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Amazon fires, global deforestation
and what we are doing about it

Background

The fires in the Amazon have rightfully captured a lot of attention given the global significance of the biome1. However, it is important to recognise that deforestation is a global crisis. Countries like Cambodia, Malaysia and Paraguay have lost more than 10% of their forests in just six years. Globally, we have lost 9% of forest cover since 2000. There are many reasons for tree cover loss with the primary drivers of permanent deforestation being agriculture and urbanisation (agriculture is a 4,000 times larger contributor than urbanisation).

Global tree cover loss

Source: Global Forest Watch. “Tree Cover Loss Globally”. Accessed on 3rd October 2019 from www.globalforestwatch.org

Deforestation, like many issues today, is complex and often painted as competing with objectives of economic development and feeding a growing population.

However, the impact of deforestation on issues like the extinction crisis (with 75% of the terrestrial environment “severely altered” by human actions2) and climate change (around 13% of global emissions) makes this a Faustian bargain. Both economic development and food security are ultimately compromised if the causes of the climate and biodiversity crises are not addressed.

It doesn’t need to be this way

Between 2000 and 2010 Brazil achieved a 70% reduction from the 1960-1999 average in deforestation. Looking only at tree cover loss it was closer to 50%. This was an extraordinary conservation success story with the success being attributed to many players: “The factors responsible for this accomplishment include government policies and enforcement actions by prosecutors, on both the federal and state levels; incentives created by Norway’s pledge of up to $1 billion in results-based compensation; the concerted pressure exerted by non-government organizations (NGOs) on the government and the soy and beef industries; and the positive response by those industries, resulting in the 2006 soy and 2009 beef moratoria.”3

The role of companies

While governments are clearly very important, zero deforestation commitments and supporting actions from companies are critical for turning the issue around. Unfortunately, despite the seriousness of the issues linked to deforestation the New York Declaration on Forests (NYDF) assessment report found that corporate commitments had slowed.4

They also found that while “Commitments cover large shares of production in international palm oil markets (65%) as well as the largest paper and pulp players operating in tropical regions (70%), the shares are low in the global soy and beef markets.”

More important than commitments is action. A recent CERES report found that while there were many commitments, there was less tangible action and progress, with only 21 companies out of more than 800 disclosing quantitative indicators of progress.5

A CDP report similarly found governance gaps and a lack of disclosure, with 70% of companies with a high impact on forests failing to disclose. Those that did disclose reported over US$30bn in losses due to deforestation risks.6

Companyfindings Png

Source: CERES. “Out on a limb: The State of Corporate No-Deforestation Commitments and Reporting Indicators that Count” (June 2019)

Deforestation is a business issue

Deforestation creates business risks. The potential for regulatory and community changes threaten companies with compromised supply chains, including sudden cost increases, unavailability of key product inputs and delays. Reputational harm, particularly through consumer boycotts are a real threat in an age of rapidly transmitted social media controversies. We have seen some brands react quickly to cease purchases of leather from Brazil in response to the fires.

As investors, we are not forest experts and cannot claim to have the solutions, but we do try to understand risk. The deforestation trends suggest that the current approach is not working and something different needs to be done.

What does this mean for investing?

For the Stewart Investors Sustainable Fund Group, sustainable sourcing and environmental stewardship are critical considerations in our company analysis. We have never owned livestock, big agricultural or trading companies due to the quality of franchise, quality of management and sustainability head winds.7 However, the complexity and opacity of soft commodity8 supply chains make complete avoidance of deforestation very difficult, and near impossible for global food companies.

Global consumer companies such as Henkel, Unilever, Jeronimo Martins, Marico, Kikkoman and Vitasoy, all buy and use agricultural commodities. Due to the complexity and limited traceability in soft commodity markets, particularly for soy, it is likely Brazilian sourced soft commodities linked to deforestation exist in these companies’ supply chains.

For example Jeronimo Martins, a Portuguese company operating in food distribution and specialised retail, notes that despite having a strong sustainable sourcing framework, 9,366 tonnes of soy, almost two thirds of the total purchased, came from countries at risk of deforestation, with only 20% of this soy being certified sustainable. Most companies do not disclose this information nor have the sustainability ethos of Jeronimo Martins.

In various assessments including Forest 500, the CERES report mentioned above and our commissioned research, Henkel and Unilever are consistently amongst the best-rated companies globally for deforestation commitments and actions. Jeronimo Martins and Vitasoy have strong and evolving sustainable sourcing strategies which explicitly call out deforestation. Marico has a responsible sourcing programme which is focused on farming communities but does not explicitly highlight deforestation. While Marico does sell soy sauce in Indonesia, it is mostly exposed to coconuts and we expect total exposure to commodities linked to deforestation to be limited. Kikkoman provides limited disclosure on their sourcing practices.

Furthermore, companies such as Novozymes are producing microbes that help increase soft commodity yields and reduce the need for chemical herbicides and pesticides.

What are we doing from here?
Our plan in response to the most recent Amazon fires is to:

  1. Join the PRI’s (Principles of Responsible Investment) joint Investor statement on deforestation and forest fires in the Amazon.
  2. Continue our support of CDP Forests.
  3. Write to targeted companies we are invested with who have an exposure and potential influence on deforestation.
  4. Include notes in our company engagement system to prompt us to follow up on the issues in our future face-to-face meetings.
  5. Write to our clients to ask them to join with us in these activities.

We have also commissioned our own research on Palm Oil and Soy, to understand better the issues faced and shape our engagement on these soft commodities.

What we are asking of companies

In our letter we refer to the CERES report, “Out On a Limb: The State of Corporate No-Deforestation Commitments & Reporting Indicators that Count”, which recommends three measures from the CDP Forest questionnaire investors should be asking companies to disclose in support of their commitments:

  • Percent of total production/ consumption covered by commitment.
  • Percent of total production/ consumption volume traceable; point to which commodity is traceable.
  • Whether the company specify any sustainable production/procurement standards for its disclosed commodity(ies), other than third-party certification? And to indicate the percentage of production/ consumption covered and if it monitors supplier compliance with these standards.

In addition, we ask companies to show greater ambition in terms of deforestation, engage with the large trading companies who dominate deforestation-linked soft commodities, and to review industry group memberships to ensure alignment on deforestation commitments.

Conclusion

Like many of the sustainability challenges we face, deforestation is complex, interconnected with other issues and not something any organisation can solve on their own. However, the 70% reduction in land use change achieved in Brazil in the early 2000s shows what is possible with concerted effort. The backward steps since then shows more needs to be done and different approaches will be needed. Investors have a key role to play. For our part, we will continue to encourage the companies we invest in, our clients and the broader industry to join the movement for a zero-deforestation future.

1 A biome is a community of plants and animals

2 Source: Sustainable Development Goals. UN Report: Nature’s Dangerous Decline
‘Unprecedented’; Species Extinction Rates ‘Accelerating’ (May 2019)

3 Source: Boucher, D. How Brazil has dramatically reduced tropical deforestation. (March 2014)

4 Source: https://forestdeclaration.org/...

5 Source: CERES. “Out on a Limb: The State of Corporate No-Deforestation Commitments and Reporting Indicators that Count” (June 2019)

6 Source: CDP. The Money Trees: The role of corporate action in the fight against deforestation (2019)

7 Sustainability head winds are conditions which can slow company growth.

8 A soft commodity is a commodity such as sugar, corn, soy, wheat. They are grown rather than mined.

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