Can Malaysia’s palm oil industry balance profit with sustainability?

In the Malaysian countryside, the sweet scent of ripening palm fruit fills the air, with vast stretches of emerald fronds extending into the horizon.

Palm oil—found in everything from chocolates to cosmetics and biofuels—holds an outsized role in the global market.

Despite occupying just 0.5 percent of the world’s agricultural land, it accounts for 35 percent of global edible oil production, making it the most consumed vegetable oil.

But its success has come at an environmental cost, historically linked to deforestation and habitat destruction, endangering wildlife like the orangutan.

Today, Malaysia faces a critical juncture: can it secure the future of this crucial industry while addressing the environmental and social challenges that shadow its growth?

The rise of palm oil in Malaysia

Palm oil’s journey in Malaysia began in the 1870s, introduced as an ornamental plant by the British. Its economic potential only became evident in 1917 with the first commercial plantation in Selangor.

Palm oil’s dominance can be attributed to five key factors, according to The Guardian. First, it has supplanted less healthy fats in food products. Second, producers have worked to maintain its low cost. Third, it has replaced more expensive oils in household and personal care items. Fourth, it has become a staple cooking oil in many Asian countries. Lastly, as those nations have grown wealthier, their fat consumption has increased, much of it in the form of palm oil.

Malaysia is now the world’s second-largest producer, accounting for 26 percent of global output and 30 percent of palm oil exports. Palm oil has become a cornerstone of Malaysia’s economy, contributing 3 percent of GDP and generating over $22 billion annually in export revenue.

Beyond its economic importance, the palm oil industry directly employs one million people in Malaysia, with an estimated 450,000 smallholders relying on the crop for their income.

Reckoning with deforestation

The growth of the Malaysian palm oil industry has left an indelible mark on the country's landscapes while bringing economic prosperity. Deforestation, habitat loss, and declining biodiversity have become persistent shadows, casting doubt on the industry's sustainability.

According to Global Forest Watch, Malaysia lost 9.23 million hectares of tree cover between 2001 and 2023, a 31 percent decline since 2000. Notably, 57 percent of this loss occurred within plantations, primarily driven by the expansion of the palm oil and timber industries from 2013 to 2023.

Recognising the urgency, Malaysia took significant steps, including a firm commitment to stop clearing new forests for plantations. The country promoted replanting to increase yields, preserve its natural heritage, and prevent further habitat loss.

In 2013, 'Malaysian Sustainable Palm Oil (MSPO) certification scheme' was launched, and made mandatory in 2019, ensuring the traceability of palm oil throughout the supply chain.

The ability to track the origin of palm oil is crucial for verifying its sustainability claims, building consumer trust, and addressing concerns over deforestation and illegal activities.

As of April 2024, 87.4 percent of palm oil plantations in Malaysia, covering 4.94 million hectares, joined the scheme.

However, smallholders, who comprise nearly 26 percent of Malaysia's palm oil sector, still need help to meet the scheme's requirements due to limited resources, technical knowledge, and a complex certification process.

Navigating global trade regulations

While Malaysia seeks to bolster its sustainability credentials, it faces new hurdles in international markets, particularly in Europe.

The European Union’s Deforestation Regulation (EUDR), came into effect in June 2023, aims to curb deforestation by imposing strict checks on companies importing commodities like palm oil.

Although well-intentioned, the regulation presents challenges for Malaysian producers, especially smallholders.

The EUDR demands detailed location data for the land where palm oil is produced, adding layers of paperwork and compliance that are difficult for smaller players to navigate.

The regulation’s full enforcement is not expected until December 2025, giving Malaysia time to negotiate fairer terms.

Ongoing discussions between Malaysia, the EU, and other stakeholders will be crucial in shaping a system that balances sustainability with the realities faced by small producers.