The Co-Development Company

AAK’s progress report on sustainable palm oil – February 2017

2

Responsible sourcing of raw materials is fundamental to AAK and reflected in our strategy. We want to make a clear difference to the environment and to the local communities where our raw materials are grown and harvested. Palm oil being the highest volume as well as the most productive vegetable oil in the world is a crucial raw material in feeding an ever-growing global population. Therefore, producing palm oil sustainably is of utmost importance. In this progress report, we share with you AAK’s part in the development towards a fully sustainable palm oil industry.

AAK’s progress on sustainable palm oil

Palm oil achievementsTraceability Traced 97 percent of palm oil, all palm kernel oil and derivatives back to mill origin;

Updated all mills traceability data;

Risk assessment Completed a qualitative risk assessment of all suppliers; Completed geospatial risk assessment of 100% supplier mills; Identifiedmillsforouron-siteverificationprogramandcompletedfiveverificationsin2016,twelveintotal;

Supplier engagement Engagedinadialoguewithalloursuppliersasregardsprogress of policy implementation, including the signing of AAK Palm Oil Policy, Completedtwopalmoilsupplierengagementworkshopsengaging 40 mills in total;

Processes and tools Developed an internal dashboard for detailed monitoring of progress and an external dashboard for communicating our achievements

Finalized implementation of palm oil grievance procedure; Strengthened palm oil competencies among our global sales force through training and supportive materials;

Customer support High level of support to our customers and the retailers.

Smallholders Identifieddifferentoptionsforsmallholderproject.

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Traceability

Risk Management Suppliers Engagement

RSPO status

Other

Palm OilDASHBOARD

Traceability to mill remains highdespitenewAAK factories in the USA, India, China and Brazil that require time to implement AAK’s Palm Oil Policy and high standard of traceability.

Percentage of AAK’s Palm suppliers risk assessed by Proforest:

Higherprioritysuppliersinvitedtoworkshopsfacilitatedby Proforest.

It is our policy to source palm oil only from RSPO members.Weareprogres-singtowardsthattarget,butsome challenges remain insomepartsoftheworldwherewehavefactoriesandcertificationisnotalwaysapriorityforgrowers.

All our palm oil is under our Palm Oil Policy, risk assessed by Proforest.

Volume covered by geospatial risk assessment.

Volume covered by signed supplier Code of Conduct.

Number of progress reports

Number of AAK employees trained in AAK’s Palm Oil Policy and Actions

6 394

%

%

%

%

%

%100

80

60

40

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0

100

80

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40

20

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60

40

20

0

100

80

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40

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0

50

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10

0

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20

0Aug 2014

2014

2014

2014

2014

2014

2014Aug 2015

2016

2016

2016

2016

2016

2016Aug 2016

Feb 2015

2015

2015

2015

2015

2015

2015Feb 2016

Feb 2017

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95 97 99 98 97

The Co-Development Company

AAK’s progress report

on sustainable palm oil

– February 2016 The Co-Development Company

AAK’s progress report on sustainable palm oil – August 2016

To mill Volumes from RSPO members

CSPO Demand

Book&Claim

Mass Balance

Signed AAK’s Palm Oil Policy

Suppliers informed about AAK’s Palm Oil Policy

Numberofmillswhoattended a Proforest/AAKworkshop

Segregated

Has aligned Policy (verifiedbyProforest)

Numberofon-siteaudits

To plantation

Geospatial risk assessment

Desktop risk assessment

Supplier Code of Conduct

Palm Oil Policy

Mill engagement

22 26

%100

80

60

40

20

02014 20162015

75

272619

88

292621

92

331923

1

4

27

8685

3

100

92

45

5

5

77

40

19

100%

Traceability progress – through cooperationwithoursuppliersTraceabilitytomillremainsaprerequisiteforhowAAKassesses compliance of its palm and palm kernel oil supply chainwithitssustainablepalmoilpolicy.Wearedelightedthatwehavemaintainedahighleveloftraceabilitythrough-out2016,despiteadditionalchallengesfromexpansionoftheAAKgroupintonewgeographieswhichtraditionallyhavenot embraced traceable or sustainable palm oil, such as India and China. The focus on traceable supply chains continues to be strong.Moresuppliersareopenlysharingorjoiningpro-gramstofacilitatethattraceabilityiswelldefinedandwellreported.

Howeverwecontinuetoseechallengesontraceabilityofpalmkerneloilandderivatives,andwewelcomeinitiativestoimprove traceability. WithacquisitionsmadebyAAKin2015and2016,andnewgreenfielddevelopments,ourworkontraceabilityhasspreadtonewpartsoftheworld.ThesenewsupplychainsarebeingalignedwithAAKstandards,includingCaliforniaOils,themostrecentacquisition.In2016ourfactoriesinBrazilandChinacommencedoperations,withparticularchallenges due to the relatively high level of traded products in these areas.

