Working towards zero deforestation contributes to many of the UN’s Sustainable Development Goals and is increasingly being recognised as imperative for investors and society as a whole.
- The agri-food sector accounts for a major proportion of deforestation
- The greatest struggle concerns the soy and cattle-farming industries
- Investor pressure can help improve governance and reduce financial and reputational risk
Deforestation (estimated at 13 million hectares annually) is simultaneously an environmental, social and governance issue. While action has been taken, BNP Paribas Asset Management believes more work needs to be done to protect the world’s forests.
More than 1.6 billion people depend on forests for their livelihood. Forests are huge repositories of food, water, ingredients for medicines and as much as 80% of land-based biodiversity. They play a crucial role in carbon sequestration and as carbon sinks capture large volumes of CO2.
Work to preserve forests contributes to the achievement of many of the UN’s 17 Sustainable Development Goals (SDGs) for 2030, including climate action (SDG 13), eliminating poverty and hunger (SDG 1&2), and responsible consumption and production (SDG 12). SDG 15 specifically includes the fight against deforestation and desertification and the protection of biodiversity.
The role of the agri-food sector in deforestation
Forty percent of deforestation worldwide can be ascribed to four commodity-based activities – palm oil, wood and paper-based products, soy, and cattle farming. For the companies involved, the business risk is estimated at USD 941 billion, matching their combined annual revenue. The agri-food sector is highly exposed to and conscious of its impact as a producer and leading consumer of the commodities concerned. Accordingly, it aims for zero overall deforestation by 2020.
Exhibit 1: Causes of deforestation (in million hectares)
As an investor, BNP Paribas Asset Management is keen to understand the risks involved and evaluate how businesses are managing these to achieve zero deforestation. Our analysis focuses on the four commodity activities at greatest risk and feeds into our ESG ratings of food sector companies.
We identify three types of risk. Financial risks relate to the potential rise in the cost (or even shortages) of supply and the impact on value chains, and the effect this could have on a company’s earnings. Regulatory risk occurs, for example, in the case of procurement from illegal sources. Damage to the company’s reputation can take the form of non-governmental organisations (NGOs), consumers and investors calling for transparency and forest protection, which can lead to market share losses and impact earnings.
A case in point is the boycott of KitKat over its palm oil content. Organised by Greenpeace in 2010, this is a textbook example: accused of contributing to deforestation and the destruction of orangutan habitats, KitKat maker Nestlé quickly dissociated itself from the incriminated supplier to protect its reputation and the revenue from this flagship product.
Separately, the World Wildlife Fund and companies such as Unilever have set up a palm oil certification system – the Roundtable on Sustainable Palm Oil (RSPO). Faced with growing public awareness, most agri-food companies have now said that they are aiming for exclusive RSPO supply by 2020. However, NGO reports have shown that even certified producers in South-East Asia and Latin America do not take their commitments seriously. Certification criteria should be tightened to address both environmental and human rights abuses.
Companies have also become aware in recent years of the need to avoid using illegal wood and use sustainable wood and paper in their supply chains, adopting certified sources that are widely available today similar to RSPO palm oil. More robust audits in the field should ensure the credibility of these certifications.
Finally, it is important to keep in mind that although illegal activity is at the root of a substantial portion of global deforestation, legal deforestation is also a substantial concern. Compliance with the law, therefore, is necessary, but not sufficient to help solve the problem.
Addressing soy and cattle-farming: the biggest struggle
Soy and especially cattle farming are the worst contributors to deforestation, having caused the loss of 480 000 and 2.7 million hectares of forest, respectively, between 1990 and 2008. However, many agri-food companies are still struggling to assess the scope of the issue. There is little mapping of the supply from areas at risk such as the Cerrado in Brazil, where expanding cattle pastures pose a continuous threat. For soy, sustainable labels exist, but labelled volumes are still far from sufficient.
While the 2008 Soy Moratorium helped to considerably reduce deforestation in the Amazon, soy production in the Cerrado remains a serious concern. Companies and investors including BNPP AM have signed a statement in support of the Cerrado Manifesto to end deforestation in the region.
To help US agri-food companies catch up in terms of addressing deforestation and soy production with leading companies in Europe, BNPP AM recently appointed a head of stewardship for the Americas to engage more thoroughly with these companies.
Investment industry brings pressure to bear
Future needs for soy and new arable land for cattle farming should continue to increase deforestation risk. For cattle farming alone, the revenue of listed companies that is related to deforestation is estimated at USD 137 billion. To put meaningful pressure on such companies, BNPP AM and more than 40 peers have called on the cattle industry to eliminate deforestation in South American production. These investors, managing USD 6.8 trillion in assets, have publicly sought greater corporate accountability, improved traceability and supplier compliance.
Too few businesses have yet mapped out their supply chains, particularly for soy and cattle farming. We welcome improved transparency since this allows us to hone our comparative analysis of businesses and our dialogue to maximise impact.
Ending deforestation is everybody’s business
Putting a stop to deforestation should help to reduce CO2 emissions, safeguard biodiversity, soil and water, and ensure that communities living in affected areas retain their livelihoods and the full range of local natural resources upon which they depend.
Better governance should improve company reputations with end-customers and support financial performance. Commitments to procure certified commodities are essential to reassuring investors and must be accompanied by audits and monitoring of suppliers to ensure traceability.
We believe ending deforestation is imperative – for investors and society at large. As fiduciaries, we continue to deepen our understanding of this multi-faceted issue and work with other organisations to find the most effective solutions. We will engage with investee companies through dialogue and proxy voting.
 BNPP AM aims for relevant companies in our portfolios to comply with no deforestation, no peat and no exploitation commitments by 2020 for agricultural commodities; source: BNPP AM Global Sustainability Strategy, p.27-29, 2019
 Why addressing deforestation is critical to business success, CDP 2017. Available here: www.cdp.net/en/research/global-reports/global-forests-report-2017
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
The mentioned companies are for illustrative purpose only, are not intended as solicitation of the purchase of such companies shares, and does not constitute any investment advice or recommendation. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.