Investors seeking to link the UN Sustainable Development Goals to their investment strategies have an opportunity to help reduce tropical deforestation associated with agricultural commodities such as palm oil, cattle or soy.
Mitigating exposure to deforestation risk in investment portfolios relates directly to SDG15 (protecting terrestrial ecosystems), SDG13 (climate action) and SDG6 (water availability and quality).
Here’s how. Agricultural commodities production is a key driver of tropical deforestation; it produces 19 per cent to 29 per cent of global greenhouse-gas emissions. Companies that source agricultural commodities from suppliers that illegally destroy forests face material financial risks, such as reputational damage, regulatory action and loss of market access.
Palm oil giant IOI Group, for example, lost dozens of buyers when its certification from the Roundtable on Sustainable Palm Oil (RSPO) was suspended for compliance failures. As a consequence, the trader’s share price dropped 18 per cent, and its reputation was tarnished.
By engaging with portfolio companies such as IOI Group that have high exposure to palm oil deforestation risks, investors can mitigate portfolio risk while reducing the environmental impacts of deforestation and helping to achieve the SDGs.
But time is of the essence, as was laid bare at the recent Tropical Forest Alliance 2020 meeting in Ghana. Global tree loss went up 50 per cent, year on year, in 2016, reaching nearly 30 million hectares of forest land – an area a little larger than New Zealand. Much of this tree loss was associated with the clearing or burning of forests for commodities like palm oil, which produced more than 1 billion metric tons of greenhouse gas emissions in Indonesia alone.
If we are to hold global warming to no more than 2°C, companies and their investors with exposure to deforestation must mitigate this deforestation. Doing so offers the greatest near-term potential for reducing greenhouse-gas emissions and achieving the Paris Agreement’s 2°C goal.
Here are four steps investors can take to mitigate deforestation risk, particularly associated with palm oil production, while doing their part to meet the SDGs:
Palm oil is the most consumed vegetable oil in the world, with a market value expected to reach $100 billion by 2021. Its demand has tripled over the last 15 years, making it one of the top four commodities contributing to deforestation (alongside cattle, soya and timber). Despite commitments from numerous producers, traders and buyers to produce and consume sustainable palm oil, unsustainable practices persist.
Palm oil expansion is greatest in Indonesia and Malaysia, where clearing for plantations is the leading cause of rainforest destruction, carbon dioxide emissions and human rights challenges. The surge in production is likely to continue, with demand expected to reach 77 million metric tons in 2050, compared with an annual average of 52 million metric tons during the last three years.
New hotspots for sourcing of palm fruit are also emerging beyond South-east Asia:
- Nigeria, Cameroon, and Ghana combined to make up 4.5 per cent of global production in 2016 Food and Agricultural Organization of the United Nations (FAO) data shows. While growth has been minimal or negative, these nations remain on the World Resource Institute’s (WRI) Global Forest Watch list as potential hotspots. A recent report reveals that Nigeria loses its forests at the rate of 11.1 per cent annually, the highest on earth.
- Papua New Guinea accounted for 0.8 per cent of global production in 2016, increasing by 19 per cent since 2011. The Global Forest Watch reports that the nation experienced “70 per cent more tree cover loss in 2015 than in any [other] year on record”.
- Colombia accounted for 2.4 per cent of global production in 2016 and has increased its output by 47 per cent since 2011. It is the fourth-biggest palm producing country in the world.
- Ecuador’s presence in the export market has been increasing in the last decade. It contributed 1.1 per cent of global production of palm oil in 2016, increasing production by 49 per cent since 2011. (FAO).
Pinpoint risk in your portfolio
Investors have increasing access to data platforms that can help them assess deforestation risks in their portfolios.
SCRIPT (the Soft Commodity Risk Platform): This interactive website designed by the Global Canopy Program provides tools and guidance to help financial institutions screen their portfolios to determine the companies and issues that pose the greatest risk to their institutions, while recommending engagement priorities.
SPOTT (Sustainability Policy Transparency Toolkit): Built by the Zoological Society of London, this website publishes transparency assessments of palm oil producers and traders. SPOTT’s resources can inform investor engagement with companies on sustainable commodity production and sourcing policies.
World Resources Institute Global Forest Watch: Investors can use this platform, and the forthcoming Global Forest Watch Pro, to analyse forest trends, receive supply-chain alerts, create custom maps, and download real-time data on forest loss.
Ceres’ Engage the Chain: Provides background information and case studies on the environmental and social challenges that drive financial risk for eight commodities, including palm oil.
Engage with portfolio companies
Through engagement with high-risk companies, investors can help drive stronger company zero-deforestation policies, supply-chain traceability, and supplier assurance mechanisms.
Many companies are starting to take action and are communicating their progress through platforms such as CDP and the RSPO; nevertheless, deforestation, land conflicts, and labour issues persist in palm oil production. Transparency on implementation of policies is critical for investors and all stakeholders to address the gap between corporate commitments and reality.
The Reporting Guidance for Responsible Palm – developed in consultation with 18 expert partners on palm oil and deforestation – provides investors with a framework and key performance indicators for engaging with companies on this implementation gap.
Help make standards stronger
This summer, RSPO is reviewing its five-year standards, offering a critical opportunity for investors to weigh in to ensure that standards for palm oil production catch up with global sustainability expectations. These standards will become the basis for enforcement protecting forests, carbon-rich peatlands and human rights for the next half decade. External stakeholders can provide input easily online.
Investors have a clear opportunity here. By engaging with portfolio companies, they can direct attention toward the business risks of deforestation, while raising solutions to help stop it.
Siobhan Collins is manager, food and water programs, at non-profit sustainability organisation Ceres.