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:
In particular:
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)
“Climate change is considered a systemic risk that poses wide-ranging vulnerabilities to businesses in all sectors. It also has the potential to trigger severe economic instability and collapses of entire industries. As a key driver of climate change, deforestation exacerbates this risk. Therefore, it is in the clear financial interest of investors – consistent with their fiduciary duty—to effectively manage climate-related risks by engaging with companies with deforestation exposure.”
Source: Ceres, The Investor Guide to Deforestation and Climate Change (June 2020)