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CDP: Underestimation of Deforestation Risks Could Cost Business Over $900B
December 12, 2016
In a new CDP study released last week, global companies — including Colgate Palmolive, L’Oréal, McDonald’s Corporation and Marks & Spencer — report that, on average, 24 percent of their revenues depend upon four deforestation-linked commodities: cattle products, palm oil, soy and timber products. As much as $906 billion in annual turnover could be at risk. The report reveals a unique market-wide snapshot of how vulnerable companies are to deforestation risks.
CDP produced Revenue at Risk: Why addressing deforestation is critical to business success on behalf of 365 investors representing $22 trillion. The report analyzes 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 though a significant portion of income is derived from commodities linked to deforestation, fewer than half (42 percent) of companies have evaluated how the availability or quality of these commodities will impact their growth strategy over the next five or more years. It’s a pretty risky move and one that 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.
“Companies need to address the sustainability of products that drive deforestation quite simply to protect their own 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.”
81 percent of agricultural producers — the companies who sit at the top of global commodity supply chains — say they have already felt the effects. In the past five years, deforestation-linked impacts 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 reports 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.
Across the four deforestation-linked commodities, 72 percent of reporting companies say they are confident that they will be able to source these supplies securely and sustainably in the future. But is such confidence warranted? The report says that it 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 percent) 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 percent 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 program 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 Global Canopy Program’s 2016 Forest 500, which was also released last week, says a small but incrementally growing number of financial institutions are introducing policies on deforestation. Nearly a fifth (18 percent) of the 150 investors and leaders analyzed in its sample now have a sustainable investment or lending policy that promotes the protection of intact, primary or high conservation value forests.
“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,” says Paul Simpson, chief executive officer at CDP.
Luckily, more companies are recognizing benefits in scaling up their forest-protection efforts. Unilever Plc and Marks & Spencer are working to prioritize commodity sourcing from areas that are pursuing comprehensive forest-climate programs. Unilever says this will allow them to improve supply chain security and make monitoring and verifying environmental impacts more straightforward. And 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.