Deforestation Puts Almost $1 Trillion in Assets at Risks Worldwide

According to CDP, the risks from unchecked deforestation are mounting worldwide. In a report issued yesterday, the NGO said that impacts from energy consumption, and resulting carbon emissions, are not the only reason why companies should be worried about how climate change could affect their portfolios. In addition, the role that forests play in helping to mitigate climate change should also be on the radar of companies – especially those that have supply chains reliant on commodities like soy, timber, palm oil and cattle products.

Deforestation, says CDP, is leaving as much as $941 billion in assets worldwide at risk as they are linked to commodities tied to deforestation.

According to the CDP survey, 87 percent of the companies said deforestation put their business portfolio at risk, and almost one-third replied that they were already experiencing impacts from those risks.

The overarching problem from CDP’s point of view is only 13 percent of the 201 companies that responded to the organization’s survey said they had implemented zero-deforestation commitments. Furthermore, 77 percent of the companies CDP contacted did not reply to the survey, leaving investors unable to assess those businesses’ portfolios.

But as is the case with the burning of fossil fuels and their emissions, CDP insists its survey is as much about creating opportunities as it is designed to help spot potential weaknesses. Companies looking to decrease their carbon footprint, for example, can invest in clean energy or energy efficient technologies – and as a result, they can harvest new growth opportunities or hedge their long-term costs in case energy prices become volatile once again.

In the case of deforestation risks, CDP says investors should have such information to identify both challenges and opportunities. As 73 percent of companies told CDP that they have some kind of commitment to reduce or eliminate deforestation from their supply chains, a market is emerging for deforestation-free commodities. The Tropical Forest Alliance 2020, for example, suggests these investment opportunities could amount to as much as US$200 billion annually for deforestation-free investments and financing by 2020.

CDP highlights McDonald’s and Asia Pulp and Paper (APP) as companies that have made clear commitments to eradicating deforestation from their supply chains. In addition, the global food giant Mars Inc. established timelines for how it will revamp sourcing for timber, palm oil, soy and cattle products.

The solution, says CDP, is to move beyond promises for transparency, traceability and certification programs. Supplier engagement, therefore, is key to removing deforestation’s links from a company’s goods or services. While 84 percent of the companies surveyed said they work with their suppliers on these challenges, CDP sees little evidence that such engagements is having meaningful impact. After all, only 3 percent of the companies in CDP’s study said they offered any financial support to their suppliers.

CDP urges investors to launch a four-step program that it believes can push companies to remove deforestation from their supply chains. The process includes the drafting of a deforestation policy in the first place; request such disclosures from the companies in which they have invested; understand the risks deforestation presents as well as opportunities; and engage with a company’s leadership so that it can fully understand the long-term effects that deforestation can leave on a company’s portfolio – and reputation, too.

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