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Traceability to mill status – February 2017

Indirectly traceableOursuppliersoftheoilhaveanownpolicywithtraceabilitythathasbeenverifiedbyProforestandthatwetrust

Traceable to known sourceAAK has a list of mills the oil can come from whichrelatestoaspecificrefinery

Overall progress 97%

4% 3%

93%

Palm oil from origin 97%

96%

1% 3%

Palm kernel oils 99%

95%

4% 1%

Palm oil – others

51%

47%2%

Derivatives96%

96%

0% 4%

Refinery

> 1000 Mills

50 km

Traceability to mill

Traceability to plantation

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ForAAK,traceabilitytoplantationisdefinedasfollows:

Palmoilandpalmoilby-productsinAAKproductsaretrace-able via the upstream supply chain to the supply base of the identifiedcrudepalmoilmill,including:

Estateinformation(>50ha):estatenames,parentcompanynames,certificationstatus,%ofoverallFFBtonnage to mill and a GPS point coordinate

Dealers: dealer names and % of overall FFB tonnage to mill Smallholders(<50ha):numberofsmallholders,certificationstatusand%ofoverallFFBtonnagetomill

AAK has focused most palm sustainability efforts on estab-lishingtraceabilitytomill,followedbyProforest’sriskassess-mentofsuppliersandmills,engagementwithsuppliers,andon-sitemillassessmentsforthoseidentifiedasthehighestpriority. It is generally agreed that more than 90 percent of freshfruitbunchesdeliveredtoamillderivefromgrowerslocatedwithin50kilometersofthatmill.Hence,focusonmilltraceability and assessment provides very good coverage of growerstoo.

TakentogetherwiththelargenumberofmillsinAAK’sextendedsupplychain(morethan1,000)anddifficultiesinidentifyinguniquenamesformills,theidentificationandrecording of names, parent company names and GPS coor-dinatesforeverygrowersupplyingthosemillsisaHerculeantaskwhichAAKjudgestohavefarlessimpactthantracingtomillandthesubsequentrisk-basedapproachadopted. However,AAKdoesexpectmillsinitssupplychaintomaintain such records to provide basic traceability to plan-tation,andon-sitemillassessmentsseektoverifythisisinplace. Such traceability to plantation is important since there are – as recent reports on the Leuser ecosystem in the Aceh provinceofIndonesiashow–non-compliantthird-partygrow-erswhichmayfindways(forinstancethroughintermediarydealers)tohavetheirproductionenterthesupplychain. AAKhasmadesignificantprogressontraceabilitytomill,subsequent risk assessment and policy implementation. But wearenotyetsatisfied.Traceabilitytoplantationbytheendof2017wasachallengingtarget.AAKhasmadeapositivedecisiontomaintaintraceabilitytoplantationasanobjective,but to defer the target date for 100 percent traceability from 2017toanambitionof2018/19.AAKwillundeterredpursuefull traceability to plantation and continue to report regularly on progress.

Refinery

50 km

Estates >50 ha

Smallholders <50 ha

%Dealers

%

Mill

Traceability to Plantation

Update of AAK’s Sustainable Palm Oil Policy

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InJune2014wesawtheneedtolaunchapolicyspecifi-callyfocusingonourcommitmenttowardsobtainingafullysustainablepalmoilsupplychain.Duringourmovetowardsafullysustainablepalmoilsupplychainwehaveovercomemanychallengesandachievedsignificantprogresstowardsourobjectives. InJanuary2017weupdatedourpalmoilpolicy.Themainchanges are:

Traceabilitytoplantation:AAKwillachievefulltraceabilitytoplantationassoonaspracticallyfeasiblewithanambitionofachievingthisgoalin2018/19whilestillregularly communicating on progress.

Newcommitmenttosupportsmallholders:duringourjourneytowardsafullysustainablesupplychain,wehaverecognized that the many smallholders that constitute asignificantproportionofthepalmoilproductionneedspecial focus.

Small holder inclusion in the supply chain is a key issue whichiswhyweinourrevisedpolicyhaveincludedanewcommitment to support smallholders.

See our updated palm oil policy page 18–19.

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Updated geospatial risk assessment methodologyProforest has undertaken supplier risk assessments on be-half of clients for several years. This experience has helped us to develop more sophisticated methodologies; in fact, itisaconstantlyevolvingprocess,asnewdata,tools,andthinking become available. WithAAK,Proforestcurrentlyperformstwokindsofriskassessment: one focuses on Tier 1 suppliers and is more qualitativeinnature;thesecondhasamill-levelfocusandlooks at the geospatial risks that are present in a mills poten-tial supply base. It is this second type of risk assessment that is the focus of this article. As part of its commitment to traceability, AAK maintains a record of the geographical coordinates of all the mills withinitssupplybase.A50kmradiusringisappliedtothesecoordinates to estimate the mills supply base, as this is the distance that FFB can travel for processing before it begins to spoil and lose quality. In reality the actual supply base is unlikely to be so large or radiate out equally from the mill in alldirections,itislikelytobeheavilyinfluencedbyfactorssuchasinfrastructure(i.e.roads)andtopography.The50km

radius ring remains the accepted method for calculating a mill supply base, but this is likely to change as better data becomes available. Withintheradiusringfourindicatorsareassessed:(1)generaldeforestation,(2)deforestationonpeat,(3)de-forestationinprotectedareas,and(4)numberoffires.Thethreedeforestationindicatorsarecomprisedoftwomeasurementseach:hectaresofforestlossin2013-2014,and hectares of forest remaining in 2015. For the peat and protected areas indicators, this deforestation data is over-laid onto peat maps and protected area maps respectively. Thesetwomeasurementsarerequiredforeachindicatorbe-cause historical deforestation trends are indicative of present deforestation likelihood, but forest must be present in order tobeatriskofdeforestation.Forfirerisk,thenumberoffiresthatoccurredduring2014–2015withinthe50kmradiusringis summed.

