By Sameer C. Mohindru and Surabhi Sahu

Crude palm oil producers are working on improving the sustainability of all aspects of their operations to address environmentalists' concerns about ecologically damaging practices and to preserve market share.

Participants in the $40 billion-a-year-sector, which is heavily concentrated in Indonesia and Malaysia, are initiating a range of eco-friendly initiatives, from restoring peatland and conserving forests to increasing the proportion of their products that are certified as sustainable and upgrading mills to reduce carbon emissions.

Palm oil is the world's most widely traded vegetable oil, but environmental campaigns have made large buyers wary of using it, threatening to reduce its share of markets ranging from biofuels to chemicals and processed foods. Any reduction in production could diminish palm oil's competitiveness against rival vegetable oils--especially for buyers in price-conscious Asian destinations, including China, India, Pakistan and Bangladesh.

In 2010, Nestle SA (NSRGY) suspended palm oil buying from Golden Agri-Resources Ltd. (E5H.SG) over the Singapore-listed company's alleged involvement in rainforest destruction. It resumed purchases only after Golden Agri-Resources demonstrated to its satisfaction a commitment to produce sustainable palm oil.

The Roundtable on Sustainable Palm Oil, a grouping of conservationists, plantation companies and buyers that promotes environmentally friendly practices at oil palm plantations, in November said it would make its certification process more stringent and is considering the inclusion of factors such as human rights, carbon emissions and labor in its certification criteria.

The RSPO recently upheld a complaint against Singapore-based First Resources Ltd. (EB5.SG) for clearing Indonesian rainforests, directing the company to suspend operations the area being disputed.

First Resources, an RSPO member, responded amenably to the request, agreeing in a statement late last month to halt all land-clearing activity on the disputed 400 hectares for the six-month period the RSPO has set to resolve the matter.

The RSPO's efforts to provide certification for sustainably produced palm oil got off to a slow start a decade ago, but it has gradually built momentum, with around 7 million metric tons certified in 2012, or 14% of global production.

The main criticism environmentalists have leveled at palm oil producers in Indonesia and Malaysia is that by burning peat forests to expand plantations, they are releasing massive amounts of carbon dioxide into the atmosphere.

Palm oil companies are reconsidering the practice--on the basis of profitability, both short and long term.

"Planting oil palms on peat is more expensive than on mineral soils, and water levels have to be maintained through a complicated series of drainage systems," Henry S. Barlow, a director at Sime Darby Bhd. (4197.KU), one of the world's top palm oil producers said in a recent interview.

Despite systems in place to maintain water levels, oil palms planted on peat still risk being engulfed by up to six centimeters of water a year, and once plantations complete a 25-year-cycle, many won't be fit for replanting--regardless of whether excess water is pumped out.

Last month, Indonesia's forestry minister announced he would recommend that a moratorium on new forestry concessions in peatlands and primary forests that expires in May be extended. Meanwhile, plantation companies are taking the initiative to designate some land off-limits.

John C. Oakley, Managing Director at London-based REA Holdings PLC (RE.LN), said in a recent interview the company has allocated 7,000 hectares, or 7% of its total area in Indonesia, for conservation.

At the same time, transnational companies such as Nestle, Unilever PLC (ULVR.LN), Neste Oil (NES1V.HE) and Cargill Inc. are increasingly using and producing sustainable palm oil.

Cargill's plantations in South Sumatra province, Indonesia, are 100%-certified sustainable, and the company expects to achieve full certification in West Kalimantan province by 2015, D. Chandramohan, the company's director of corporate affairs said in a recent interview.

But even if the plantation side of the palm oil industry meets sustainability targets, critics point out that the process of extracting oil from palm fruit is another major source of greenhouse gas emissions.

The palm crushing industry is addressing this criticism by upgrading its processes. "Many oil palm mills have turned carbon neutral or positive by using technology to capture methane, which is then burnt to produce energy," K.R. Raghunath, the managing director for Southeast Asia at KIS Group, told The Wall Street Journal.

KIS Group has upgraded mills in Malaysia, Indonesia and Papua New Guinea, he said.

Peatland conservation and carbon capture at mills will help the oil palm industry in efforts to meet European Union standards on feedstock to make biofuels. The EU standards evaluate feedstocks based on carbon emissions from ground preparation through refining, using diesel emissions as a yardstick.

Ilmari Lastikka, head of EU affairs at Neste Oil, the world's largest biodiesel producer, told The Wall Street Journal that methane-capture facilities at mills can reduce palm oil's emissions to just 20% of diesel's--a far lower percentage than can currently be achieved by other vegetable oils.

And it will exceed the EU's standards, which require biofuels' carbon emissions to be no more than 65% of diesel's. This will fall to 50% 2017 for existing biofuel plants and the EU has proposed a 40% threshold for new operations.

M.R. Chandran, former chief executive of the Malaysia Palm Oil Association, told The Wall Street Journal, "As long as the industry is able to address sustainability and reduction of greenhouse gases, palm oil sales will continue to rise."

Even the U.S.--one of the world's largest producers of rival soyoil--is increasing its consumption of palm oil, he said, noting that annual U.S. imports of the tropical oil have already exceeded a million tons thanks to what is deemed a healthful property, the absence of trans-fatty acids.

Write to Sameer C. Mohindru at sameer.mohindru@dowjones.com and Surabhi Sahu at surabhi.sahu@dowjones.com

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