Structures

The eight most relevant structural factors identified from literature reviews were: land tenure; demography and level of development; human resources capacity of farmers; financial capacity of farmers; geopolitics; smallholder business models; climate change and natural disasters; and national and global political stability. Land tenure systems are a crucial challenge in oil palm development. The Government of Indonesia has indicated that the area of oil palm planted inside the state forest estate exceeds three million hectares (CMoEA 2021). This results in land legality issues being a key impediment to sustainability certification (Brandi et al. 2015). Unclear land tenure rights and lack of acknowledgment of indigenous rights in land allocation processes are other critical issues for oil palm development in the forest frontier (Andrianto et al. 2019, Gatto et al. 2015). Literature findings show that on-site demography and community development level influence the success and profitability of oil palm development, which is more successful in communities with less dependence on forest services (Abram et al. 2017), and that oil palm development in indigenous villages progresses at a slower pace than in migrant villages (Gatto et al. 2015). The Government of Indonesia has issued several policies to improve palm oil sustainability, including a moratorium on new oil palm licences in primary forest and peatlands, the mapping of oil palm corporations and their licences, and the omnibus law on job creation.

From the smallholder side, type of business model (independent or plasma scheme) determines farmers' sustainability behaviour and capacity to apply sustainable practices (Cahyadi and Waibel 2016, De Vos et al. 2021; Jelsma et al. 2017, 2019, Lee et al. 2014, Schoneveld et al. 2017, 2019). Previous studies show that independent farmers face more challenges and sustainability constraints than plasma farmers (Hidayat et al. 2021, Hutabarat et al. 2019). Human resources and financial capacity, especially for independent farmers, are the main constraints for sustainable practices. Farmers often lack knowledge on applying good agricultural practices, documentation, and administration of farming businesses, and understanding of sustainability standards (Brandi et al. 2015, Gatto et al. 2017, Glasbergen 2018).

From a broader environmental perspective, the oil palm sector in Indonesia is directed by national, global and regional political situations. This is because oil palm is an export commodity in which the global trade is regulated and influenced by various policy regimes and transnational governance pressures, such as climate change and green deals (Abdullah et al. 2020a, Apriyani et al. 2020, Astari et al. 2019). Political stability is also an influencing factor for palm oil development in which different political eras and their accompanying land tenure approaches reflect today's landscape (Kunz et al. 2017). Another important factor is climate change, which threatens palm oil production due to increases in global temperature that may impact land suitability (Paterson 2015, Paterson et al. 2017) and yield (Hidayat et al. 2021).

Trade

Nine important trade factors for palm oil sustainability were identified: international demand; domestic consumption; competition; market preferences; supply; supply chain governance; voluntary certification; trade incentives and barriers; and consumer behaviour. In addition to domestic consumption, global palm oil expansion is driven by international demand for renewable energy policies, such as by the European Union (EU), and growing demand for food, biodiesel and other commodities (Rulli et al. 2019). Domestic consumption in Indonesia began in the late 1970s and early 1980s, primarily for cooking oils (Gaskell et al. 2015). Recently, the biodiesel policy in Indonesia has contributed to an increase in domestic palm oil consumption (Harahap et al. 2017).

As palm oil is a market-driven commodity, market preferences play an important role in driving trade. Western markets (the EU for instance) now prefer and demand sustainable palm oil (Apriyani et al. 2020, Kadarusman and Pramudya 2019). Meanwhile private-driven markets like China and India require fewer sustainability standards (Kadarusman and Pramudya 2019). The sustainability concerns of western markets have led to the emergence of voluntary certification mechanisms (Meijer 2015, Schmidt and De Rosa 2020). These concerns have also been strengthened by the widespread adoption of green consumer behaviour on an individual level (Koh and Lee 2012). Another important driver in the oil palm boom is economic forces, especially incentives or disincentives from global trade, such as price changes (Hidayat et al. 2021, Lim et al. 2019). Consequently, global market stability strongly influences the Indonesian palm oil industry.