< 0.2 Lowerrisk0.2 – 0.4 Medium risk0.4–0.6 Medium – high risk0.6–0.8 High risk

> 0.8 Extremely high risk

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Each mill is then assigned a risk category for each of the four indicators individually. An overall risk category is not calcu-lated,asanoverallvaluemaymaskspecificriskspresentina mills potential supply base. For example, if a mill’s location presentsahighriskfordeforestationonpeat,butislowerriskforeverythingelse,thelowerscoresonthethreeindi-catorswill‘dilute’theoverallriskscoreandhidethefactthatpeatispotentiallyanissuewithinthesupplybase.

In addition to a calculated risk value for each of the four in-dicators,thetoolalsoallowsthecreationofmapstovisualisethedata.Aswiththeriskcategorisation,thiscanbedoneona range of scales. Larger scale maps on a country or state levelpermitidentificationofclustersofhigherriskmillsinaparticularlandscape,whichcanbeagoodwaytoprioritisemills for engagement. Smaller scale mill level maps can also beproducedtoidentifyspecificareasofinterestwithina50km radius ring.

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Target mill

50km buffer

Forest cover

Deforestationpre-2013

Deforestation 2013–2014

Otherlanduse(e.g.plantation)

Peatland

Protected area

Fire occurrence

<30%confidence

30–70%confidence

>70%confidence

Example mill level risk map

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AAK risk assessment activities in 2017

Supplier mill engagement

Bytheendof2016allAAKsmillshadundergoneageospa-tialriskassessmentonagloballevelusingthenewmeth-odologydescribedabove.In2017thisdatawillbeanalysedat different relevant scales, including by supplier, and on na-tionalandsubnationallevelswhererequiredorappropriate.TheTier1supplierriskassessmentmethodologywillalsobeupdatedtoincorporatenewthinkingandnewdata,andallofAAKsTier1supplierswillbereassessedinQ12017toidentifyprioritycompaniestoengagewith.

Since the last Progress Update Report, Proforest has carried outoneawarenessraisingworkshopformillslocatedonPeninsularMalaysiathatsupplythroughaspecificstrategicsupplier.Twoofthesemillswereselectedformill-levelveri-ficationvisitsthattookplaceinOctoberandDecember,anddependingonthefindingsandsupportneededfromthemillswillbeincludedinrelevantcapacitybuildingworkshops. Toensurethatoursuppliersarecommittedtoworkto-wardsasustainablestandard,wehaveengagedwitheachofthemandaskedthemtoacknowledgeandsignourpalmoilpolicy.Thishasnowbecomeakey requirement for becoming a supplier of palm oiltoAAK,andwillensurethatallnewsuppliersarecommittedtoworktowardsthestandardwhichisstatedinourAAKSustainablePalmOil Policy.

ThisengagementwilltaketheformofworkshopstoraiseawarenessofAAKpolicycommitments,andtobuildcapacityof key staff at suppliers and mills in order to implement the changesrequired.Theprogrammeofindepthmill-levelverificationvisitswillalsobecontinuedfromlastyear.Thediagrambelowillustratestheprocess.

Progressontheseactivitieswillbereportedinthepublicationschedulesetoutfor2017.

Awareness-raising workshop:

Make suppliers and mills awareofpolicycommitments

andwhatisrequiredtoimplement them

Mill-level verifications:

In depth visits to targetted mills to assess performance against policy and develop action plan to close gaps

Capacity-building workshops:

Train key staff in skills andknowledgerequiredto implement activites

required

As a founder member of the Roundtable on Sustainable PalmOil(RSPO),AAKiscommittedtodrivinghighsus-tainability standards throughout the palm oil industry. This commitmentbeginswithourownsupplychains. AAK’s Sustainable Palm Oil Policy and Supplier Code of Conduct set out our commitment to sourcing responsibly produced palm products. Fully implementing our policies can be challenging, because of the scale and complexity of our supply chains. AAK has no direct grievances to report relating to planta-tions,becauseAAKdoesnotownplantations.Wesourcefrom a range of suppliers incorporationg more than 1,000 mills. We are committed to tracking activity in the market-place, and monitoring numerous NGO reports and score-cardstoidentifynon-compliancewithourpolicy. Manyofoursuppliersareproactiveandworktoidentifypotential issues before they arise, or address them as early as possible. Should a grievance relating to the AAK supply chain beraisedthroughtheRSPOgrievanceprocess,AAKwillmonitor the prescribed RSPO process. As an additional approach,weestablishedourowngrievanceproceduretoenable stakeholders to highlight any perceived issues in AAK palm oil supply chains, and to ensure they are ap-proached in a timely, transparent and systematic manner.

