Up to US$906 billion in company turnover depends on commodities that drive the majority of tropical deforestation globally, says environmental non-profit CDP.
5 December, 2016: Global companies—including Colgate Palmolive, L'Oréal, McDonald’s Corporation and Marks & Spencer—report in a new study released today that, on average, nearly a quarter (24%) of their revenues depend upon four deforestation-linked commodities: cattle products, palm oil, soy and timber products. As much as US$906 billion in annual turnover could be at risk. The report by CDP reveals a unique market-wide snapshot of how vulnerable companies are to deforestation risks.
The findings feature in CDP’s new report “Revenue at risk: Why addressing deforestation is critical to business success”, produced on behalf of 365 investors representing US$22 trillion. The report analyzes data disclosed by 187 companies this year on their deforestation risk management strategies. Two of the most important global commodity traders, Archer Daniels Midland and Bunge, are among the major firms who disclosed deforestation data for the first time through CDP.
The report finds that despite the fact that a significant share of income is derived from commodities linked to deforestation, fewer than half (42%) of companies have evaluated how the availability or quality of these commodities will impact their growth strategy over the next five or more years. This suggests that companies are overlooking potential business risks linked to deforestation. Risks include impacts arising from the physical effects of climate change on the quality, availability and prices of commodities; tightening regulation; and brand damage from increasing media and civil society scrutiny of commodity-sourcing practices.
Already 81% of agricultural producers—the companies who sit at the top of global commodity supply chains—say they have experienced deforestation-linked impacts in the past five years that have led to substantive changes to their business. Marfrig Global Foods say drought conditions have resulted in higher operating costs and reduced beef production in the Brazilian industry. And Wilmar International report impacts on brand value as customers become more sophisticated in their demands for sustainable products that are traceable and deforestation-free.
These companies produce the commodities that are fed down global supply chains and end up in products ranging from ice cream to toothpaste, footballs and lipstick.
“Companies need to address the sustainability of products that drive deforestation quite simply to protect their balance sheets”, says Katie McCoy, head of forests at CDP. “Supply chains are like rows of dominoes: if unsustainable commodities enter the top of a supply chain, the effects will cascade throughout. Failing to address deforestation will have knock-on reputational impacts, manifesting themselves as consumer boycotts, community opposition, and increased regulatory scrutiny. Business growth is at risk.”
Across the four commodities, a high percentage of reporting companies (72%) say they are confident that they will be able to source these supplies securely and sustainably in the future. The report says this confidence may be misplaced because not only do the majority of companies not evaluate the supply or quality of deforestation-linked commodities over the next five or more years, but:
- Fewer than half (44%) of manufacturers and retailers with procurement standards monitor compliance with these standards and audit suppliers across commodities;
- Only one in five assess deforestation-risks beyond a six-year horizon across commodities; and
- On average, only 30% of manufacturers and retailers can trace these commodities back to the point of origin.
The financial risks to companies can impact investor portfolios and pressure is mounting on both investors and companies to act on deforestation. More investors have joined the call for companies
to disclose: The number of investors that are signatories to CDP’s forests program has risen by a fifth since 2015, with new signatories including UBS and Morgan Stanley. There are now 365 institutional investors requesting corporate deforestation data through CDP, up from 184 in 2013.
The 2016 Forest 500, a new report from the UK-based Global Canopy Programme that was also published today, says a small but incrementally growing number of financial institutions are introducing policies on deforestation. Nearly a fifth (18%) of the 150 investors and lenders analyzed in its sample now have a sustainable investment or lending policy that promotes the protection of intact, primary, or high conservation value forests.
Paul Simpson, chief executive officer at CDP comments: “More than ever before, deforestation needs to be firmly on the boardroom agenda. With a clear financial dependency on these forest risk commodities, growing investor expectations, a changing regulatory environment, and the rise of consumer campaigns impacting brand reputations, companies’ deforestation actions are under intense scrutiny. Long-term profitability is at stake.”
Companies are recognizing benefits in scaling-up their forest-protection efforts. Unilever Plc and Marks & Spencer are working to prioritize commodity sourcing from areas that are pursuing comprehensive forest-climate programs. Unilever says this will allow them to improve supply chain security and make monitoring and verifying environmental impacts more straightforward. German consumer goods giant Henkel AG is training key smallholders in order to improve livelihoods and ensure sufficient volumes of sustainable palm oil are available on the market. And Colgate-Palmolive—who is working with suppliers on responsible sourcing practices—also identifies opportunities to increase the capacity of sustainable commodity markets.
For media information please contact:
CDP: Kharunya Paramaguru // [email protected] // +44 (0) 7983613577
Notes to editors
In total 155 companies analyzed in the report provided data on the proportion of their revenues linked to one or more of the commodities. The US$906 billion figure has been calculated by looking at the percentage of revenues publicly listed companies say is dependent on the commodities they reported on.
CDP's forests program acts on behalf of 365 signatory investors, with US$22 trillion in assets, who wish to understand how companies are addressing their exposure to deforestation risks. This year 201 companies disclosed data through CDP in response to this investor-backed request for information – a 10% increase since 2015. A full index of companies who provided data is available in the appendix of the report. It also lists the 650 companies who failed to disclose deforestation-risk data through CDP this year.
All requested companies that responded prior to July 1, 2016 have been scored on their disclosed efforts to address deforestation risks and opportunities. Scoring was undertaken by leading sustainability solutions provider South Pole Group. The scores range from “A” for leadership to “D” for disclosure. Companies who failed to provide sufficient information to CDP in order for us to evaluate performance receive an “F”. It does not indicate a failure in terms of environmental stewardship and does not indicate the company does not provide environmental information through other sources, but only though CDP reports. More details about CDP’s deforestation scoring methodology can be found here.