Few commodities have generated as much controversy as palm oil. Surging global demand for the crop, which is a vital cooking oil and widely used in ultra-processed foods and cosmetic products, is a major culprit in the loss of ancient rainforests, especially in Southeast Asia.

Indonesia, the world’s largest palm oil producer, cut down 11% of its old-growth forests between 2001 and 2019, one-third due to palm oil cultivation, according to an academic study.

While deforestation peaked around 2008 to 2012, and has since declined, the conversion of forests to plantations continues in pockets of the country, including in the palm oil frontier province of Papua, where deforestation doubled in 2025.

Although only 10% of Indonesia’s palm oil is exported to Europe, conservationists hope the EU’s Deforestation Regulation, which will apply to large and medium-sized companies from the end of this year, will push firms to clean up their entire palm oil supply chains, and show it isn’t coming from land cleared after 2020.

But there are also fears that smallholder farmers, who account for some 40% of global production, will be excluded from the European market due to the complexities of complying with the regulation.

A recent study published in Nature Sustainability, which interviewed smallholder farmers in two palm-producing Indonesian provinces, found that voluntary zero-deforestation commitments by companies over the past decade had not resulted in greater exclusion of smallholder farmers.

But Joseph D’Cruz, CEO of the Roundtable on Sustainable Palm Oil, argues that many farmers who are currently certified as producing sustainably won’t be able to meet the EUDR’s tougher requirements.

These farmers are “doing everything that we've asked them to do in terms of producing in a deforestation-free way, and in demonstrating and documenting that they're doing so,” D’Cruz said in an interview.

According to its latest data, the RSPO certifies almost 175,000 smallholders. Yet RSPO certification does not automatically ensure compliance with the EUDR, because it has a separate set of due diligence requirements.

“The problem is that the documentation cannot transmit across the supply chain in the way that the European regulators require,” says D’Cruz. “(Smallholders’) access to the market is being blocked by (what are) effectively paperwork requirements.”For almost 20 years, major consumer goods companies have been working with the RSPO to import certified-sustainable palm oil into the EU market through a mechanism known as “mass balance” accounting.

This allows batches of both certified and uncertified palm oil to be mixed together in shipments. Providing the proportion of palm oil in the batch matches or exceeds the proportion to be sold in the European Union, the palm oil can be labelled as “sustainable”.

However, the EUDR doesn’t allow the mixing of compliant and non-compliant material, creating a significant compliance challenge. Mapping smallholders requires establishing robust traceability mechanisms through several layers of a complex supply chain, which includes refiners, mills and local purchasers.

The fear is that large companies will decide to source only from large plantations that can be easily documented, rather than risk entire shipments being rejected at the gates of Europe.

“Even these producers who have been working for many years to support and uplift smallholders are saying that ‘from a risk management point of view, this EU regulation is putting us in a very delicate position’,” D’Cruz says.

Smallholders who have contracts with major commodity companies that already have some form of traceability are in a better position than independent smallholders, who typically sell produce to local dealers.

It’s a different story for Malaysian producers. Malaysia, which produces around 24% of the world’s palm oil, has been working for several years, independently of the process around the EUDR, to address criticisms of the social and environmental impacts of palm oil production. All growers in the country, including smallholders, have been required to adhere to the Malaysian Sustainable Palm Oil standard since 2020.

Last year, the European Union recognised MSPO certification as a “credible sustainability standard with a high-standard digital traceability system that can facilitate operators’ compliance with the EU Deforestation Regulation”.

Reza Azmi, executive director of non-profit Wild Asia, says the EUDR should present “no problem” for Malaysian smallholders from a technical perspective, notwithstanding some challenges in formatting geolocation data in a way that is acceptable for European customs agents.

Yet he warns that Indonesia, which provides around 57% of global supply, remains the “wild west”. Smallholders often farm plots within large concessions in the country, but their land rights can be poorly documented, making it difficult to demonstrate that they meet the EUDR requirement of holding legal tenure.

Moreover, the government enacted a regulation in June that heavily restricts sending geospatial data outside the country. This sets up a stand-off with Brussels, since Jakarta’s new data sovereignty law forces companies to secure special permission before entering six-decimal coordinates into the EU’s TRACES system, as required by the EUDR.

The reality, says Azmi, is that Indonesia is not dependent on demand from EU. Much of its palm oil is used domestically, including in biofuels, while there remains plenty of demand from countries such as China, which do not impose traceability requirements.

Matthew Spencer, global director of climate and nature at international trade non-profit IDH, points out that the cost of verifying deforestation-free status could “come down dramatically” if palm oil buyers, refiners and mills collaborate on providing traceability assurances.

He highlights an IDH project in Indonesia’s Aceh province, in which major consumer goods companies such as Unilever and PepsiCo have worked with smallholders to increase yields and boost income, while also supporting local efforts to stem deforestation.

The provincial government, meanwhile, has committed toing smallholders and monitoring deforestation to help ensure palm oil producers meet international standards.

However, despite lobbying from the Council of Palm Oil Producing Countries (CPOPC) – a lobby group dominated by Indonesia and Malaysia, the EU ultimately declined to take a “landscape-based approach” with the EUDR.

Rather than simply assessing that particular areas are deforestation-free, the regulation insists all imported palm oil must be traceable to specific plots.

Enforcement of the EUDR was originally meant to start at the end of 2024. Despite ongoing challenges, the extra time to adapt means the impact on smallholders may not be as bad as first feared.

“On day one, it's going to be a really mixed picture,” says Will Schreiber, director of sustainability consultancy 3Keel and facilitator of the Palm Oil Transparency Coalition. Impacts on smallholders will vary, he says, as progress in establishing traceability mechanisms has been uneven across different regions.

Schreiber notes that the European Commission has been working with importers to simplify aspects of the regulation and help mitigate risks of smallholders being excluded.

For example, importers are required to provide a “polygon” mapping the boundaries of a large plantation from which they source palm oil. But when sourcing from a farm smaller than four hectares, only a single set of coordinates are required to identify the plot.

And in April 2025, the Commission confirmed it would operate a “declaration in excess” mechanism. This allows companies to declare a list of plots from which the palm oil included in a shipment may originate, rather than specific plots. This is set to reduce the administrative burden of sourcing from smallholders, since a mill can aggregate produce from across a network of compliant suppliers.

Schreiber believes the EUDR requirements that take effect in December will be “a lot less exclusionary towards smallholders” than was feared when it entered the statute books in 2023.

What is clear from the Nature Sustainability study is that regulation is needed, because the voluntary approach of companies making zero-deforestation and no deforestation, no peat, and no exploitation (NDPE) commitments over the past decade or so has not moved the needle.

“We find very limited evidence that (these) are reaching smallholders in ways that support effective or equitable conservation,” the researchers, from the Conservation and Development Lab at University of Cambridge and ETH Zurich, concluded. None of the independent smallholders they interviewed reported awareness of NDPE-related restrictions such as peatland protection or prohibitions on planting in forest estates, though there was some awareness among smallholders tied to supply specific companies.

“Price incentives, if coupled with sufficient monitoring and enforcement, might increase awareness and encourage behavioural change,” the researchers said. But at the same time, companies and importing countries “must go beyond deforestation control alone and address underlying livelihood needs”.

With smallholder farmers accounting for much bigger traded volumes of cocoa, coffee and natural rubber, (in the case of cocoa 80%-95%), it’s a recommendation that could be equally relevant throughout the tropics as regulations such as the EUDR begin to bite.

This article is from the latest issue of The Ethical Corporation magazine, on deforestation risk. You can download the digital pdf of the magazine by clicking here