AAKalsoincludesreviewsofthirdparty(inparticularNGO)reports in order to proactively identify potential grievances against suppliers. Examples of such reports include recently released documents by Amnesty International, Greenpeace, MightyEarthandothers,aswellasparticularissuesrelatingtohumanrightsinBorneowhichhavebeenbroughttoourattentionbySwedwatch. TheprocedureappliestoAAKoperationsworldwideandtoallthird-partypalmoilsuppliers.Itcoversthefollowingsteps:

Recordinggrievancesandcommunicatingwithrelevantparties;

Developing plans to investigate a grievance; Deployingafieldverificationteamwhereappropriate; Creating and implementing action and monitoring plans to resolve grievances.

If a supplier breaches AAK policies and is not able to resolve theissuerelatedtothegrievance,AAKwillterminatecom-mercialrelationswiththatsupplier. AAKwelcomesfeedbackfromstakeholdersonthegriev-ance procedure, in order to measure the effectiveness of our policies and continue to improve them.

Seegrievanceflowchartpage16.

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Grievance activities

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AAK and the RSPODuringthecourseof2016theRSPOhasreceivedmorecriti-cism than in almost any other year, including matters relating to membership suspension and reinstatement, quality of certi-ficationprocedures,andincreasinglyrelatingtohumanrights. Asafoundermemberandever-presentBoardmember(re-electedforafurthertwo-yeartermatRT14in2016),AAKisalong-termsupporteroftheRSPO,whichisthebench-mark for sustainable palm oil and the most credible global multi-stakeholderinitiativeandcertificationschemeforpalmsustainability.OverallprogressoftheRSPOcompareswellwithothersimilarindustryinitiatives,butthereisnodoubtthatthere is plenty of scope for further development. RSPOcertificationisoneoftheparallelsustainabilitystreamsfollowedbyAAK,theotherbeingourownpolicyandimplementation plan. Our target is for all palm oil (crude and refined)sourcedbyAAKtobeRSPOcertifiedbytheendof2020.Thisisachallengingobjective,mainlybecausecus-tomers(andconsumers)ofmanyregionsintheworldshowlimitedenthusiasmforRSPOcertification,andareunwillingtopay the current premium over conventional palm oil. Without commensurate customer demand, like other processors AAK willfinditdifficulttomoveentirelytofullycertifiedpalmoil.

Issues and concernsThereareparticularissuesinAAK’snewmarketssuchasChina,IndiaandBrazil.InChinaRSPOcertifiedpalmoilremainsdifficulttosource.InBrazildemandislimiteddespiteastrongfocusonAmazoniandeforestation.InIndiawehavesome hopes that local production of palm oil can be extended fromitscurrentlowbase(about250,000MTannually)inasustainableway,toencouragefurtheruseofRSPOcertifiedsustainableoil.However,forthetimebeingdemandforsus-tainable palm oil remains a small proportion of overall demand forpalmoil,whichinmanypartsofIndiaisviewedasacheapalternativetootheroils.Inacountrywithhighlevelsofpover-ty, paying more for sustainability is not easy for all. TheRSPOnowboastsmorethan3,000members.How-ever,weareconcernedthatmanymembers(oftenintheTraders and Processors or Consumer Goods Manufacturers categories)arepassiveanddonotparticipateexceptwherethey are required to do so by their customers. At the same timenewcertificationofmillsisnothappeningfastenough–therearenotenoughapplyingtobecomecertified.Itisad-ditionallytroublingthatcertificationisdominatedbyrelativelyfewcompanies–morethanhalfoftheproductionofcertifiedsustainablepalmoilisfromcertifiedmillsownedbyfivemajorplantation companies. AAKisconcernedthatpremiumsforcertifiedsustainablepalmoil,whichcanbehighinparticularforpalmkerneloilor for fractions, provide a disincentive to encourage further certificationforthoseownersofmillsandassociatedplanta-tionsalreadycertified,andofteninpositionsofinfluence,asincreasedsupplywithoutcommensurateincreaseindemandmayreducepremiums.ItisinthefinancialinterestofsuchcompaniestomaintainthenichestatusofRSPOcertifiedpalm oil. This dilemma is not so easy to resolve. We must congratulateandsupportthosewhohavereachedthegoal

ofRSPOcertification,butalsoencouragethosewhoarestilloutsidetobecomecertifiedoratleastimprovesustainabilitycredentials. InparticularwefeelthattheRSPObarhasbeensettoohighforsmallholdersandsmallfarmers(upto500hectares).WhilewecongratulatethosewhohaverisentothechallengeofRSPOcertification,itisessentialtoseegreaterparticipationfromsmallholdersandsmallfarmers,evenatalowerlevelofcertification,togetherwithacommitmentforcontinualim-provement. It is generally accepted that smallholders comprise around40percentoftotalproduction.Howcanwehaverealprogresswithoutthem?

