Palm oil has become one of the world's fastest expanding crops, but industry has been facing intense over deforestation and methods used to clear land

* Malaysia watchdog has reinstated IOI's green certification

* But firms such as Nestle, Kellogg say holding off on buying

* IOI says working to "re-engage" customers

By Emily Chow

KUALA LUMPUR, Aug 15 (Reuters) - Leading global buyers of palm oil are holding off on mending business ties with Malaysian plantation giant IOI Group despite an industry watchdog's decision to reinstate the producer's green certification.

The Roundtable for Sustainable Palm Oil (RSPO) in April withdrew IOI's 'sustainability certification' after allegations the company had illegally chopped down rainforests in Indonesia and planted palm crops on peatland.

But earlier this month, it said IOI, one of the world's leading palm producers and traders, had satisfied conditions for the suspension to be lifted, a move that has sparked sharp criticism from environmental groups.

Palm oil, used in everything from chocolate to cosmetics, has become one of the world's fastest expanding crops, but the industry has been facing intense pressure over deforestation and methods used to clear land. That has driven many buyers to demand certification of environmentally sound behaviour.

Food companies Nestle, Kellogg, Mars Inc and Hersheys, along with healthcare product makers Johnson & Johnson and Reckitt Benckiser told Reuters they had no immediate plans to return to business with IOI despite the latest step by RSPO.

Procter and Gamble told Reuters it had ended its relationship with IOI, while Unilever said it was looking into the watchdog's decision.

"(We will not change our approach until) we see IOI's upgraded policies enacted, with improvements verified on the ground by an independent group of experts," Nestle said in an emailed statement.

IOI officials in Kuala Lumpur said the company remained committed to "engagement with all its stakeholders" and would be "working hard to re-engage with them in the coming weeks and months".

"Our focus will now be on the implementation of our commitments, and progress reports detailing delivery against them will be made public on a quarterly basis," said Surina Ismail, its group head of sustainability.

Meanwhile, major palm oil trader Cargill Ltd said it was sticking to its decision to suspend business with IOI. Rita Aspen, regional director of corporate affairs for Asia Pacific, said the company would "review IOI's sustainability policy ... before taking further action".

Environmental groups such as Greenpeace called RSPO's decision to lift IOI's suspension premature and counter-productive, and urged companies to put on hold buying from IOI.

RSPO, a body of consumers, green groups and plantation firms, said its decision to lift the suspension was recommended by its independent complaints panel, and that it stood by "the integrity of the panel" and its conclusions.

IOI is one of the RSPO's founding members.

"It sends the message that the RSPO is more concerned about helping a founding member regain its customers than ensuring its standards are upheld," said Greenpeace Indonesia forest campaigner Annisa Rahmawati.

Around 90 percent of the world's palm oil crop grows in Malaysia and Indonesia.

RSPO previously said the suspension would be reinstated if IOI fails to follow through on an action plan to correct environmental shortfalls.

(Reporting by Emily Chow; Editing by Joseph Radford)

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