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New Report Puts Spotlight on Deforestation Risks in Supply Chains

A new report by CDP, formerly the Carbon Disclosure Project, shows growing risk to investment returns as companies are not addressing deforestation risks in their commodities supply chains. Over USD 900 billion of annual turnover is dependent on commodities linked to deforestation, including soy, palm oil, cattle and timber, making financial institutions increasingly concerned about business risks.

Launched on 21 November at the London Stock Exchange, the “From Risk to Revenue” report says companies need to improve their risk assessment, ensure transparency and take urgent measures to achieve deforestation-free commodity supply chains. The report also warns that a lack of engagement, risk disclosure and accountability on deforestation is putting millions of dollars of investments at risk, calling on investors to engage with companies and demand more transparency.

Commenting on the findings of the report, Leslie Samuelrich, President, Green Century Capital, said: “Deforestation poses a number of material concerns to investors, including restricted market access, competitive disadvantage, and reputational damage. To counter this risk, investors must demand rigorous disclosure from companies.”

The CDP report notes that 15% of all greenhouse gas emissions are directly caused by deforestation and that up to 33% of climate mitigation efforts depend on persevering forests. Tackling deforestation, therefore, is key to addressing climate change as forests play a crucial role in limiting the rise of global average temperatures – the central goal of the Paris Climate Change Agreement.

Companies that are responsible for deforestation by producing or consuming forest-risk commodities are increasingly facing physical, regulator and reputational risks.

87% of the companies reporting to CDP recognize that deforestation threatens to reduce their profits and increase risks, while around 32% have already experienced impacts from forest-risk commodities in the form of corporate losses and share price falls. For instance, Empresas CMPC, a Chilean pulp and paper company, reported that fires affecting large areas of forests in its home market cost it USD 41 million in 2016.

Yet, only 13% of companies have announced a time-bound zero deforestation commitment so far. Nearly four out of five companies failed to disclose in the CDP survey how they are exposed to risks from deforestation.

Making a clear business case for investor action, the report also highlights new business opportunities emerging for those acting against deforestation.  87% of companies see opportunities from the production, marketing or sourcing of deforestation free commodities, such as more demand for sustainable materials, or increased brand value.

By developing sustainable sources of deforestation-free commodities, new business models can be launched to generate attractive, stable long-term returns. For example, with a commitment to zero-deforestation by 2020, L’Oréal is sourcing 100% of its palm oil derivatives from sources certified by the Roundtable on Sustainable Palm Oil. Swedish company Tetra Pak has introduced a procurement policy to ensure all paperboard comes from forests with permanent forest cover.

However, corporate action to halt deforestation has not yet reached a tipping point.