Future developmentsThe greater involvement of government, in particular relating tojurisdictionalapproachestoRSPOcertification,particular-ly in South East Asia, but also emerging in Africa and Latin America,isverywelcomeandindeedmayberegardedasanecessitytoincreaseRSPOcertifiedproductiongiventhelim-its of the global market noted above. Appropriate governmen-tal intervention is essential in producing countries, as there are signs that the market may be reaching its limits. Internal issues continue to irritate those close to the RSPO and to provide ammunition for its critics. It is essential that certificationbodiesdoafullandproperjobofcertificationandthatAccreditationServicesInternationalindependentlyverifiesthequalityoftheworkdonebysuchcertificationbodies.Thereare undoubtedly issues to address here for the RSPO. On a more positive note, AAK is pleased to see progress in developing a more robust complaints and appeals procedure andlooksforwardtoitsimplementationin2017. Inotherfuturedevelopments,weareconcernedthatthereviewofRSPOprinciplesandcriteria,whichistocommenceimminently,addressestheweaknessesevidentinthecurrentversion, and also that RSPO Next does not become another premium niche, raising the bar for the best, but leaving others behindinitswake. WerecognisetheimportanceofRSPOcertifiedsustain-ablepalmoiltofeedthegrowingworldpopulationandatthesame time to minimise use of land in sensitive areas by taking advantageofthesignificantyielddifferentialsversusothervegetableoils.However,weareconcernedthatrelativelyhighadditional sustainability and food safety premiums for palm oil (forinstancerelatingto3MCPDandglycidol),togetherwithpotentiallylowerliquidoilbio-dieseldemandindevelopedmarkets, may open the door for substitution of palm oil by fully hydrogenatedandinteresterifiedsoftoils,suchasrapeseedoil. TheRSPO’ssuccessinmanywayshasalsoledtogreaterscrutiny,whichAAKwelcomes,butwhichalsolaysbareissueswhicharebothurgentandimportant.WewillcontinuetoworkwithintheBoardandinstandingcommitteesandworkinggroupstomovetheRSPOforward,toaddressthoseissuesanddevelopnewsolutions.

Tim StephensenMember of RSPO Board

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” Oil palm smallholders

Smallholdersarereferredtowithanincreasingfrequencyamongstmanufacturersandretailerswhoallwanttogivethem their support. Smallholders are, of course, extremely important as they contribute to over 40 percent of the oil palm production in Indonesia and Malaysia – and up to 80 percentinothergrowingregions.Weusethetermsmallhold-ersinagenericwaybutareallsmallholdersthesame?Arecent trip that took me to Malaysia and India illustrates that they clearly are not. MyfirstportofcallwastheJohorregionofMalaysiawhereIwastovisitcollectioncentersforFreshFruitBunches(FFB)from all the local smallholders. The collection centers are the focal point for about 300 smallholders and provide a route to the mills to process their FFB. Johor, located in the southern partofPeninsularMalaysia,isafour-hourdrivefromKualaLumpur.

HereIvisited2collectioncentres,thesewerenotchoseninrandombuthadbeenpartofthefirstphaseofaprojectcoordinatedbyProforest.IjoinedrepresentativesfromProforest’steaminthefieldwhoexplainedthattheambi-tion is to improve the livelihoods of smallholder farmers by encouraging improvements in farming practices.

Johor collection centersThefirstcollectioncenterIvisitedwasrunbyaMr.Khamis,whowasverypleasedtoreceiveus.Heexplainedthatveryfewpeoplefromoutsidetheareahadshowninterestinthem. The smallholdings supplying FFB into his collection centerhadbeenestablishedforalongtimeandwerebeing

AAKisveryawarethatsmallholderscomprisearound40%of global palm oil production, and likely a similar proportion of AAK’s palm oil purchases. Smallholders form a relatively smallproportionofRSPOcertifiedproduction,particularlyindependentsmallholders,andhaveveryspecificrequire-ments regarding sustainability. From a social perspective there is a requirement for smallholders, often supporting extendedfamilies,tobeallowedandassistedtomakeareasonable living from the land they farm. At the same time thereareissuesaroundlandownership,communalrights,la-bour(forabsenteesmallholdersforinstance),deforestation,burning and development on peat. This is a complex issue. AAK’snewapproachistobalancetheserequirements.Wearedevelopingasmallholdercodeofpractice,togetherwithProforest,whichwillseektoengagewithsmallholdersby

improving livelihoods, and seek to move in parallel to push forwardsustainabilitypractices.Wewillseekcontinuousimprovementasagoalinitself,whichmayormaynotleadtoRSPOcertification.Wearecurrentlydiscussingwithsuppliersspecificprojectstoapplythisapproachindifferentcontinents. SimultaneouslyweseektoinfluencetheRSPO’sap-proachtosmallholdercertificationduringthecurrentstrategicreview.Wewillcontinuetoseeksupportforourapproach,whichissimilartosomeothersadopted,andtolobbyforappropriate changes. ThefollowingarticleisapersonalarticlefromBobNormanwhotravelledtoMalaysiaandIndiatoinvestigatesmallhold-erprojectsforAAK.

