Refining Malaysia’s palm oil industry with sustainability

Malaysia is the second largest palm oil producer in the world, making the industry one of the country’s growth engines. In 2024, the industry’s export value amounted to MYR 114 billion (USD 26.98 billion) and contributed roughly 3 per cent of Malaysia’s GDP.

Palm oil might seem promising, however, international regulations concerning sustainability have made investors approach it with greater caution. To tackle these challenges, Malaysia is taking action to align its palm oil production with the Sustainable Development Goals of the UN by adopting more environment-friendly practices.

Beyond sustainability issues, the country’s production is still far from Indonesia, the biggest palm oil producer globally. One may ask what is unique about Malaysia’s palm oil and how this industry could be significant for investors looking to take positions within ASEAN.

International reputation

To ensure palm oil production meets sustainability goals, the Malaysian government established the Malaysia Sustainable Palm Oil (MSPO) agency and MSPO Certification Scheme in 2015 to oversee palm oil farming and management. Currently, over 3.86 million hectares of palm oil plantations have been certified under MSPO, with almost 645,000 hectares handled by independent smallholders.

Malaysia’s certification protocols have been in place for years, but it has yet to be recognized by the EU. In May 2025, the European Commission (EC) classified Malaysia under a “standard risk” status under the European Union Deforestation Regulation, noting that its domestic palm oil industry has not satisfactorily curbed deforestation.

The label gives the assumption that Malaysia’s palm oil industry has little commitment towards environmental preservation. However, according to Malaysian Palm Oil Council CEO Belvinder Sron, they will be requesting clarification from the EC, implying that the regulator’s assessment methods may have been biased. Sron shared that data from Satelligence and the UN show that the country has taken action to curb deforestation, with primary forest loss reduced by 65 per cent between 2013 to 2023, and an additional 13 per cent reduction in 2024 alone.

Additionally, Malaysian Minister of Plantation and Commodities Johari Ghani has invited EU delegates to see the sustainable practices being implemented in palm oil farms to convince foreign regulators that their MSPO certification should be fully recognised by the European body. Tighter regulations under the MSPO 2.0 concerning green practices that took effect in January 2025, and believed to be EU-compliant, could boost investor confidence and unlock new trade deals for Malaysia.

Looking at potential

While US tariffs on Malaysian exports is set at 24 per cent, it will only have minimal impact on the palm oil industry as shipments to the US only account for 1 per cent of national production. Instead, the growth in demand will come from elsewhere. Already, Malaysia and China have agreed to establish a cross-border palm oil supply chain. Meanwhile, Japan has invested MYR 500 million (USD 117 million) in a new palm oil refinery in Kota Tinggi last year. Malaysia is also looking towards the Japanese market to export products such as palm-based biomass for housing and furniture.

As illustrated in Graph 1, there have been extreme fluctuations in Malaysia’s exportation value in mid-2024 but it has since stabilized with the steady rise in demand for palm oil products globally. India’s decision to reduce the import duties for palm oil due to the lack of edible oil stocks could further boost demand for Malaysia’s palm oil. Malaysia is also looking to Kenya as Africa’s trade hub for palm oil thanks to 2024’s palm oil exports amounting to MYR 5.2 billion (USD 1.22 billion). Rising global demand combined with government efforts towards sustainability within the palm oil industry suggest that this segment has immense potential to raise Malaysia’s prospects for international trade.

Opportunistic investors can look to the FTSE Bursa Malaysia Palm Oil Plantation Index, which is composed of 17 companies as of May 2025, in timing their entry into the sector. Although Malaysia’s palm oil stock market slipped downwards as seen in Graph 2, we see that the industry will sustain a modest expansion this year; a year-on-year comparison shows that the index gained 4.2 per cent in May.

For example, sustainable palm oil company IOI Group has a growing market capitalization of MYR 22 billion (USD 5.18 billion). By end-March 2025, this company successfully gained a revenue of MYR 8.37 billion (USD 1.97 billion), illustrating that the sector is able to bring in particularly attractive profits for investors.

Further, we see two more opportunities for palm oil production that are in line with sustainable practices. First is the biomass waste generated during palm oil extraction, washing, and cleaning. Biomass can be used for renewable energy, and this creates a new revenue stream for producers. In 2024, the total approved investment for this specialized sector totalled MYR 909.6 million (USD 214.25 million).

Another economic potential is red palm oil, which is considered as premium oil. This product has been studied for nutritional purposes, especially for mothers and infants, and is gaining some popularity. Not only is red palm oil vegetarian-friendly, it is also considered a halal ingredient. There is also the potential for palm oil products to be added into animal feed, following the collaboration of Malaysia’s JF Nutritech and China’s Palmort Food Tech.

The persistence of Malaysia in adapting sustainability practices for palm oil production appears to be paying off. Together with increasing global demand for palm oil, domestic producers have more markets to explore, and this bodes well for investors in the sector. Given that compliance with EU standards seems forthcoming, investing into Malaysian palm oil producers ahead of that milestone would be a good bet.

This original article has been produced in-house for Lundgreen’s Investor Insights by on-the-ground contributors of the region. The insight provided is informed with accurate data from reliable sources and has gone through various processes to ensure that the information upholds the integrity and values of the Lundgreen’s brand.