The way certain commodities are grown and harvested is leading to deforestation and disrupting the balance of natural systems. The far-reaching consequences of deforestation can lead to irreversible damage to the environment and human resources – and that’s a concern for many shareholders.
The UN Climate Change High-Level Champions predict that some leading food and agriculture companies could lose up to 26% of their value by 2030, with permanent sector-wide losses equivalent to the 2008 financial crash.
No-deforestation pledges have proliferated as international standard-setting bodies, such as the Science Based Targets Initiative, have concluded that corporate climate emissions targets aren’t achievable without ending deforestation. Companies must eliminate deforestation from their supply chains no later than 2025 to protect biodiversity and reduce emissions in alignment with the Paris Agreement.
But that’s no easy feat because tracking commodities is difficult, supply chain and production processes can be opaque, and obtaining granular data is tough. Moreover, various products are blended in second stage systems and productions before they go out into the world.
Although supply chain mapping solutions are a great help, suppliers – especially those at low levels of the chain – may still violate sustainability standards, exposing corporations to serious operational and regulatory risks.
The EU’s Regulation on Deforestation-free Products (EUDR), which came into force in June 2023, is probably the strictest deforestation regulation on the planet. Any operator or trader who places certain commodities on the EU market, or exports from it, must be able to prove that the products don’t originate from recently deforested land or have contributed to forest degradation.
After December 30, 2024, violators could incur stiff fines and penalties and suffer reputational damage that could affect shareholder value.
Deforestation-free leaders
Global Canopy’s annual Forest 500 report ranks 500 companies and financial institutions that have the power to transform cattle, timber, soy and palm oil supply chains. Over the past decade, the top 10 companies have made strong progress on deforestation, conversion and associated human rights abuses. This includes developing policies, implementing them and reporting on progress.
Leading companies drive change across global supply chains by engaging suppliers to bring them into compliance. They require suppliers to not just ensure that their supply is free from deforestation, but that all the suppliers’ products and operations are as well.
By pushing change up through supply chains, companies can multiply the impact of their action on deforestation and conversion — especially when frontrunners’ supplier lists and sourcing regions are transparent.
In 2024, Nestlé headed the list of the top 10 leaders. CEO Mark Schneider commented on the Feb. 22, 2024, earnings call that Nestlé sees itself “at or near the head of our industry when it comes to progress … on ensuring a deforestation-free supply chain.”
The other nine Forest 500 leaders are Unilever, Mars, Danone, Colgate-Palmolive, Neste, PepsiCo, Socfin, Sipef and Upfield Holdings.
Financial institutions also have a significant role to play in addressing deforestation and conversion through the financing that they provide to companies through shareholdings, bond holdings, loans and underwriting.
“Financing can essentially act as leverage,” says Emma Thomson, Forest 500 and tracking lead at Global Canopy. “Financial institutions can require companies that they’re financing to have specific policies, to prove their compliance with the financial institution’s policies and to make progress in order to continue receiving finance.”
When it comes to financial institutions with a publicly available deforestation policy for all four commodities, Forest 500’s top 10 were Schroders, Rabobank, BNP Paribas, Deutsche Bank, Standard Chartered, Barclays, SMBC Group, Banco Bilbao Vizcaya Argentaria (BBVA), ABN Amro and HSBC.
Good progress elsewhere
Hormel HRL and Conagra CAG have pledged to be deforestation-free by 2025. Tyson Foods TSN aims to achieve a deforestation-free beef supply chain by the end of 2028 and to eliminate deforestation in its soy and palm oil supply chains by 2030.
In addition, Cargill has committed to transforming its agricultural supply chains to be free of deforestation by 2030. While the company is transforming its entire supply chain, it is offering deforestation- and conversion-free products including soy palm oil and cocoa. According to Cargill’s website, 43% of its total cocoa volume is third-party certified sustainable, either via Rainforest Alliance or Fairtrade.
Some industry groups are trying to become more transparent about their impact on forests. The Roundtable on Sustainable Palm Oil (RSPO) for example, brings together stakeholders from across the palm oil supply chain to develop and implement global standards for sustainable palm oil.
RSPO verifies forest protection and social and environmental safeguards are met during the oil’s production and harvest. Investors can log on to the RSPO’s website, search members – including major brands such as Nestlé, Unilever and Cargill – and retrieve their sustainable palm oil report.
Funds’ indirect deforestation play
DeforestationFreeFunds.org scores funds based on their investment levels in deforestation-risk companies. In reality, funds that specifically screen for deforestation are rare, but some environmental funds provide an indirect deforestation play by screening for the efficient use of natural resources.
The website gives an A grade to the Impax Global Environmental Markets Fund , which owns 40 to 60 securities of companies. The fund’s universe is focused on about 2,000 companies worldwide. To be included in the portfolio, the companies must derive at least 20% of their revenues from a solution to an environmental challenge.
The top sectors include resource efficiency and waste management, transport solutions, energy management and efficiency, digital infrastructure, environmental services and resources, sustainable food and agriculture, and water infrastructure and technologies. Most portfolio holdings tend to be industrial, fuels, utility and technology companies.
“What we’re really looking for is secular drivers of growth within the realm of the environment, so that is the first stop in our investment process,” says Siddharth Jha, portfolio manager of the fund. “The second stop is we’re looking for companies that can actually capture value from that growth.”
A company that sells a product that produces 10 times the amount of a raw material needed from one tree instead of, say, 100 acres of trees could be included in the portfolio. However, a company that is simply purchasing those products or taking steps to avoid deforestation would not be included.
Ultimately, the operational, reputational and regulatory risks and opportunities associated with deforestation could have a significant impact on shareholder value. As such, leading companies are endeavoring to engage with their suppliers and increase transparency about sourcing and sourcing regions.
And that is good news for shareholders who want to align their investments with their values and manage risk while achieving positive returns.
Read more: Decarbonizing agriculture: The next step in impact investing
