Even investors who continued to calibrate climate risk in the face of the current health and social crises have not always included deforestation on their climate risk lists. Yet a recently published report from the sustainability nonprofit Ceres draws on research supported by the Gordon and Betty Moore Foundation through its Conservation and Markets Initiative, to forge a timely link between the staggering volumes of greenhouse gas emissions released by the clearing and burning of tropical forests and the world’s warming.
“Even as the COVID-19 pandemic throttled the global economy,” observe the authors of The Investor Guide to Deforestation and Climate Change “vast swaths of tropical forests were being razed for the production of agricultural commodities such as soybeans, palm oil and beef that eventually made their way to grocery shelves worldwide. Protecting and restoring forests and other natural ecosystems is second only to eliminating fossil fuel use as a solution to climate change.”
That’s why it’s more essential than ever that institutional investors vigorously engage with companies that produce agricultural and forest commodities, from food and consumer products to auto components, textiles and apparel, to eliminate deforestation from their supply chains. In light of the wide-ranging material impacts associated with forest loss, the report encourages investors to recognize and act on deforestation with the same rigor and urgency they bring to engaging with fossil fuel companies to reduce their carbon footprints.
In addition to helping investors get a better grip on the drivers of deforestation risk, the guide is designed to help them prioritize company engagements based on industries, geographies and sourcing patterns. It also outlines key expectations that investors should look for when assessing the quality of corporate climate and deforestation commitments and includes sample questions to ask management to obtain more granular detail about those commitments. Importantly, the guide provides a series of concrete steps investors can take to more rigorously address deforestation risk.
The guide describes how companies that embed deforestation in their supply chains face material financial risks if they fail to adapt to changes in laws, regulations, consumer behavior and market systems as part of the transition to a low-carbon economy. Companies also face risks associated with the projected physical effects of climate change, including increasingly extreme droughts, flooding and fires that may reduce yields and affect input costs and volumes.
Deforestation exacerbates the physical risk from climate change by changing local precipitation patterns in ways that impact agricultural resilience. In some parts of the Amazon, forests are drying out as rainy seasons are delayed for up to two weeks due to rampant deforestation.
Beyond climate change, other salient issues stemming from deforestation pose significant financial material risks that can affect a company’s bottom line. Companies whose products are not sustainably sourced are exposed to potential regulatory action, loss of market access and loss of customers in the short term. They also face supply chain disruptions and increased production costs in the long term.
The report details how a growing group of investors, recognizing the wide-ranging risks inherent in deforestation, are demanding action to mitigate them. In September 2019, 230 institutional investors with more than $16 trillion in assets under management called on companies to implement anti-deforestation policies for all of their supply chains, to set up monitoring systems to ensure compliance and to report every year on their progress.
The report urges investors to prioritize companies for engagement in three ways:
- Analyze companies’ sourcing patterns to identify where they might be sourcing commodities from countries with high emissions from deforestation
- Review companies’ climate disclosures for information on deforestation-driven emissions
- Evaluate how the company is mitigating its deforestation exposure
After identifying priority companies for engagement, investors can use the report’s framework to assess company commitments related to deforestation and climate change. Among the policies and actions investors should ask about:
- Setting ambitious GHG reductions targets aligned with the science-based Paris climate goals, aimed at eliminating GHG emissions from deforestation.
- Putting a climate action plan in place, with implementation strategies to address emissions from deforestation, including a no-deforestation policy that applies to all commodities and extends to direct and indirect suppliers. These policies should be paired with time-bound commitments to eliminate deforestation from their supply chains, including monitoring, evaluation and incentives.
- Providing annual public disclosures of a company’s quantitative progress on reducing GHG emissions from deforestation across its supply chains.
The report makes the case that the time has come for investors to engage with companies to better manage their current and emerging material risks from deforestation. In the short and long term, taking the steps outlined in the report will enhance the long-term positive impacts of their investments.
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