Last summer, heavy smoke choked the bustling financial center of Singapore.

The government sent out an alert, warning the poor and the elderly to avoid the potentially life-threatening air. It was the worst smoke the city had seen in 16 years, caused by the annual fires to clear rainforest in Indonesia and make way for palm oil plantations.

The irony of Singapore’s smoke problem was not lost on environmentalists. Singapore is a hub for palm oil trading, a lucrative market that has soared in recent years and is responsible for extensive deforestation in Southeast Asia.

But last week, the largest player in the palm oil market, Wilmar International Ltd., agreed to halt deforestation – not only in its own plantations, but on the lands of the hundreds of companies from which it buys palm oil. Wilmar controls nearly half of the palm oil market.

“I think the thing that turned the corner for Wilmar was during the summer, when they were so loudly criticized for the smoke haze in Singapore,” said Scott Poynton, executive director of the Forest Trust, who consulted Wilmar on the policy with Climate Advisers and Unilever. “It was not because of burning on their own plantations … but it was really the fact that they were providing a ready market for this oil.”

In recent years, Poynton has become the go-to adviser for large, multinational companies that want to clean up their act. Poynton created a policy for Asia Pulp and Paper, the largest paper company in the world, that ended cutting in native forests, carbon-rich peatlands and habitat for endangered species. Poynton also helped Golden Agri-Resources, the world’s second-largest palm oil plantation company.

Palm oil is an ingredient in everything from cookies to shampoo to biodiesel. It is an important dietary staple in Asian, African and South American cooking. The rapid expansion of palm oil, driven by rising global demand for food and fuel, has been linked to widespread deforestation in Southeast Asia, where about 85 percent of palm oil comes from. Forest loss has become the largest source of carbon dioxide emissions in Indonesia and has destroyed habitat for species like the orangutan and Sumatran tiger.

‘Lots of hard work’ ahead

The policy, announced Thursday, bans any plantation development on lands with large amounts of carbon – like peat soils – or lands that are are valuable for conservation. It prohibits exploitation of workers and local communities. Several palm oil companies have been accused of human rights violations. Finally, Wilmar’s suppliers will no longer be able to burn forests.

The agreement is long overdue, said Jeremy Goon, Wilmar’s head of social corporate responsibility. Third-party suppliers make up about 80 percent of the palm oil traded under Wilmar’s name. Even before the hazy summer in Singapore, the palm oil sector had developed a dirty reputation. Wilmar was one of 23 companies that lost $314 million in investment this year, as Norway’s government pension fund divested from companies with a reputation for deforestation.

“I wouldn’t attribute this to any particular reason,” said Goon. “It wasn’t about Wilmar; it was about the industry.”

Wilmar formed in 1991 and was bought in 2006 by the Kuok Group, an investment company founded by Malaysian billionaire Robert Kuok. While environmental groups claim that their pressure eventually influenced Wilmar, the impetus for the policy came from within, asserted Goon.

“This policy has the potential to transform a significant part of the industry,” he said. Unlike Golden-Agri Resources’ policy, which only concerned the company’s own plantation, Wilmar’s decision attempts to regulate every small palm oil grower that wants to sell to Wilmar.

“Lots of hard work is needed over next couple years,” he added. “We make no bones about that.”

Wilmar’s decision was cheered by environmental and science groups, from Greenpeace to the Union of Concerned Scientists, which saw the move as a step closer to decoupling the necessary oil from deforestation.

“I think Wilmar recognizes that there is growing demand among customers for [palm oil] that doesn’t make them choose between orangutans and food,” said Glenn Hurowitz, one of the managing directors of Climate Advisers, one of the groups involved in the crafting of the policy.

Environmentalist’s rant spurs company action

Hurowitz’s appearance on the Bloomberg television channel in a segment on the summer fires left an impression on Wilmar’s executives. Hurowitz pointed the finger directly at Wilmar for driving the fires.

“He was really passionate,” said Poynton. “Wilmar Chairman Kuok Khoon Hong felt he really needed to understand why this fellow was so unhappy with him, and he knew he was speaking with genuine passion and genuine concern.”

As governments, nongovernmental organizations and businesses struggle to maintain the world’s forests, decisionmakers are struggling to find the best strategy. Norway has committed $1 billion to Indonesia to improve governance. Interpol is cracking down on the illegal timber trade. And the United Nations has launched the Reducing Emissions from Deforestation and Forest Degradation (REDD+) program, a mechanism that would pay countries enough money to outbid the various economic drivers that threaten forests.

Poynton is adamant that partnership with the companies themselves, not government interference, is the best way to slow deforestation. The rising demand for sustainable products, with palm oil on top of the list, is a much more powerful incentive.

“It’s companies within supply chains that are doing the bad things,” he said. “They profit from the exploitation of people, they profit from chopping down forests, and they are the ones that must be the drivers of the solutions.”

Some caveats for a multibillion-dollar industry

Norway’s $1 billion to slow deforestation through REDD+ is a drop in the bucket of the amount needed to reverse forest loss, said Poynton. Wilmar alone reported revenues of more than $45 billion last year. REDD+ is hindered by lack of clarity and government interference, he added.

“There is a market for REDD+: It’s called the global supply chain. Trillions and trillions of dollars go through the global supply chain every year,” he said. “We don’t need to torture ourselves with 20 years of U.N. REDD+ meetings.”

But corporate pressure is a complement to the solution, not a substitute, said Frances Seymour, a senior fellow at the Center for Global Development. The policy is likely to give some “breathing space” and slow the rapid conversion of forests in lands that are legally sanctioned for palm oil development. Protected areas like national parks won’t be conserved.

Another caveat to the Wilmar policy is that it relies on demand for sustainable palm oil.

“As long as there are markets for palm oil that are not sensitive to environmental and social considerations, there are always going to be bad actors on the producer side,” she said. There are also broader policy changes needed in a country like Indonesia, where the government can take away land-use licenses if a grantee does not develop palm oil in a concession designated for that use.

Finally, corporations with no-deforestation policies could decide to stop sourcing from smallholders in an attempt to control their supply chain.

“You’d be hurting the people who can most benefit from good international markets for palm oil,” said Seymour.

Indeed, this is likely to be Wilmar’s biggest hurdle.

“The biggest challenge will be capacity building for the small and medium players,” Goon said. “They don’t really see the global perspective on these things.”