• Malaysia, along with our neighboring country Indonesia, is recognized as one of the world largest producers in the palm oil industry, accounting for 32% of global oils and fats production.

• In 2022, global deforestation reached 6.6mn hectares (Mha), indicating a divergence from the intended trajectory towards achieving no deforestation by 2030 in halting the loss of forest.

• The Environmental element is the focus of discussion in relation to deforestation occurring in palm oil cultivation.

• The European Union Regulation on Deforestation-Free Products (EUDR) mandates that starting January 2025, companies must conduct due diligence on the traceability of their commodity supply chains, ensuring products are free from deforested land.

Green Dilemma: Surging Worries as Agriculture Sparks Deforestation Concerns The permanent reserved forest in Malaysia covers an extensive area of 4.8Mha. A breakdown of its functions divided into 1.93Mha for protection and 2.92Mha for production, including logging, sawm timber, plywood, veneer, and mouldings (refer to Chart 1). Concurrently, Malaysian peatlands are categorized based on their roles in socioeconomic activities such as forestry, agriculture, infrastructure, and community livelihood. These peatlands are distributed across more than 6 of the 13 states, covering approximately 2.13Mha, accounting for about 6.46% of the total land area in Malaysia. Predominantly, peatlands are located in the states of Selangor, Johor, Perak, Pahang, Sabah, and Sarawak whereby Sarawak boasts the largest peat area, exceeding 1.0Mha (refer to Table 1). It has been reported that 50%, equivalent to 1.086Mha, of the total peatland area in Malaysia is designated as permanent reserves whereas the remaining areas have undergone conversion for various purposes, while some still maintain their status as state forest land.

It is well noted that Malaysia is a significant global palm oil producer, alongside Indonesia in Southeast Asia. This prominence stems from the increasing cultivation of palm oil, driven by its versatile uses in industries like food, cosmetics, and biofuels. Notably, palm oil is recognised as the most efficient oil-bearing crop, needing only 0.26 hectares (Ha) to produce one tonne of oil. In comparison, soybean, sunflower, and rapeseed require 2.0Ha, 2.22Ha, and 1.52Ha, respectively, to yield the same amount per tonne. This efficiency contributes to the growing global demand for palm oil. Alongside with the efficiency, Malaysia could enhance its European Union (EU) market position through the Malaysian Sustainable Palm Oil (MSPO) certificate, covering almost 90% of the country's production.

Meanwhile, as per the Indonesian Palm Oil Association (IPOA) or Gabungan Pengusaha Kelapa Sawit Indonesia (GAPKI), 90% (611 out of 731) of its member companies have secured certification for Indonesian Sustainable Palm Oil (ISPO). Meanwhile, the impact of fire on tree cover in Indonesia has also contributed loss of 2.87Mha (Refer Chart 2) for the same period, whereby the peak annual loss is in 2016 recorded a total of 729 thousand hectares (Kha). In that particular year, it was observed that the trend continued in Riau, with 47% of the fires occurring within wood fiber concessions. The ongoing frequency of fire incidents in the country raises concerns, as indicated by a recent report from GFW showing in between 16th of January 2023 to 15th of January 2024, Indonesia experienced a total of 8,326 Visible Infrared Imaging Radiometer Suite (VIIRS) fire alerts.

Despite the alarming figures, climate change stands out as a significant catalyst for the escalating incidence of fires. Presently, extreme heat waves are five times more probable than they were 150 years ago. Additionally, heightened temperatures are contributing to more intense fires in boreal forests, the world’s largest land biome. Approximately 70% of tree cover loss due to fires in the last two decades is concentrated in specific regions, including Canada, China, Finland, Japan, Norway, Russia, Sweden, and the United States (refer to Chart 3)

Source: BIMB Securities Research - 31 Jan 2024