Deforestation and risks to business

Our key takeaway: Forests are critical to the global economy with an estimated value of at least US$150 trillion. Yet deforestation is still happening at an unprecedented rate with over 15 million football fields of trees cut down in tropical regions last year. This seems to be happening despite a record number of companies disclosing their progress towards eradicating deforestation in their supply chains, which has increased by almost 300% since 2017. Why is this happening? According to CDP, companies do not prioritise eradicating deforestation in their supply chains and do not perceive the environmental challenge as one that encompasses all nature- and climate-related risks such as climate change, water scarcity, and biodiversity loss. Companies address these risks in siloes rather than seeing them as intricately connected. Thomas Maddox, Director of Forests and Land at CDP, states that “[a]ddressing the environmental challenge requires a holistic approach: a comprehensive understanding of all the environmental impacts, dependencies and resulting risks and opportunities.” Not doing so leaves companies exposed to enormous financial risks and missing out on significant opportunities and potential gains. What can companies do? Companies can begin by implementing governance, strategies and implementation measures to weave no-deforestation into all stages of the business. This includes allocating board-level oversight and competence of forest-related issues; conducting comprehensive forest-related risk assessments including mapping of suppliers; and implementing management systems to monitor and verify compliance to their no-deforestation commitments. These actions should be grounded in stakeholder engagement with smallholders, direct suppliers, and suppliers beyond tier one. Notably, companies should ensure that they are driving projects aimed at ecosystem restoration in addition to addressing the problem - deforestation. The latter takes priority. ‍

CDP released The Forest Transition: from Risk to Resilience - Global Forests Report 2023 (July 2023):

• Why are forests important to businesses? The report highlights how forests are “at the heart of our economy”, with its total value estimated to be “at least US$150 trillion—nearly double the value of global stock markets.” There are some industries such as forestry, agriculture or food that directly depend on forests “through direct extraction of resources and the ecosystem services they provide.” There are also other industries such as chemicals and retail that indirectly depend on forests throughout their supply chains. Due to this dependency, deforestation poses risks for businesses and financial institutions through: a) “the dependency of business on nature”; b) “fallout of business impacts on nature (losing customers or entire markets, costly legal action and adverse regulatory changes due to direct and indirect impacts of business activities on nature)”; and c) through the wider impacts of nature loss on society.” On the latter, nature-related systemic risks such as deforestation have “modest tipping points that combine to produce large failures” which can prevent systems from recovering and devastatingly impact companies and the financial sector that relies on them.
  

• Forest loss remains at an unprecedented rate: Despite the growing recognition that forests are critical to the resilience of economies and societies, the report finds that 11 million hectares of trees - or over 15 million football fields of trees - were lost in tropical regions last year. This is coupled with very few companies claiming to be on track to removing deforestation from their supply chains. For instance, out of the companies reviewed: 1) only 12% of companies “monitor their deforestation/conversion footprint of their full consumption in their supply chain”; 2) Only 31% of companies “have board-level oversight and competence of forest-related issues”; and 3) Only 3% of companies are “conducting comprehensive forest-related risk assessments including mapping and reporting locations of operations and suppliers.” The lack of business action on eradicating deforestation presents significant financial risks but also opportunities. According to the report, “[o]ver US$58 billion in forest-related opportunities were identified by 231 companies in 2022” and this is only a fraction of potential gains.
  

• What can companies do? Based on CDP’s Forests KPIs, we can draw actions companies can take to address deforestation in their supply chains through their governance, strategies and implementation measures. Measures include: 1) Establishing board-level oversight of forest-related issues, including “management-level responsibility for both assessing and managing forests-related risks and opportunities”; 2) Publishing internal and external no-deforestation policies with “social elements, remediation and restoration that is time bound” and which “covers 100% of production/consumption and applies to all relevant operations”; 3) Integrating “forest-related issues into all parts of their long-term strategic business plans”; 4) Conducting “a comprehensive forest-related risk assessment, map their entire value chain and report locations of operations and suppliers”; 5) Implementing a “system to control, monitor, or verify compliance and this system covers all relevant direct operations or supply chains and report more than 90% of total volume in compliance”; and 6) “Recognising the central role deforestation plays in climate and nature-related risks and broadening strategies to address it in transition plans.”