Deforestation in Supply Chains: A Challenge to Sustainable Business and Climate Action

Zeroing-in on deforestation

Addressing deforestation is critical to business, climate action and the sustainable post-2020 global economy. Deforestation is caused by the global trade of soy, palm oil, cattle products and timber products (the four forest-risk commodities) and the presence of these four commodities in company supply chains is a significant contributor to climate change. If not addressed, this may cause significant ramifications for the reputation, operations and expenditures of companies. Widely recognized problems from deforestation include biodiversity and habitat loss, negative impact on forest-dependent communities, greenhouse gas emissions and social conflict. The world’s impoverished are not the only ones vulnerable to these effects. They will result in direct and supply chain risks for suppliers and customers.

To date, the world’s forests are disappearing at an alarming rate. From 1990 to 2000, 8.3 million hectares were disappearing annually. Up until 2010, 6.2 million hectares were disappearing every year. While this has slowed, the rate remains alarming enough for global concern.

Taking on critical environmental and social impacts such as deforestation and climate change has become a priority for policy makers and UN member states. Two international agreements, the Paris Agreement and the UN Sustainable Development Goals (SDGs), are the key areas of focus in this front and are attracting massive investor interest.

The Paris Agreement commits the international community to keep global temperatures below 2 degrees Celsius above pre-industrial levels. The Sustainable Development Goals are a set of goals, targets and indicators to frame agendas and political policies until 2030, covering environmental degradation, poverty, healthcare and employment issues.

Serving as a new compass for businesses, the SDGs and the Paris agreement give companies and investors a framework for a sustainable global economy post-2020. As they challenge businesses to address their role in deforestation and climate change, they also invite governments, investors and customers to exert pressure on businesses to align with sustainability.

The role of business

Forests are the world’s carbon sinks, providing carbon storage and emissions offsetting. If further destroyed, the world loses a natural counteragent to climate changing greenhouse gas emissions from businesses. As major sources of deforestation, businesses have a role to play in climate security by addressing deforestation in their supply chains.

The Paris Agreement states that since companies are responsible for a large percentage of the greenhouse gas emissions, they are also responsible for delivering the necessary reductions.  The Paris Agreement also concludes that its 2020 goal of limiting climate change to 1.5 degrees will not be achievable without commitment and additional action from businesses. By eliminating deforestation, the business community can deliver emissions reductions equivalent to .5 to 1.2 billion metric tons.

Businesses need to understand and address deforestation risks in their operations and in those of their suppliers. These risks have an environmental and social impact, and will also affect the survival and future of businesses in the post-2020 global economy. CDP’s Global Forests Report 2016 reveals that an average 24% of company revenues are dependent on the four forest-risk commodities. The total global turnover dependent on these commodities is $US906 billion. With pressure for a more sustainable economy that eliminates deforestation, a significant portion of the global economy is at risk if businesses don’t find more sustainable sources for these commodities.  There is massive investor support for sustainability. Deforestation is no exception.   It offers a massive opportunity for investments, and for transformation into sustainable and resilient businesses. For example, 365 institutional investors with US$22 trillion in assets have asked CDP to urge companies to disclose forest-risk information, a move that will direct investment decisions and invigorate change. Companies that take action on deforestation have a lot to gain through investor support.

Formerly known as the Carbon Disclosure Project, CDP is a global disclosure system for companies, cities, states and regions to manage their environmental impacts and for investors or purchasers to access environmental information for use in financial decisions.

Four forest-risk commodities

What are these forest-risk commodities that need to be addressed in company supply chains?

Palm oil is a vegetable oil derived from the palm fruit on the African oil palm tree. Palm oil is linked to deforestation and climate change, as well as other environmental, social and governance (ESG) issues such as habitat degradation, animal cruelty and indigenous rights abuses. The World Wildlife Fund reports that 48 football fields’ worth of rainforest is cleared every minute for palm oil production. Palm oil accounts for 30% of the world’s vegetable oil production, which is found in 40–50% of household products in developed countries.

  • Companies in CDP’s Global Forests Report 2016 disclose that 24% of their revenue is dependent on palm oil. For publicly listed companies, the revenue dependent on palm oil is up to US$217 billion.
  • 85% of the companies in CDP’s report have recognized opportunities for the sustainable production or sourcing of this commodity.
  • "The environmental and social impacts of palm oil are well publicized as drivers of deforestation, biodiversity loss and climate change. If Burberry's products were found to contain unsustainable palm, this would have a negative impact on Burberry’s reputation and reduce revenue." Burberry Group on the risks associated with palm oil

Soy production and soybean cultivation has resulted in large-scale deforestation of Brazil’s Amazon rainforest. Industrial production methods and new varieties of the soybean have accelerated the pace of deforestation. At the current rate, scientists predict about 60% will be cleared or degraded within 20 years. As a result of forest clearing for soybean production, Brazil has become one of the largest emitters of GHG. In spite of past measures to address deforestation, Brazil’s emissions come from industries that rely on land-use change and forestry.

