Sustainability Practices and Financial Profitability: The Case of the World’s Top 20 Crude Palm Oil Producers

Abstract

Sustainability certifications have been introduced for the palm oil industry to ensure its sustainable operation and the production of highly demanded palm oil. At present, there are several sustainability certifications in the market, namely the Roundtable on Sustainable Palm Oil (RSPO), the Malaysian Sustainable Palm Oil (MSPO), and the Indonesian Sustainable Palm Oil (ISPO) certifications. As the crude palm oil (CPO) becomes the largest product been produced and exported in the palm oil industry, it is assumed that the major CPO producers would adhere to the call for sustainability practices by producing certified palm oil. However, the additional cost of acquiring sustainability certification might hinder them from doing so. Besides, it is unclear on the effect of these certifications on firm profitability since there are very few studies have provided quantitative evidence empirical research focuses specifically on the sustainability certification in palm oil industry context. Thus, this intends to fill this gap by examining the effect of local, that is, MSPO or ISPO and international, that is, RSPO certifications on the financial profitability of the world’s top 20 CPO producers which comprises of the leading global palm oil companies based in Malaysia and Indonesia for the period of 2013 to 2018. General Least Regression is employed due to the problems of non-normality of data, heteroscedasticity, and autocorrelation. The main variable under investigation in this study is RSPO, MSPO, and ISPO, proxied by dummy variable. The results showed no significant difference in profitability of locally certified and non-certified CPO producers. Meanwhile, CPO producers with international certification, that is, RSPO recorded reduced profitability of 5% compared to locally certified producers. Hence, the adverse effect of sustainability certifications calls for intervention from both Malaysian and Indonesian governments as well as palm oil authorities in the respective countries, for example, introduction of tax incentives and/or subsidies to compensate for the reduced profitability and the cost of certification.