Q. From an investor’s perspective, what is the value of businesses making strong commitments to tackling deforestation?
A. As long-term investors, climate-related effects will structurally and systematically affect the markets in which we invest and therefore the underlying value of our portfolios over time. Climate change and its drivers, such as deforestation, must therefore take centre stage for companies to ensure that investment decisions taken today will be relevant and value creative in the future.
Forests are an important method of carbon capture and storage and key in perpetuating the water cycle. For a heavily diversified universal asset owner such as a pension fund which is focused on long-term wealth creation, destruction of such a valuable ecosystem with no comparable alternative makes no sense.
One company externalising its costs (for example by not paying for the value it is destroying through deforestation) simply means that the costs will manifest themselves elsewhere and those short-term benefits to one are felt as costs elsewhere. These costs are likely to be borne by wider society so they affect adversely the context in which all companies do business. This is not conducive to overall wealth creation and presents a significant portfolio risk.
We need companies to be aware of and prepared for regulatory changes to tackle unsustainable practices. For instance, a clamp-down on illegal deforestation or a sudden policy change on permits or licences means that companies will face significant risks to security of supply and input costs if they are not appropriately prepared. In addition, regulation that forces companies to internalise costs that they have previously been externalising, for example through trading schemes, means that unprepared companies will be exposed to increased margin and competition pressure. Both of these present potential material impacts on business operations and corporate strategy.
There is also reputational risk companies should address. Consumers and companies alike are becoming more and more aware of the damage caused by unsustainable practices and are choosing products which are sourced or produced in a sustainable way to reflect this. This is fuelled by activist NGOs and negative press coverage which further create risk to the top line.
For all of these reasons, we press companies to make strong commitments to tackle deforestation, eliminating unsustainable forestry practices from their supply chains, and report on progress through CDP’s forests program.
"[CDP’s forests program] is also home to a wealth of knowledge and expertise on sector and commodity issues, which we greatly appreciate its willingness to share"
Freddie Woolfe, Head of UK Engagement, Hermes Investment Management
Q. What is it that you are looking for companies to demonstrate?
A.We look for companies to demonstrate an awareness of deforestation risk within their supply chains and to set targets to eliminate it. They should also demonstrate preparedness for related regulatory risks, including those that might cause disruption to supply chains or increase input costs. Lastly we expect them to understand the related reputational risks and encourage them where relevant to engage with the consumer on the sustainability of their products.
Q. How does CDP’s forests program support your investment objectives and engagement with companies?
A. CDP’s forests program assists us in understanding how companies perform against their peers and what we can expect in best practice. It is also home to a wealth of knowledge and expertise on sector and commodity issues, which we greatly appreciate its willingness to share.