Institutions

Institutional factors comprise public policy; legal and regulatory framework; national politics and policy processes; sub-national initiatives; land-use planning and allocation; permits and licensing; mandatory sustainability standards; governance and rules of the game; local politics and informal institutions; corruption; financing and investment; and zero-deforestation pledges. In Indonesia, public policy and political processes, especially at the national level, play key roles in directing oil palm plantation development (Austin et al. 2017, Gaskel et al. 2015, Gatto et al. 2015, Harahap et al. 2017). Indonesia's oil palm development policy is linked to development programmes in other sectors, such as transmigration, food (as a substitute for domestic consumption of coconut oil), climate change and energy (biofuels). Furthermore, policies also indicate land-use planning and allocation, and permits and licensing being critical drivers of oil palm plantation expansion. Lack of participation and clarity in land-use planning and allocation processes has given rise to various tenurial problems, such as unclear land rights, and overlapping and/or mutual land claims between actors (Abram et al. 2017, Andrianto et al. 2019, Hamilton-Hart 2017a, Juniyanti et al. 2021). Cases of misalignment between central and local governments have been identified in permit and licensing processes. Due to ambiguities over authority under decentralization, some local governments have issued concession licenses on forest estate land before the central government has enacted any formal forest estate release (Rusli 2018, Setiawan et al. 2016). There have also been cases of corruption in land allocation and licensing processes in land-based sectors (Goh et al. 2018), and local politics where local actors identified as political brokers or having patronage networks have been involved in illegal land transactions (Diprose et al. 2020, Purnomo et al. 2019). Overall, governance and rules of the game in the oil palm sector (i.e., land-use planning, licensing and supply chains) are key to achieving sustainability, as suggested by many studies, including Carlson et al. (2012) and Purnomo et al. (2018). Mandatory sustainability standards and zero-deforestation pledges are also potential pathways for supporting a transformation to sustainability, although challenges remain in their implementation (Astari et al. 2019, Austin et al. 2017, Glasbergen 2018, Hidayat et al. 2021).

Actors

From the range of collected literature, 13 key actor groups were identified in Indonesia's oil palm sector: traders; small-scale producers; large-scale producers; rent seekers and free riders; local communities; national government; sub-national governments; the financing sector; CSOs, NGOs and other international organizations; exporters; consumers; business associations; and political figures.

These key actors work, interact and form networks embedded with power, authority and influences that can either support or hinder efforts in the transformation to palm oil sustainability. Small-scale producers (Brandi et al. 2015), village-level traders (Goh et al. 2018), large-scale producers (Gatto et al. 2017), exporters (Larsen et al. 2018) and consumers (Koh and Lee 2012) are the main supply chain actors. National and sub-national governments (Kadarusman and Pramudya 2019) and the financing sector (Henderson and Shorette 2017). are actors with the power and authority to alter enabling conditions in the oil palm sector. Other influential actors include business associations (Innocenti and Oostever 2020), local communities (Abram et al. 2017), political figures (Juniyanti et al. 2021), rent seekers and free riders (e.g., national and local elites and political brokers) (Purnomo et al. 2017) and CSOs, including environmental and advocacy NGOs as well as other international organizations (Henderson and Shorette 2017).

Sustainability and livelihoods

Six observed variables were found for ecological, economic and social aspects of sustainability: no deforestation; biodiversity; exports and government revenue; employment; infrastructure, health and education; and poverty reduction and economic equity. Oil palm plantation expansion is often associated with major direct environmental impacts, such as deforestation and biodiversity loss (Austin et al. 2017, Chaudhary and Kastner 2016, Vijay et al. 2016). On the other hand, its development and resulting trade provide benefits such as export earnings and government revenues, employment and rural development outcomes (infrastructure, health and education, poverty reduction and enhanced economic equity), although these vary depending on the local socio-economic baseline and situation (Dib et al. 2018, Gaskell et al. 2015, Gatto et al. 2017, Santika et al. 2021, Shresta and Coxhead 2018). Several observed variables were identified for socio-economic aspects relating to smallholder farmers: on-farm income; household income; consumption and nutritional diet; and financial assets. Oil palm plantations are known to provide economic benefits for farmers, both directly through cultivation and on-farm income, or indirectly from employment increasing household income (Dib et al. 2018, Krishna et al. 2017a, Kubitza et al. 2018).

