ESG deforestation risk shoots up over 2018

Environmental Risk Outlook

Renewed global focus on limiting forest loss spells significant reputational and economic risk for companies and investors linked to deforestation.  

Deforestation is back on the agenda

Deforestation roared back onto regulatory and corporate agendas this year due to its importance to climate change mitigation goals and growing customer and investor interest in sustainable supply chains. Over half the signatories to the Paris Agreement pledged some form of action on land use, land use change and forestry (LULUCF), which will need to come in by 2020 if they are to meet their pledges. Given legislative timelines, this means we will see these regulations starting to percolate through this year.

Reputational risks are the obvious threat – HSBC won’t be the only investor NGOs push into dropping funding for palm oil companies involved in deforestation. But while financial institutions and investors are already aware of stranded assets in relation to fossil fuels, many have overlooked that deforestation poses similar risks. The CDP estimates almost USD950 billion of publicly listed companies’ turnover is thought be threatened if governments move to halt activities driving deforestation.

Yet the CDP warns that while many companies recognise the risks, just 13% have made time-bound commitments to mitigate the threat – the remainder are putting themselves and their investors in danger of restricted market access and reputational damage.

Aided by several new industry initiatives focusing on the issue, such as the PRI and Ceres-backed Investor Initiative for Sustainable Forests, we expect investors will ramp up their engagement with deforestation in 2018. This could take the form of demanding greater disclosure from companies or participation in cross-sector initiatives to reduce forest loss, both of which will have significant cost implications.

Likelihood of more stringent forestry policies_ESG deforestation risk shoots up over 2018

High forest loss in countries that have pledged to address deforestation means companies operating in those nations are set to face tougher regulations

Read more

Part 1: The inexorable march of climate risk transparency

Part 2: Businesses on the hook for mounting climate change costs

Part 3: ‘Make or break’ year for China’s environmental credentials

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Will Nichols

Head of Environment