Land use change represents significant operational and climate-related risks to both companies and investors looking to create long-term value. To minimise these risks, investors can engage with their investee companies about eliminating deforestation from their direct operations and supply chains.
Agriculture, forestry and land use account for 24% of the greenhouse gas emissions arising from human activity, with the majority of this coming from land use change and tropical deforestation and degradation. National governments are aware of this and preparing to take action: according to countries’ Nationally Determined Contributions to the Paris Agreement, emissions reductions from land use, land use change and forestry represent a quarter of all planned emissions reductions by 2030. Companies involved in cattle, soy, palm oil and timber are particularly likely to be affected: at least two-thirds of tropical deforestation is driven by the production of these four commodities.
Beyond climate-related risks, companies directly or indirectly linked to soft-commodity driven land use change can face reputational risks, legal risks and market access risks. Land use change also affects agricultural productivity, through a loss of biodiversity and ecosystem services, soil degradation and disruption of hydrological cycles.
Climatic tipping points are critical thresholds that determine how the Earth’s system functions as whole. Once reached, these tipping points cause positive feedback loops which can lead to uncontrollable increases in carbon emissions and global temperatures, while exacerbating physical climate risks, resulting in potentially catastrophic global consequences. This short report highlights a number of potential climate tipping points and how they interact, including changes ocean circulation and the melting of ice sheets, but focuses on deforestation within the Amazon rainforest as a critical tipping point.
The increased uncertainty and economic costs related to climatic tipping points will have significant detrimental impacts on economies and societies globally and poses a systematic risk to investors’ portfolios. Institutional investors should be aware of the risks posed by climatic tipping points, particularly when assessing their portfolios for climate-related risks. It is also important for institutional investors to tackle deforestation and prevent dangerous climatic tipping points from being reached by actively engaging with investee companies. Investors can learn more about the PRI’s work on sustainable land use to understand how to engage with companies on deforestation.
The risks of these climatic tipping points being reached increases dramatically beyond 2°C, emphasising the urgent need for climate policy to meet the Paris Agreement’s target of keeping global average temperatures to well below 2°C. A rapid and forceful policy response and a disruptive transition to a low-carbon economy will have significant implications for institutional investors. Find out more about the PRI’s work on the inevitable policy response and how institutional investors can take action to build resilience across their investment portfolios to such a policy response.
The Investor Initiative for Sustainable Forests, run in collaboration with Ceres, is helping investors to understand how deforestation within cattle and soybean supply chains represents a material risk to companies.
It is coordinating collaborative investor engagement with companies that have either a direct or indirect exposure to commodity-driven deforestation, whilst also addressing other ESG issues related to soft commodity production, such as poor working conditions, land rights and impact on indigenous peoples.
More than 35 investors are already engaging with over 20 companies across the soy and cattle value chains.
While cattle and soybean production have made significant contributions to economic development and the livelihoods of farmers in many countries across Latin America, there is now a growing awareness of the environmental and social issues associated with producing these commodities.
Commercial agriculture accounts for approximately 70% of tropical deforestation in Latin America, with cattle and soybean production being the largest drivers of this land use change, and demand for each growing. Despite this, there are far fewer corporate commitments around deforestation in cattle and soybean supply chains than for other soft commodities.
These statements highlight what disclosure and management of deforestation risks investors expect of companies operating within the cattle and soybean value chain, and can be useful for investors when engaging with companies on these issues.
They have each been signed by about 50 investors representing approximately US$6.5 trillion in assets.
The PRI-coordinated Investor Working Group on Sustainable Palm Oil has, since 2011, been:
Initially engaging major buyers of palm oil and retailers of palm oil-based products, in 2013 the group shifted attention to engaging the major palm oil growers, processors and traders, and more recently the ASEAN banks that are key lenders to the industry.
The group comprises more than 50 PRI signatories.
Palm oil is widely used due to boasting several benefits over other vegetable oils, including versatility, low cost and high yield. It has contributed significantly to economic development in a number of countries, in particular Indonesia and Malaysia, which together produce over 85% of the world’s crude palm oil.
However, the development of palm oil plantations has been linked to significant negative social and environmental impacts that pose risks to investors, including widespread deforestation, increased greenhouse gas emissions, social conflicts and damage to ecosystem services.
More than 50 investment organisations with approximately US$8 trillion in assets under management have endorsed a statement laying out their expectations of companies operating across the palm oil value chain and highlighting their continued support for a sustainable palm oil industry.