Some studies indicated higher incomes leading to more consumption and better nutrition in farmers' households (Krishna et al. 2017a, Kubitza et al. 2018). Another important outcome from sustainable oil palm plantation practices in Indonesia is improved financial assets in farming households (Hidayat et al. 2015, 2021).

Table 1 summarizes observed variables for each exogenous and endogenous latent construct.

Initial model

An initial model was developed consisting of a measurement sub-model and a structural sub-model (Figure 3). The measurement sub-model describes relationships between latent constructs and observed variables, while the structural sub-model describes the relationships between latent constructs.

This model shows that actors have a significant influence on sustainability with a coefficient value of 0.40. In contrast, technical economy and structures significantly influence livelihoods, with coefficient values of 0.34 and 0.36, respectively.

However, the initial model did not pass a goodness-of-fit (GoF) test. The GoF test indicated values of χ2 = 2 940.738 with df = 1 419 p-value = 0.000, normed χ2 value = 2.072, GFI = 0.552, CFI = 0.612, and RMSEA = 0.097. These results indicate that the initial iteration failed to meet the criteria for a fit and proper model because the value of χ2 was greater than χ2-table (1507.748), p-value was below 0.05, normed χ2 value was greater than 2, GFI was smaller than 0.90, CFI was smaller than 0.90, and RMSEA was greater than 0.08 (Hulland et al. 1996, Tabachnik et al. 2001)

TABLE 1

Latent constructs and observed variables

Standardized and compact model

The initial model was modified to become the compact model (Figure 4). The modified model consists of one exogenous construct (trade); four mediating constructs (structures, technical economy, institutions and actors); two endogenous constructs (sustainability and livelihoods); and 20 observed variables. A covariance was added based on the high modification indices in AMOS, i.e., the error term of sustainability (z1), livelihoods(z2), technical economy (z3), actors (z4), institutions (z5) and structures (z6), as seen in Figure 4. The analysis shows that this covariance is significant at the 95% confidence level with coefficient values of 0.2 to 0.7. Thus, the addition of this covariance in the model is considered appropriate.

FIGURE 3

The initial POPETS model

Structures, technical economy and institutions act as mediating variables. They are influenced not only by observed variables, but also by other latent constructs. Its measurement model consists of the observed variables, their significance with the latent construct, and their Correlation Coefficient (CC).

The compact model test results show an improvement from the initial model. The value of χ2 = 180,764 with df = 155, p-value = 0.08, normed χ2 value = 1.166, CFI = 0.966 and RMSEA = 0.038. These values mean that the model meets GoF criteria because the value of χ2 is smaller than χ2-table (185.052), p-value is greater than 0.05, normed χ2 value is smaller than χ2, CFI is greater than 0.90, and RMSEA is smaller than 0.08. In addition, the critical ratio (CR) value of the multivariate normality assessment was 2.53, smaller than the critical value of ±2.58 at the 95% confidence level. Therefore, based on the GoF index and the fulfilment of the assumption of multivariate normality, it was concluded that the compact model could reflect actual conditions.

Relationships between variables

Each observed variable has a significant relationship with the latent constructs, which is indicated by a p-value smaller than 0.05, hence the observed variable can describe the latent construct. The relationships between variables are shown in Table 2.

Seven significant relationships were also observed between latent constructs at the 95% confidence level (Table 3).

The pathways of trade to palm oil sustainability are shown through trade to structures, then technical economy to livelihoods. Other pathways are trade to institutions, then actors to sustainability. These indicate trade going through the elements of political economy, i.e., structures, institutions and actors, and technical economy in affecting sustainability and farmers' livelihoods. The results of the SEM analysis show the POPETS model inferred the presence of significant direct and indirect effects of political economy, i.e., structures, institutions and actors on sustainability and livelihoods of farmers in the oil palm sector in Indonesia (Table 4). Actors is the only construct with a direct effect on sustainability (0.86), and technical economy is the only construct with a direct effect on livelihoods (0.5).

