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Companies must halt deforestation to safegauard revenues

Global companies – including Colgate Palmolive, L’Oréal, McDonald’s Corporation and Marks & Spencer – report in a new study released on Monday, December 5, 2016 that, on average, nearly a quarter (24%) of their revenues depend upon four deforestation-linked commodities: cattle products, palm oil, soy and timber products.

Paul Simpson, chief executive officer at CDP
Paul Simpson, chief executive officer at CDP

As much as $906 billion in annual turnover could be at risk. The report by CDP (formerly the Carbon Disclosure Project) 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 $22 trillion. The report analyses 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 programme 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 on Monday, 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 analysed 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 recognising benefits in scaling-up their forest-protection efforts. Unilever Plc and Marks & Spencer are working to prioritise commodity sourcing from areas that are pursuing comprehensive forest-climate programmes. 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.

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