Malaysia Battles EU Deforestation Label with Sustainability Push

In a determined bid to counter the European Union’s classification of Malaysia as a “standard risk” under its stringent deforestation regulations, the government is intensifying efforts to bolster sustainability in its agricultural sectors, particularly for smallholder farmers who form the backbone of the nation’s palm oil and cocoa industries. This comes amid growing frustration from industry leaders who argue that the label unfairly tarnishes Malaysia’s reputation despite significant strides in reducing environmental impact.

Government’s Sustainability Drive

Malaysia’s Plantation and Commodities Minister, Datuk Seri Johari Abdul Ghani, has outlined a robust strategy to align the country’s agricultural practices with global sustainability standards. Speaking to reporters after launching the Malaysia International Cocoa Fair 2025 in Kota Kinabalu on May 26, 2025, Johari emphasized the importance of integrating smallholders into the Malaysian Sustainable Palm Oil (MSPO) certification system. “What we want to do now is ensure the MSPO standards can also embrace smallholders. As of today, about 85% of our smallholders are able to comply” he said. He highlighted that many small-scale farmers lack mills or refineries but play a critical role in producing raw materials, and the government is working to integrate them into traceable supply chains to meet international expectations.

This initiative is part of a broader commitment to halt deforestation by focusing agricultural expansion on existing land rather than clearing new areas. “We must use existing land and increase yields through good agricultural practices and high-quality planting materials. That is the only way we can double our yield per hectare” Johari stated. His remarks underscore a policy shift towards maximizing productivity without further environmental degradation, a key concern for both local stakeholders and international regulators.

EU Deforestation Regulation Sparks Controversy

The EU Deforestation Regulation (EUDR), which aims to curb imports linked to deforestation, has placed Malaysia under a “standard risk” category, prompting concerns about increased scrutiny and compliance costs for exporters. Industry leaders have been vocal in their criticism, with Malaysian Palm Oil Council chairman Datuk Carl Bek-Nielsen likening the classification to “getting slapped with a fine for speeding while you have been driving below the speed limit.” The label is seen as a significant setback for an industry that has invested heavily in sustainable practices over the past decade.

Despite the frustration, Johari acknowledged the need to comply with EUDR requirements, even as enforcement remains pending. He noted that many of Malaysia’s major exporters, particularly large companies with control over entire supply chains—from plantations to refineries—are already well-positioned to meet export standards. “A large portion of our products are exported to Europe because many of our players are large companies. These companies own the entire supply chain, so they have full control and are able to meet export requirements” he explained.

Smallholders at the Heart of Reforms

Smallholders, who account for a significant portion of Malaysia’s palm oil and cocoa production, are a focal point of the government’s sustainability agenda. Unlike large corporations, many small-scale farmers face challenges in meeting certification requirements due to limited resources and infrastructure. Johari’s ministry is addressing this gap by providing support to ensure compliance, particularly through registration and certification programs. For cocoa farmers, he has instructed the Malaysian Cocoa Board to ensure all smallholders are registered and their plantations certified, with or without state-issued land grants.

The push to include smallholders is not just about meeting international standards but also about safeguarding livelihoods. The EUDR’s potential impact on small-scale producers has raised alarms, as higher compliance costs could disproportionately burden those least equipped to adapt. By prioritizing inclusivity in certification systems like MSPO, Malaysia aims to protect these vulnerable groups while maintaining its position as a leading exporter of palm oil and other commodities.

Broader Implications for Commodity Sectors

Beyond palm oil, the government’s sustainability efforts extend to other commodity sectors such as cocoa and rubber. Johari has urged all players in these industries to adopt sustainable practices if they wish to access international markets. “I have also encouraged all commodity players in Malaysia, whether in palm oil, rubber or cocoa, to adopt sustainability practices if they wish to export” he said during his speech at the cocoa fair. This holistic approach reflects an understanding that global trade increasingly hinges on environmental accountability, with certifications becoming a prerequisite for market access.

In a promising development, representatives from the EU are expected to visit Malaysia in September or October 2025 to assess the country’s regulatory framework and on-the-ground practices. Johari expressed optimism about the visit, viewing it as an opportunity to demonstrate Malaysia’s commitment to sustainability and traceability. “Actually, our certification is already recognized. Currently, we are classified under ‘standard risk’, but we are working on improving this. We aim for recognition of our sustainability and traceability systems” he added.

Balancing Economic Growth and Environmental Goals

Malaysia’s agricultural sector is a cornerstone of its economy, contributing significantly to GDP and employment. Palm oil alone accounts for a substantial share of export revenue, with Europe being a key market. However, the industry has long faced criticism for its historical links to deforestation and habitat destruction, particularly in regions like Sabah and Sarawak. Over the past decade, the government and industry have made concerted efforts to address these concerns, implementing stricter regulations and promoting sustainable practices.

The EU’s “standard risk” classification, while a setback, has galvanized further action. Johari’s emphasis on using existing land and improving yields signals a pragmatic approach to balancing economic imperatives with environmental responsibilities. If successful, this strategy could serve as a model for other tropical nations grappling with similar challenges in their agricultural sectors.

Regional and Global Context

Malaysia’s situation is not unique. Neighboring Indonesia, the world’s largest palm oil producer, has also faced scrutiny under the EUDR and has taken steps to challenge the regulation through diplomatic channels. Both countries argue that the EU’s policies fail to account for local contexts and the progress made in curbing deforestation. For instance, Malaysia has reduced its deforestation rate significantly in recent years, with initiatives like MSPO gaining traction among producers.

Globally, the push for deforestation-free supply chains is reshaping commodity trade. The EUDR, set to be fully enforced in the coming years, requires importers to prove that products such as palm oil, cocoa, and rubber are not linked to deforestation after a specific cutoff date. While the regulation aims to protect global forests, critics in producing countries argue that it risks marginalizing smallholders and creating trade barriers under the guise of environmental protection.

Looking Ahead

As Malaysia navigates the complexities of the EU’s deforestation rules, the government’s focus on sustainability and smallholder inclusion offers a potential path forward. The upcoming EU delegation visit could be a turning point, providing an opportunity to showcase the country’s progress and advocate for a reassessment of its risk status. Meanwhile, the commitment to halting deforestation and enhancing traceability reflects a broader recognition that environmental stewardship is no longer optional but essential for economic survival in a globalized market.

For smallholders and industry leaders alike, the stakes are high. The outcome of Malaysia’s efforts could determine not only the future of its commodity exports but also set a precedent for how developing nations balance growth with sustainability. As Johari and his team push for international recognition of their systems, the question remains whether these efforts will be enough to shift perceptions and secure a more favorable standing under the EU’s regulatory framework.