Companies failing to delink supply chains from deforestation harm balance sheets, environment

Private sector commitments to protect tropical forests by using only sustainably sourced commodities “lack the teeth” to make meaningful change, and this is putting corporations’ own balance sheets at risk as well as the environment, according to two new reports. The tropical forest think tank, Global Canopy Program, says that not enough companies have robust deforestation policies in place to ensure their supply chains are forest friendly, and as a result the goal to end deforestation by 2030, established in the New York Declaration on Forests, is unlikely to be achieved. The declaration is a voluntary commitment signed by businesses, governments and NGOs in 2014. The GCP “Forest 500” report, released today, looks at 500 companies, investors and governments most closely linked to global supply chains of soya, palm oil, beef, leather, timber, pulp and paper. These products, which have an annual trade value of more than $100 billion and are found in half of packaged products in supermarkets, are the major commodities driving tropical deforestation globally, with two-thirds of all forest loss resulting from commercial agriculture production. Companies are coming under increased pressure from policymakers and socially conscious investors to limit their exposure to deforestation-linked commodities and help achieve global forest targets since forest loss is responsible for 15 percent of global greenhouse gas emissions. A second report, also released today by London-based analysts CDP, further made the case for businesses to move away from high-risk commodities due to the fact that over-reliance on such products could lead to losses of up to $906 billion in annual turnover. Climate change impacts, tightening regulation and potential brand damage from being associated with forest loss, are some of the potential risks that could hit corporate bottom lines and are associated with the supply of deforestation-linked commodities, the report said. Despite these pressures, the Forest 500 report found that 57 percent of companies surveyed have either weak policies or no policies at all when it comes to deforestation. Furthermore, the report reveals that some entire sectors, such as cattle supply chains, are without robust deforestation policies. Businesses cite a number of barriers to ensuring deforestation-free commodities, including inadequate traceability systems, weak governance and poor compliance enforcement of national deforestation policies, and high costs and limited availability of certified deforestation-free materials. “The Forest 500 reveals that many of these commitments lack the teeth to make meaningful change in the sustainability of commodity production. While they appear ambitious on face value, company policies need to close loopholes that simply relocate environmental and social impacts to new geographies, or sequester them into less sustainable supply chains,” said Sarah Lake, head of the supply chains program at GCP. The CDP report, “Revenue at risk: Why addressing deforestation is critical to business success,” found that companies which rely on commodities linked to deforestation, could stand to lose billions of dollars in annual turnover by failing to protect themselves from risks associated with deforestation. Nearly 25 percent of these companies’ revenue is dependent upon cattle products, palm oil, soy and timber products, according to the report, and 81 percent of surveyed agricultural producers said they have experienced deforestation-linked impacts in the past five years that have led to substantive changes to their business. Despite these warnings, the report, which draws on information from 187 companies about their deforestation risk management strategies, found that only 42 percent of those surveyed have thought about the availability or quality of key commodities over the next five or more years. Furthermore, more than 70 percent of businesses CDP spoke to said they were confident they will be able to source cattle, soy, timber and palm oil sustainably in the future. In addition, only 44 percent of manufacturers and retailers actually audit their suppliers to ensure compliance to their procurement standards, and only approximately 30 percent can trace commodities in their supply chains back to their point of origin to ensure they were sourced sustainably. “Companies need to address the sustainability of products that drive deforestation quite simply to protect their balance sheets”, said Katie McCoy, head of forests at CDP. “Failing to address deforestation will have knock-on reputational impacts, manifesting themselves as consumer boycotts, community opposition, and increased regulatory scrutiny. Business growth is at risk,” she added. The CDP report calls on companies to work with suppliers to ensure transparency concerning the origins of commodities, and to elevate the issue of deforestation risk management to the boardroom. It also recommends companies work cross-sectorally and with customers, governments and civil society groups to address barriers to securing sustainable, deforestation-free commodities. Join Devex to network with peers, discover talent and forge new partnerships in international development — it’s free. Then sign up for the Devex Impact newsletter to receive cutting-edge news and analysis at the intersection of business and development.