FIGURE 4

POPETS compact model with 20 observed variables

Our findings also indicate three pathways having indirect effects on sustainability and two pathways having indirect effects on livelihoods. Trade has an indirect effect on sustainability through structures and actors (0.79). It also has an indirect effect on livelihoods via structures and technical economy (0.43). Institutions affect sustainability through actors (0.44). Actors also play an intermediary role in the pathway from structures to sustainability (0.44). Structures has an indirect effect on livelihoods via technical economy (0.43). In addition, there is also a positive correlation of 0.73 between sustainability and livelihoods, which implies that the more sustainable palm oil is, the greater the increase in farmers' livelihoods.

Defining palm oil sustainability

The sustainability of palm oil is indicated by two key variables, i.e., employment and no deforestation, while livelihoods is indicated by household income of farmers. Employment is a key factor in palm oil economic development from the Government of Indonesia (GoI)'s perspective at national and sub-national levels, while no deforestation is the key indicator of palm oil sustainability from the global community. Therefore, any discussion of increasing palm oil sustainability should involve efforts to secure employment in the oil palm sector and ensure zero-deforestation.

TABLE 5

Key variables in palm oil sustainability as described by the POPETS model

The palm oil sector in Indonesia currently employs around seven million people and is projected to employ more than 23 million people within the next 22 years (Purnomo et al. 2020). Through its National Economic Recovery or Pemulihan Ekonomi Nasional (PEN) programme, GoI aims to recreate jobs lost due to the Covid-19 pandemic (MoF 2022). GoI is trying to increase employment opportunities in all sectors, including palm oil, and is supported by evidence that palm oil sustainability means securing jobs for millions of people along palm oil supply chains in the longer term.

Securing and boosting post-Covid-19 employment opportunities is critical to ensuring palm oil sustainability. This will favour national and local government agendas as well as people on the ground. Palm oil sustainability is closely tied to the livelihoods of people involved in its value chain, which is indicated by household income. Previous findings reveal that at the community level, the oil palm industry not only contributes to on-farm income, but also to total household income from off-farm employment (Dib et al. 2018) The other key indicator for palm oil sustainability is no deforestation, which falls in line with the European Union Deforestation-Free Regulation (EUDR) scheme, the United Kingdom's law on Forest Risk Commodities (UK-FRC), and with G20 commitments.

The European Commission passed a set of policies in December 2019 called the EU Green Deal to support the EU's commitment to climate neutrality by 2050, which was strengthened in its second Renewable Energy Directive (RED II) (European Union 2022a). At the heart of the EU Green Deal is the “Farm to Fork Strategy” on sustainable food systems, which also places emphasis on green supply chains and will support the region's demand for sustainable palm oil (European Union 2022b). In November 2021, the EU issued a proposal for a regulation on deforestation-free products prohibiting commodities and products produced on land subject to deforestation after 31 December 2020 from entering EU markets. At the end of 2020, the UK government also proposed a highly debated due diligence law on Forest Risk Commodities, with the main aim of avoiding deforestation. Both proposals include palm oil as a high-risk commodity. Another no deforestation commitment on land-based activities was voiced during COP 26 in Glasgow, where at least 110 world leaders pledged to end deforestation by 2030 (United Nations 2021). In addition, G20 leaders have committed to environmental conservation, protection and sustainable use of natural resources (G20 Rome 2021). President Joko Widodo of Indonesia, who holds the G20 Presidency in 2022, wants to set an example in addressing climate change by Indonesia becoming a ‘net carbon sink’ by 2030 and achieving net-zero emissions by 2060 or sooner (Cabinet Secretariat of the Republic of Indonesia 2021).

