Sustainable Production Policy Impact on Palm Oil Firms’ Performance: Empirical Analysis from Indonesia

Sustainable production is a key element of sustainable development. The concept was first introduced in the United Nations Rio Earth Summit in 1992 and has become an important item on the management of industries. In conjunction, the government of Indonesia introduced the Indonesian Sustainable Palm Oil (ISPO) policy in 2011 to adhere to international sustainability standards of Sustainable Palm Oil and of reducing emissions from deforestation and forest degradation (REDD+). This study investigates the impact of ISPO policy on palm oil firms’ performance. Using a sample of 409 palm oil firms of the Indonesian palm oil sector for the years 2010 and 2015, we employed a regression discontinuity (RD) with a difference-in-differences approach to explore the effect of the policy on firms’ performance. The RD results show that the introduction of the policy significantly reduced large firms’ profit by IDR 75m (equivalent to USD 5250); the negative effect of the policy increased with firm size. Furthermore, there was a significant reduction in performance for firms that promptly purchased land before the policy’s ban on land expansion. These findings suggest that a punitive sustainable production policy does not sustain the palm oil sector. Nevertheless, large companies that complied with international sustainability measures ahead of the introduction of the domestic policy benefited.