Smallholders

farmedbyfamiliesforseveralgenerations.Theywereverysetintheirwaysandtheirfarmingpracticesresultedinverypoor yields. I explained to Mr. Khamis that AAK shared the same am-bitions as Proforest – to improve the livelihoods of smallhold-ersandthatthereasonbehindmyvisitwastolookatwaystocontributetotheprojectinitiatedwithProforest.Iwastheninvitedtovisitatypicalsmallholdingwheretheissueswerevery evident. Thesmallholdingwastwohectaresinsizeandthetreeswereapproaching30yearsold.Theyweresufferingfromavarietyofissuesrangingfromdisease,deficienciesinvitalnutrients and an overall poor care. The problems did not stem from the farmers themselves but rather from a lack of up-to-datefarmingtechniques.Farmersallovertheworldareproudandhardworkingandstrivetoproducemoreoutoftheirland,andthesesmallholderswerenodifferent.Alltheylackedwassomeknowledgethatwouldhelpthemmakesmall changes possible.

ThesecondcollectioncenterIvisitedwasmanagedbyaMr. Hairul and he conveyed a very similar situation to Mr. Khamis’. He also had not experienced any external support andwasverygratefulformyvisit.Hewaspassionateaboutthe environment and recounted stories from his childhood. Asaboy,heexplained,heusedtofishinthelocalriver–somethinghewasn’tabletodoasagrownmansinceallfishhad disappeared because of pollution. SustainabilityresonatedwellwithhimasbetterfarmingpracticesformpartoftheRSPOstandardtogetherwiththe environment, biodiversity and social element. He also mentionedthathislocalsmallholdersweresincelonges-tablished,verysetintheirwayandinneedofhelpinbetterfarming practices.

It immediately became clear that AAK could play an im-portant role in providing access to training for the smallhold-ers – to improve the use of fertilizers and pesticides, general maintenanceoftheland,watermanagement,andtrialinga program to harvest FFB three times a month, instead oftwiceamonth–atechniquethathasdemonstratedanimprovement in yield. AAKhasnowcommittedfundstoprovidetrainingfortheseBetterFarmingPractices.Aprogramwillbedevisedandimplemented during this year. We are convinced that our contributiontotheprojectwillmakearealdifferencetothesmallholders in Johor.

Smallholders in IndiaBacktothequestionthatwasaskedinitially,aresmallhold-ersallthesame?IcontinuedmytripandwentlookingforanswersinIndia. Indiaisperhapsnotthefirstcountrythatpeopleassociatewithoilpalmproduction,andrightlyso.Despiteproductionbeinglow,consumptionofpalmoil,however,ishighinthecountry. Therefore, India has to import large amounts and initiatives are being taken to increase local production. I visited three mills in the Andhra Pradesh region of India andthesimilaritiesbetweenthemwereastonishing.Theywereallsuppliedbysmallholderfarmersandthemillshadadirectrelationshipwiththefarmers,coordinatingcollec-tions and deliveries of FFB. Each mill had a dedicated team to provide technical support to farmers and also provided accesstohigh-yieldingseedlings. When visiting the farmers themselves the difference from Johorcouldnotbeclearer.ThesmallholdingsinIndiawererelativelynew,established8–10yearsago.Theholdingshad been converted from other crops, such as mango, so therewerenodeforestationconcerns.Therewerenopeatissueseither,noranywatermanagementconcernsthankstooptimizedirrigationsystems.Therewerenodiseasedtreesandthelandwasclearandwellmaintained.Furthermore,therewasintercroppingwithotherproductslikecocoa,andthefarmsgeneratedtheirowncompostfromoldfrondsandempty fruit bunches collected back from the mills. TherewasonemajorconsistencybetweenthefarmersinJohorandtheonesinIndia–theyallwantedtoimprove

the yields generated from their land. Clearly, there are different baselines and my trip has highlighted perhaps

thetwoextremes.Asoilpalmsmallholdersaroundtheworldhavedifferentneedsandrequirements,AAKwillcontinuetomakeadifferenceandlookintowayswherewecansupporttheminachievingtheirownambitions,and,asaresult,introducethemtothefirststepstowardssustainability.

Bob Norman, AAK Smallholder ProjectManager

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GreenPalm – the success story

GreenPalm

CertificatetradingforRSPOcertifiedsuppliersconceived,administeredandmanagedbyAAKfrom2008to2016.

Achievements:

19millioncertificatestraded(3.9millionalonein2015) US$19millionpaidtotheRSPO,supportingadministrationandgrowthUS$115millionpaidtogrowers,incentivisingfurthercertification The only transparent pricing mechanism for RSPO supply chains Thebestaccesstomarketforcertifiedindependentsmallholders,withaseparatepremium market Theonlyaccesstosupportcertifiedsupplyformanymanufacturersandretailers Direct marketing and helpdesk for RSPO supply chains ReplacedbytheRSPO’sownPalmTracein2017

14

After eight years of supporting the RSPO by providing an innovativecertificatetradingsystemandrelatedsupportandmarketing,thecontractofGreenPalm(ownedbyAAK)withtheRSPOhasbeenterminated.GreenPalmwillceasetooperateasacertificatetradingsystemon31March2017,being replaced by Palmtrace.

ItisappropriatetorecognisethebenefitswhichGreen-PalmhasprovidedtotheRSPO,growers,manufacturersand retailers over this period.

