deforestation through their supply chain to net zero by the end of this year through a 2010 commitment to the Consumer Goods Forum, environmental groups have warned overall progress remains slow and the large majority of companies are on track to miss their targets.

The Orbitas research analyzed the impact of climate scenarios on the industry, looking at which types of palm oil producers are best prepared to face different climate transition scenarios and how investors can work with the industry to capture projected increased value for palm oil while avoiding future deforestation.

It concluded that the extent of a company's vulnerability to climate transition risks depends heavily on land-use strategies, emissions reductions efforts, access to capital, and operational efficiency, while stressing that a sustainability business model "is a profitable strategy."

"Orbitas' analysis indicates that the palm oil industry will enter a new era as the result of climate change," the company said.

In response to the research, the Roundtable on Sustainable Palm Oil (RSPO) said the findings — alongside last month's landmark IPCC report on the scale of the climate crisis the planet faces — provided an "urgent wake up calls to end tropical deforestation." It also stressed that RSPO-certified sustainable palm oil prohibits deforestation, and also generates 35 percent fewer greenhouse gas emissions while incurring a lower impact on biodiversity from land-use changes compared to non-certified palm oil. 

"While it can be a challenge to balance sustainable economic development and the critical need to achieve the global climate goals, a recent Climate Advisors report showed that companies certified to the RSPO P&C showed stronger equity returns than those that aren't certified," the RSPO said. "This means investors will see better returns when playing an active role in achieving the climate goals by only investing in palm oil supply chain actors that comply with the RSPO standards."

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