Deforestation: understanding the risks to investors

Forests are vitally important to world ecosystems and the global economy. Their preservation is central to the fight against climate change; they deliver a huge range of systemic services and generate significant economic value, underpinning the supply chains of thousands of companies worldwide.

Forest next to land what has been deforested - Rathbone Greenbank

Kate Elliot, Senior Ethical Researcher

Forests have an intrinsic social and cultural value that isn’t easy to quantify in economic terms. What can investors do to ensure the preservation of such far-reaching benefits for current and future generations?

The Carbon Disclosure Project’s (CDP) 2017 Global Forests Report estimates that 10-15% of all greenhouse gas emissions are directly caused by deforestation, while around a third of climate mitigation efforts depend on forest preservation. A failure to combat deforestation therefore makes it harder to deliver the climate reduction targets agreed in the 2015 Paris Agreement. CDP also estimates that around $941 billion of turnover generated by listed companies globally is currently dependent on commodities linked to deforestation - and could potentially be at risk.

One of the chief barriers to mitigation and greater investor action on deforestation is a lack of quality information regarding risk. Forest risk commodities - timber, palm oil, soy and cattle products among others - have clear and well documented links to deforestation, but it’s often difficult to identify the degree to which companies and their supply chains are exposed to these. Relatively few companies provide meaningful information on their mitigation policies and systems concerning deforestation or their progress in rerouting supply chains towards more sustainable sources.

CDP’s Forests Program (formerly the Forest Footprint Disclosure Project) is one initiative helping to bridge this information gap. It encourages companies to report definitively on their exposure to forest risk commodities along with their efforts to combat deforestation. It also works with investors to provide them with the necessary data to conduct informed and productive dialogue with investee companies.

Rathbone Greenbank has been a supporter of CDP’s activity on this issue since 2009 and was invited to speak at the launch of its 2017 Global Forests Report. While it’s encouraging to note that the total number of companies disclosing to the initiative has grown from 35 in its first year in 2009 to 272 in 2017, less than a quarter of the
1,103 companies approached last year by CPD chose to respond.

There is, however, some evidence of good practice and a small number of companies are demonstrating leadership in this regard. Unilever stood out as the sole recipient of an ‘A’ rating for its disclosure efforts across all four of the main forest risk commodities alongside its development of origin maps for its entire beef supply chain.

These efforts are commendable, but our work will continue to promote greater awareness, transparency and improved performance regarding deforestation and associated environmental risks and opportunities.

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