Transition in supply chainAs discussed in the previous report, the operational challeng-eswithsustainabilityaremostlyrelatedtothehandlingofsustainable segregated palm oil because this oil, by its very definition,requiresaseparateroutethroughtheproduc-tion process. Because not all of our customer base as yet demands sustainable segregated products (or is prepared to payforthem),weoftenstillhavetohandletheconventionalproductaswellandthusweareoftenincreasingthenumberofdifferentcomponentswehandleonsite. During2016wehavecontinuedtoincreaseourrangeofofferings of sustainable segregated palm products. In partic-ularwehavebeenabletoimproveourofferonpalmkerneloil-basedmaterialfromourZaandijksiteintheNetherlandsoffering a range of products as an SG alternative. In addition, wehaveinvestedinadditionaltankcapacityatoursiteinKarlshamn,Swedenandhavebeenabletointroduceanum-berofnewSGmaterialsthere.Aseachcomponentaffectsanumberoffinishedproductswehaveincreasedtherangeofavailable products substantially.

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Aswehaveworkedonthiswehavealsohadtoconsiderour route for getting these components from our suppliers in South East Asia to our sites in Europe. As our range of mate-rials become more complex and diverse, traditional shipping methodsarelesseffectiveandweneedtolookatalternativemethods of shipping. Obviously, any changes to shipping methods also have to be managed at our receiving sites in Europeandwearecurrentlylookingatwaystohandlethis. An important part of the supply chain role is to try to antic-ipate future demand. This applies especially to SG material. Thishasbeenaparticularlydemandingtaskin2016asthevolatile market has affected customer demand, and some limited material availability in the second half of the year has made accurate forecasting of paramount importance to ensurewedonotdisappointanyofourcustomers. The transition to a fully segregated offering continues to beverydemandingintheshortandmediumtermaswecontinuetowidenourofferoffullysegregatedsustainableoptions,thusincreasingoperationalcomplexitysignificant-ly.However,wecontinuetomakeprogresswherethereiscustomerdemandandknowthatultimatelythepressurewilleasesignificantlyoncethetransitioniscomplete.

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2003-AAKfounding

member of RSPO

2010-FirstAAK

supply chain certification

2015-29%certifiedPO

2020-AllPO,

PKO and derivatives RSPO certified

2008-GreenPalm

established-AAKfirst

segregated certifiedPOinto EU

2013-Allsites

supply chain certified-14%certifiedPO

2014-95%

traceability to mills-Risk

management approach

2013-Sustainable

palm oil policy

2015-99%

traceability to mill-Executedriskman-agement approach on full supplier base

2018/19-Fulltrace-

ability to plantation

RSPO Principles & CriteriaFullysustainablepalm oilNo deforestation,

No peatland, FPIC

Towardssustainablepalmoil

Grievanceflowchart

Grievance Raiser AAK PSTF Object of Grievance Verification Team

Identification of Grievance

Grievance investigation

and management

Implementation and Monotoring

of Action

Grievance reported to AAK

or publicly

AAK engage withcomplainant

Invite to participate as andwhen appropiate

Communicate outcomes to

external stakeholders

Acceptance of issue as a grievance

Record as a Grievance and engagewith

parties

PrepareapproachfordealingwithGrievance

Prepare Action Plan to resolve Grievance

Implement Action Plan and Monitor until Grievance is resolved

Site Investigations Fieldverification

Verificationreporting

Notify of Grievance and gather information

Key next steps for AAK

17

In2017AAKwill pursueitsoverallobjectiveof100percenttraceabilitytomilloriginforpalmoil,palmkerneloilandderivatives riskassessnewsuppliersandcontinuetokeepriskassessmentupdatedonexistingsuppliers identifymillsmostatriskofnon-compliancewiththeAAKSustainablePalmOilPolicy• identifythoseoriginswherethereissignificantriskofpolicynon-compliance• continuethegeospatialriskassessmentforthewholesupplybase• continuethemillverificationofhigher-riskmills• focusgreaterscrutinyonhigher-riskmills,includingfield-basedverification followuponidentifiednon-conformities/non-compliancesandensureclosureassoonaspossible proactively manage any potential grievance issues continuetoincreaseouractiveengagementwithsupplierstoensurepolicycompliance,includingtargetedworkshopswithsuppliermills

furtherdevelopapalmoilsmallholdersupportproject,aswebelievemakingarealdifferencewithsmallholdersisatleastasimportantasraisingthebarforthetopperformers,withapotentiallymoresignificantimpactonpalm oil sustainability

Revised January 2017

AAK Group Policy: Sustainable Palm Oil

Sustainablesourcingofrawmaterialsispartofthebackboneofourstrategy.Rawmaterialsourcingisalsoanareawherewewanttomakeacleardifference,totheenvironmentandtothelocalcommunitieswheretherawmaterialsaregrownandharvested.

Justasitisvitalforustoobtaintherightrawmaterials,weplaceequalemphasisonsustainablegrowingandprocurement.OurSupplierCodeofConductincludesarequirementforallrawmaterialsuppliersandtheirsupplychains to adhere to fundamental UN Global Compact principles of labour and human rights, environmental protectionandanti-corruption,andtonationallawsinthecountryinwhichthesupplierconductsitsactivities.

