Protecting forests has become a pre-requisite for a stable climate and a stable economy. As we launch our 2017 forests report, the case for action has never been clearer.
Acting as the ‘lungs of the planet’, the world’s forests provide essential ecosystem services, ensure the livelihoods of billions of people and form the foundation of countless supply chains. They are central to the global economy.
When it comes to climate change, forests are a key piece of the puzzle. Deforestation is a major contributor, causing between 10-15% of all greenhouse gas emissions, but forests themselves are also part of the solution, given their natural ability to capture carbon. As such, addressing deforestation is fundamental to tackling climate change, and it is estimated that we could achieve up to one third of the carbon mitigation needed to keep temperature rises in check by halting deforestation entirely.
Most companies are linked to deforestation through their supply chain exposure to forest-risk commodities such as timber, cattle, palm oil and soy. This exposure is increasing, as up to US$941 billion of turnover in publicly listed companies is now dependent on these commodities, rising from US$906 billion last year.
This exposure is proving to be risky business. 87% of companies foresee at least one risk associated with the production or sourcing of these commodities, and these risks are not distant, with a third of companies reporting that they are already experiencing impacts. Ultimately, these risks are borne by investors, as they have the potential to drive up costs, reduce revenue and impact company valuation and capacity to pay debts.
This is why a growing number of investors (380, up from 184 in 2013) are now calling for transparency on this issue, through the CDP forests program. Yet despite this rising concern, there is a lack of transparency and engagement from companies on the issue. Out of the 838 companies approached on behalf of investors this year, nearly four out of five failed to respond - leaving investors in the dark about the deforestation risks they may face.
Companies have an obligation to be transparent about financially material risks, so that investors can responsibly invest their assets, manage risk, and capitalize on potential market opportunities.
On the bright side, 87% of responding companies now see opportunities from addressing deforestation in their organisation and supply chain. Sustainable commodities often command a price premium and improve brand value, and there is a growing market for certified deforestation-free commodities. Indeed, the Tropical Forest Alliance 2020 suggests the investment opportunity for deforestation-free investment and financing will total around US$200 billion annually by 2020.
A handful of companies are forging ahead. This year, Brambles, L’Oréal, SCA, Tetra Pak, Unilever, and UPM-Kymmene achieved the top score and have been named as pioneers in tackling deforestation as part of the CDP A List 2017. These companies are leading the way, and showing that sustainability can go hand in hand with long-term profitability.
Investors are uniquely positioned to increase this kind of corporate action. As we launch this report, we are calling on investors to action a roadmap to engage with the companies they own to identify risks and opportunities related to deforestation, in order to protect their portfolios, and generate positive social and environmental outcomes.
Action on climate change and water security is now established in the corporate world. Deforestation is equally important, but more work needs to be done to drive it up the boardroom agenda. Investors are key to bridging this gap.