Week of 13 July 2020
Commodity-driven deforestation is linked to climate change and poses risks to investors and companies, as well as to broader society; meeting climate targets requires addressing supply chain deforestation and there are a number of areas related to targets, policy, supply chain implementation and disclosure that investors should push companies on (Ceres)
Sustainability non-profit organization Ceres launched its Investor Guide to Deforestation and Climate Change, providing investors with “a framework to understand and engage on deforestation-driven climate risks across their portfolios.” Ceres underscores the critical link between ending commodity-driven deforestation and curbing climate change, citing the International Panel on Climate Change’s (IPCC) Special Report on Climate Change and Land’s finding that 23% of global greenhouse gas (GHG) emissions are released by human land use activities, in particular agriculture.
Deforestation in tropical regions is one of the largest sources of GHG emissions as “vast swaths of tropical forest are being cleared every day to make way for commodities such as beef, palm oil and soybeans.” Ceres delves into commodities that are unsustainably sourced from at-risk regions—such as beef and soybean production in South America and palm oil in Asia, and notes that company disclosures often fail to include suppliers beyond tier one suppliers, where the most exposure to deforestation risks typically is.
Source: Ceres, The Investor Guide to Deforestation and Climate Change (June 2020)
The report highlights the financially material risks of commodity-driven deforestation for investors and companies, including transition risk, risk to physical assets, regulatory costs, legal liability and reputational risk, among others. The report also points to other significant risks of deforestation that, while not as readily quantifiable, are still crucial for the bottom line. These include risks to the environment and to people, who depend on healthy ecosystems as a matter of well-being, development and survival. These are summed up by the below excerpt from the report:
Source: Ceres, The Investor Guide to Deforestation and Climate Change (June 2020)
Ceres provides recommendations for investors to both limit their exposure to commodity-driven deforestation and to proactively seek to invest in companies that prioritize sustainable agricultural production and responsible sourcing:
- Identify portfolio-level investment in high-risk commodities, which can occur across sectors—from palm oil, soybeans, beef and timber, to leather, rubber, wood pulp for paper, cocoa and coffee.
- Assess investment in geographies at high risk of commodity-driven deforestation. These include emerging economies well-known to have significant deforestation (especially Brazil, Indonesia and Malaysia). However, this also extends to companies that source commodities from high-risk geographies, meaning that “downstream manufacturers in all markets are exposed to deforestation through these supply chain emissions.”
- Prioritize engagement with investee companies based on where they source commodities, their own climate disclosures and how they seek to mitigate their exposure to deforestation.
- Use their leverage as shareholders to strategically and meaningfully engage with companies on their contribution to deforestation.
In particular:
- Investors should ask companies to set and implement ambitious science-based GHG reduction targets, which should cover a company’s full scope of emissions and include emissions from land use change (including supply chain deforestation).
- Companies should have no-deforestation policies that are paired with time-bound commitments.
- Implementation of such policies should include the tracing of raw materials throughout supply chains, monitoring and verifying supplier compliance, developing a protocol for suppliers that are not complying with the deforestation policy, and providing incentives to producers to protect forests.
- Companies should also be asked to publicly and regularly disclose quantifiable progress to eliminate deforestation from their supply chains and quantifiable progress on GHG emissions.
Ceres provides a framework for engagement, with the below figure summarizing the changes that investors should seek to effect through their engagement:
Source: Ceres, The Investor Guide to Deforestation and Climate Change (June 2020)
Source: Ceres, The Investor Guide to Deforestation and Climate Change (June 2020)