Nestle (NESN.VX), the world's largest food maker, has dropped Sinar Mas Agro Resources & Technology (SMAR.JK) as a supplier of palm oil, after environmental group Greenpeace led protests accusing the latter of destroying Indonesian rainforests.

However, Greenpeace said Nestle's concession doesn't go far enough in ensuring its products are not tainted by palm oil that's been produced as a result of forest destruction.

Nestle has replaced Sinar Mas with an unidentified supplier, the company said in a statement released Thursday. The company said it bought palm oil from Sinar Mas only for manufacturing in Indonesia, and no palm oil bought from Sinar Mas has been used for manufacturing in other countries.

Another food giant, Unilever NV (UN), dropped Sinar Mas as one of its palm oil suppliers three months ago.

Greenpeace on Wednesday published a report accusing Sinar Mas of destroying rainforests and orangutan habitats to set up its palm oil plantations. The organization subsequently launched protests at Nestle's headquarters and factories in the U.K., Germany and the Netherlands.

Following Nestle's action to drop Sinar Mas, Greenpeace said Thursday that palm oil produced by Sinar Mas would continue to flow through Nestle's supply chain as it buys palm oil from third party suppliers like Cargill, which Greenpeace said purchases from Sinar Mas.

Nestle said it is "making sure that companies, such as Cargill, understand our demands for palm oil which is not sourced from suppliers which destroy rainforests."

Sinar Mas Agro denied that its palm oil plantations were damaging the environment.

"We are committed to applying responsible land clearing and the best practice of farming management in all our plantations," President Director Daud Dharsono said Thursday.

Dharsono did not disclose how much palm oil the company supplies to Nestle.

Unilever, the other company that has banned purchases from Sinar Mas, accounted for 3% of Sinar Mas' total annual palm oil sales of $1 billion, which Dharsono in an interview in December had characterized as "insignificant."

During that interview, Dharsono said the bulk of Sinar Mas's customers, who are based in India and China, won't be swayed by Unilever's actions.

Nestle said it is committed to using only "certified sustainable palm oil" by 2015.

Of the 45 million tons of annual, global crude-palm-oil output, only 2.3 million tons has been certified by the palm oil watchgroup Roundtable for Sustainable Palm Oil as having been produced through sustainable methods.

Of the 2.3 million tons, Indonesia, the world's largest CPO producer, accounts for only 400 tons.

-By Fawziah Selamat, Dow Jones Newswires; +62 21 3983 1277; fawziah.selamat@dowjones.com