The role of PET in influencing palm oil sustainability

Palm oil sustainability is influenced by political economy and trade factors (Figure 5). Livelihoods of people in the palm oil sector are connected to palm oil sustainability (CC. 0.72). Livelihoods are influenced mostly by technical economy factors (CC. 0.50) such as extension services, while sustainability is influenced by actors (CC. 0.86), with the national government being the dominant actor. Structures, which are dominated by financial capacity of farmers, influence technical economy (CC. 0.86) and actors (CC. 0.51). Structures are influenced by climate change and natural disasters. Actors' behaviour and actions are affected by institutions (CC. 0.51), mainly by governance and rules of the game. Trade, in which green consumer behaviour is the strongest variable, influence structures (CC. 0.99) and institutions (CC. 0.82). POPETS can provide justification, for example, that green consumer behaviour in the UK and Europe influence efforts to reduce deforestation due to oil palm. Actors is the primary driver of palm oil sustainability, in which the national government, CSOs/NGOs and political figures are all key. Increasing the technical economy of palm oil will have a greater impact on livelihoods than sustainability, though both factors are correlated. Therefore, we cannot rely solely on technical economy factors to improve sustainability. This accords with a study by Pacheco et al. (2018), which indicates the importance of STIA factors, particularly institutions and interaction of actors in governing sustainable palm oil supply chains.

Scenarios to improve palm oil sustainability and livelihoods

POPETS is useful in developing scenarios and narratives to improve palm oil sector sustainability and livelihoods (Table 6).

First, the Trade Scenario describes how trade interventions will improve palm oil structures and institutions. Improving structures will enhance technical economy, which will enable livelihoods and actors to improve palm oil sustainability. However, Jafari et al. (2017) indicate that trade interventions, e.g., sustainable consumption, will be more profound when imposed in all importing countries. POPETS also modelled the impact of increasing trade interventions via institutions. Such interventions would increase the capacity of actors to achieve palm oil sustainability. Improving livelihoods means improved household income, while improving sustainability means increasing employment and reducing deforestation. Therefore, improvements to sustainability will generate effects to enhance livelihoods, and likewise, livelihood improvements will boost sustainability.

FIGURE 5

POPETS and its factors and key variables

TABLE 6

Scenarios, interventions and their effects on palm oil sustainability and livelihoods

Second, the Technical Economy Scenario describes interventions through improvements to technology and infrastructure, as well as provision of more intensive extension services and technical guidance. Under this scenario, technical economy interventions would directly improve the livelihoods of people along palm oil value chains. Due to the correlation between livelihoods and sustainability, there are opportunities for such interventions to have an indirect effect on sustainability. This is confirmed in a study by Herdiansyah et al. (2020), who indicate that good agricultural practices are important contributions to farmers' prosperity and well-being, and such knowledge and improvements in practices can only be obtained through assistance from all relevant stakeholders.

Third, the Political Economy Scenario describes various interventions on structures, institutions and actors. Structural interventions, such as improving farmers or smallholders' financial capacity, as well as mitigating and adapting to climate change and natural disasters would improve technical economy, lead to improved livelihoods, and strengthen actors. This would also lead to palm oil sustainability. Sub-national initiatives with landscape and jurisdictional approaches, mandatory certification schemes like Indonesian Sustainable Palm Oil (ISPO), strengthening governance and rules of the game, and anti-corruption movements can all be used to strengthen palm oil institutions. These strengthened institutions would lead to improving the capacity of actors, which in turn would lead to improved sustainability. Actors have the greatest direct influence on palm oil sustainability. Strengthening key actors, such as the national government and CSOs/ NGOs, and ensuring powerful political figures support environmental and community causes would also lead to sustainability. The national government role is clear in developing and endorsing national policies that will be followed by sub-national governments, communities, and private sector practitioners. CSO and NGO movements that represent the interests and voices of civil society and communities should also be increased. The Political Economy Scenario goes beyond technical solutions, and may provide an ideal approach for addressing the complex issues surrounding palm oil in Indonesia, such as addressing legality issues with more than three million hectares of oil palm plantations being unable to comply with mandatory and voluntary standards as they are located inside the state forest estate (CMoEA 2021).