  • Companies in CDP’s Global Forests Report 2016 disclose that 16% of their revenue is dependent on soy. For publicly listed companies, the revenue dependent on palm oil is up to US$167 billion.
  • 68% of the companies in CDP’s report have recognized opportunities for the sustainable production or sourcing of this commodity.
  • "Droughts have impacted soy production in major growth regions which affects global supply. This has previously increased the price of soy which then impacts upon the feed process. The price of feed is an important aspect of the cost of rearing animals and meat and dairy production." J Sainsbury Plc on the risks associated with soy
  • "JBS is exposed to reputational risks in a potential situation of purchasing soy from areas with illegal deforestation that could adversely affect the company’s image, with a large damage to its brand resulting in loss of markets, trade embargo and termination of contracts. The side effects of these events would be consequent revenue and profits decrease." JBS S/A on the risks associated with soy
  • "Regulatory changes that could impact our work towards our no-deforestation targets include the implementation of the Forest Code in Brazil." Delhaize Group on the risks associated with soy

Cattle products come from cattle ranching, which occurs on over two-thirds of deforested land in the Amazon. More than 300,000 km2 of tropical forests have been cut, burned and converted to pastures. Cattle ranching is one of the largest emitters of GHGs (methane, nitrous oxide and carbon dioxide) and, when paired with burning from deforestation, the negative impacts are intensified.

  • Companies in CDP’s Global Forests Report 2016 disclose that 18% of their revenue is dependent on cattle products. For publicly listed companies, the revenue dependent on cattle products is up to US$137 billion.
  • 69% of the companies in CDP’s report have recognized opportunities for the sustainable production or sourcing of this commodity.
  • "There is a risk of reputational damage if we did not have strict sourcing policies that provide a degree of protection against global/national food traceability incidents, such as the horse meat scandal in recent years. We rely on our sourcing and traceability policies to mitigate this risk." Eurostar on the risks associated with cattle products
  • "The implementation of the Brazilian Forest Code and the requirement for farmers to officially register their land poses a regulatory risk. Farms which do not register will face challenges raising finance and could potentially be prevented from supplying the market, hence this will affect their production." J Sainsbury Plc on the risks associated with cattle products

Timber products contribute to long-term carbon emissions reduction. The world’s forests and soils can store more than one trillion tons of carbon and act as a natural mitigation of GHG emissions. Forests can absorb about 10-20% of the total global emissions.

  • Companies in CDP’s Global Forests Report 2016 disclose that 39% of their revenue is dependent on timber products. For publicly listed companies, the revenue dependent on timber products is up to US$620 billion
  • 86% of the companies in CDP’s report have recognized opportunities for the sustainable production or sourcing of this commodity.
  • "As resources are limited, we believe that a stable supply of forest resources exerts a significant impact on business. Physical risk factors emanating from forest resources are various, including temperature and precipitation patterns, and the frequency of occurrence makes forecasting impossible." Dai Nippon Printing Co. Ltd on the risks associated with timber products
  • "Forests fires started by third parties, such as community or land speculators using slash-and-burn methods to clear land, have negatively impacted our brand in the international market due to the resulting haze problem that impacted neighboring countries." APP on the risks associated with timber products

The impact on businesses

In 2016, 201 companies responded to an investor-backed request for disclosure. Companies that participated (in CDP’s Global Forests Report 2016) reported operational, reputational and regulatory risks associated with these commodities.

According to CDP’s Global Forests Report:

  • 81% of companies in agriculture have experienced impacts related to forest risk commodities – causing significant changes in operations, revenue and expenditure
  • 45% of food and staples retailing companies report impacts related to deforestation
  • 68% of producers, processors and traders believe that deforestation risks associated with the four commodities will impact their businesses in the next 6 years
  • 65% of manufacturers and retailers believe that deforestation risks associated with the four commodities will impact their businesses in the next 6 years

Companies have reported impacts due to the presence of the four commodities in their supply chain:

  • Manufacturer Kimberly-Clark has reported a possible increase in operational costs and supply disruption of eucalyptus timber due to precipitation changes if the Amazon is further deforested.
  • Indonesian pulp and paper giant APP is growing increasingly aware of potential climate-related increases in plant diseases or pests, something that will negatively affect operations.
  • Both Archer Daniel Midlands and Wilmar International report impacts to brand value as consumers increase demands for sustainable, deforestation-free products.
  • Retailer Delhaize Group reports damage to brand value caused by a Greenpeace campaign against deforestation.
  • Golden-Agri Resources reports reduced fruit production at as a result of haze from Indonesia’s forests fires.

Risk management and public policies

Producers, processors, traders, manufacturers and retailers dealing with these forest-risk commodities need to align their supply chains with sustainability (and climate action). As businesses are major contributors to deforestation, if these commodities are present in supply chains, they need be traced to sustainable sources. Risk management is fundamental to accomplishing this. Traceability systems, governance and the availability of certified materials are essential to risk management against deforestation in company supply chains. CDP also discusses the role of policy makers in creating enabling environments to ensure a virtuous circle - one where governments encourage companies to act on deforestation, companies respond by taking action, which in turn enables governments to set more ambitious timeframes for reducing deforestation.

ADEC Innovations ESG Solutions  helps organizations recognize business drivers for sustainability practices and offers cost-effective sustainability risk management solutions, providing guidance on industry best practices and sustainability programs.