AAKrecognizesthatpalmoilistheworld’sleadingvegetableoilintermsofproductionvolumeandconsumption.Palmoilisalsothemostefficientvegetableoilwithaproductionvolumeperhectarealmostsixtimesgreaterthan the volume produced per hectare for rapeseed and ten times greater than for soy. Hence, it is a very critical rawmaterialinfeedinganever-growingglobalpopulation.Therefore,producingpalmoilsustainablyisofutmostimportancetoallofus.AAKiscommittedtoitsroleinsupportingthemovetowardsfullsustainabilityinthepalmoil industry.

Specifically,AAKmakesthefollowingcommitments:

• AAK is a founding member of RSPO, the Roundtable on Sustainable Palm Oil. We continue to be very engagedintheRSPO,anditsBoard.AAKrecognizesRSPOcertificationastheonlyestablishedandstablesystematicorganizationandstandardforsustainablepalmoil.RSPOisnotperfect.However,itisimportanttohaveonewell-establishedrecognizedsystemratherthanaseriesofindividualsystemsandorganizations,whichaddcomplexityandmightpreventprogresstowardsafullysustainablepalmoilsupplychain.AAKiscommittedtoincreasingthevolumeofRSPO-certifiedrawmaterialthatitpurchases,withtheultimateobjectivetoachieveRSPOcertificationofallpalmoil,palmkerneloilandderivativespurchased.

• Wealsoseeaneedforfurtherprogresstowardsfullsustainabilityinthepalmoilsupplychain,beyondthecurrentRSPOcertificationrequirements.AAKisthereforealsocommittedtosourcingpalmoilthathasbeen produced without deforestation or destruction of peatland, and where plantation development only takes place with the free, prior and informed consent (FPIC) of any affected local community.

• AAK’s policy is to ensure full traceability in our palm oil supply chains. This means having traceability to mills and traceability to plantation level.Traceabilityisfundamentaltoourriskmanagement-basedassessmentandasthebasisforassuringsuppliercompliancewiththerequirementsinthisandrelatedpolicies.

• More than 40 percent of the global palm oil production comes from smallholders. AAK recognizes that smallholder inclusion in the palm oil supply chain is a key issue requiring action on a number of fronts. AAK’spolicyistoinitiateprojectswhichencourageandsupportsmallholderstomakepractical,stepwisechangestobestpracticethatwillsupportsmallholderstowardsachievingRSPOcertification,andtoworkwithintheRSPOtoimprovesmallholderaccesstoRSPOcertification.

AAK AB(publ)Skrivaregatan 9SE-21532MalmöSWEDEN

Phone+46406278300Fax+46406278311

info@aak.comwww.aak.com

556669-2850SE5566692850001Registeredoffice:Malmö

18

Revised January 2017

• Our selection and approval criteria for palm oil suppliers is based on RSPO membership, signing and committing to our Supplier Code of Conduct and this Sustainable Palm Oil policy, and our general questionnaire and requirements relating to quality management, food safety, environment, social and other issues. Our mechanisms for implementation of these commitments include supplier engagement atdifferentlevels.Wealsoconductsite-basedassessmentsofoursuppliersandtheirsupplychainsregularly,includingwithexternalthird-partyassessors.

• This policy applies to all palm oil, palm kernel oil and their derivatives at all origins.

IfAAKbecomesawareofasupplierviolatingorbreachingAAK’sSupplierCodeofConductorthesepolicycommitments,AAKwilltakeappropriateactiontoinvestigatetheissuewithintheframeworkofourgrievanceprocess,andwillseektoworkwiththesuppliertoresolveit.Ifnoadequateresolutioncanbefound,AAKwillterminatecommercialrelationswiththesupplier.

AAKwillregularlycommunicateprogressrelatingtotheimplementationofthisandrelatedpoliciesinitsProgressreport on sustainable palm oil.

Yours faithfully,AAKAB(publ.)

Arne Frank, President and CEOJanuary 2017

19

AAK AB(publ)Skrivaregatan 9SE-21532MalmöSWEDEN

Phone+46406278300Fax+46406278311

info@aak.comwww.aak.com

556669-2850SE5566692850001Registeredoffice:Malmö

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Thefirstchoiceforvalue-adding vegetable oil solutionsWedevelopandprovidevalue-addingvegetableoilsolutionsinclosecollaborationwithourcustomers,enablingthemtoachievelonglastingbusiness results. Wedosothroughourin-depthexpertiseinoils&fatswithinfoodapplications,workingwithawiderangeofrawmaterialsandbroadprocess capabilities. Throughouruniqueco-developmentapproachwebringtogetherourcustomers’skillsandknow-howwithourcapabilitiesandmindset.Bydoingso,wesolvecustomerspecificneedsacrossmanyindus-tries – Chocolate & Confectionery, Bakery, Dairy, Special Nutrition, Foodservice, Personal Care, and more. AAK’sprovenexpertiseisbasedonmorethan140yearsofexpe-riencewithinoils&fats.WithourheadquartersinMalmö,Sweden, 20productionfacilitiesandcustomizationplants,andsalesofficesinmore than 25 countries, our more than 2,800 employees are dedicated toprovidinginnovativevalue-addingsolutionstoourcustomers. Sonomatterwhereyouareintheworld,wearereadytohelpyouachieve long lasting results.

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