Branching out in deforestation

Why does deforestation matter to investors?

According to the Carbon Disclosure Project (CDP), more than 60% of selected reporting companies disclose some kind of risk caused by deforestation and on average face losses of $330 million due to risk exposure; the cost of dealing with this risk is a fraction at $17.4 million.[1] 

Given the vital ecosystem services forests provide to the real economy, deforestation permeates different economic sectors and markets on a global scale, making it a systemic risk.[2] Physical, litigation, reputational, and increasing regulatory risks linked to deforestation have material financial implications for the companies in which we invest on behalf of our clients.[3] For instance, under the EU Deforestation regulation, non-compliant companies can face fines up to 4% of their total annual turnover.[4]

In addition of being vital to combating nature loss, stopping deforestation and forest degradation is critical for climate change mitigation and adaptation efforts[5], and is therefore a crucial aspect of making credible progress towards the goals set by the Global Biodiversity Agreement[6] and the Paris Agreement[7]. 

How have we evolved our approach to deforestation?

We have updated our deforestation policy to reflect best practice guidance, follow the latest industry standards on deforestation[8], and ensure alignment with our broader global stewardship policies. 

We also set out how we have been working towards the milestones of the COP26 Commitment on Eliminating Agricultural Commodity Driven Deforestation from Investment Portfolios, which we signed in 2021. Among the progress we have made so far, we highlight our deforestation engagement campaign, collaborative engagement through FSDA[9], the introduction of minimum expectations linked to voting for companies in deforestation-critical sectors, an update of our deforestation risk exposure assessment, and the disclosure of activities in our quarterly ESG reports as well as in our annual Active Ownership report. 

So, what’s new?

·         Adding cocoa, coffee and rubber 

We have expanded our deforestation policy scope to include cocoa, coffee, and rubber[10]. These commodities have significant deforestation impact:

-       Around 130,000 hectares of land have been lost annually over the past 20 years due to coffee production[11], with the EU driving 30-40% of the embodied deforestation for coffee as a key importer[12] 

-       Cocoa production is a prominent driver of deforestation in West Africa, with Côte d'Ivoire and Ghana responsible for over 59%[13] of global production, causing around 50% of forest loss in protected areas[14]

-       Rubber plantations in South-East Asia produce about 70%[15] of the world’s natural rubber supply and have caused the loss of nearly 4 million hectares of tropical forests over the past 30 years[16], with tyre and automative industries driving the increased demand for rubber[17] 

Improvements in data have enabled us to identify and assess companies involved with these commodities, allowing us to expand beyond our initial coverage of palm oil, soy, cattle products (beef and leather), and timber products (forestry, pulp and paper).

·         Linking deforestation and human rights

Human rights and deforestation are intrinsically linked, with 25%[18] of the global population living in or depending on forests. Indigenous peoples and local communities are vital protectors of forests and are directly affected by the pressures of the expansion of agricultural commodities. 

LGIM’s Human Rights Policy sets out our approach to this broad and varied topic, including the related areas of Indigenous peoples, land rights and labour rights. 

·         Helping companies improve their deforestation disclosure

We outline disclosure frameworks for companies to follow, list useful tools, and include links to guidance that we believe can help companies achieve supply chains free from deforestation and conversion. 

We also note key data providers for companies to collaborate with to increase availability and accuracy of nature data. 

What do we expect companies to do?

We expect investee companies to proactively analyse, assess and address deforestation and land conversion risks within their operations and supply chains, and to provide relevant disclosures. In line with our deforestation campaign, which we initiated in 2022, we will vote against companies in ‘deforestation-critical’ sectors that fall short of our deforestation minimum expectations.[19]

Our minimum expectations are that companies in ‘deforestation-critical sectors’[20] should have both a public deforestation policy and a programme of actions to deliver on that policy.[21] 

As we increasingly monitor, measure and engage on the contents of companies’ policies and programmes to determine their strength and comprehensiveness, we include within our deforestation policy a framework of key questions for companies to consider as they evolve their approaches to combating deforestation. These questions are centred around six pillars: 1) commitments and targets; 2) scope of policy; 3) governance & risk oversight; 4) risk management & traceability; 5) associated social & human rights impacts; and 6) reporting & disclosure.[22] 

Looking ahead 

Over the coming months, we will continue to actively engage with our collaborative partners on deforestation, particularly through the FSDA and IPPD, and take forward the next phase of our deforestation engagement campaign.

In addition, following on from our participation at the global biodiversity summit in Montreal in 2022 - where the Global Biodiversity Framework was agreed - we will be heading to the next summit, COP16 where there will be a strong focus on implementation.

 
[1]Indicative figures based on data reported by selected companies through CDP in 2022. CDP, 2023. Available at: CDP_Global_Forest_Report_2023.pdf  
[2] Seeing the forest for the trees. WWF, 2022. Available at: https://wwfint.awsassets.panda.org/downloads/seeing_the_ forest_for_the_trees.pdf   OECD, 2019. Available at: https://www.oecd-ilibrary.org/environment/biodiversity-finance-and-the-economic-and-business-case-for-action_a3147942-en
[3] Deforestation, what does it mean for investors. Hymans, 2023. Available at: https://www.hymans.co.uk/media/uploads/Investment_DeforestationPaper_Feb23.pdf
[4] Global Impact of EU’s Anti-Deforestation law. S&P Global, 2023. Available at: https://www.spglobal.com/esg/insights/featured/special-editorial/global-impact-of-the-eu-s-anti-deforestation-law 
[5] Deforestation and forest degradation, IUCN, 2021. Available at: https://www.iucn.org/resources/issues-brief/deforestation-and-forest-degradation  Forests and climate change, IUCN, 2021. Available at: https://iucn.org/resources/issues-brief/forests-and-climate-change  Forest Pathways Report 2023, WWF. Available at: https://www.wwf.org.uk/sites/default/files/2023-10/WWF-Forest-Pathways-Exec-Summary-2023.pdf
[6] Kunming-Montreal Global Biodiversity Agreement of halting and reversing nature loss by 2030 and living in harmony with nature by 2050.
[7] Paris Agreement. Available at: https://unfccc.int/process-and-meetings/the-paris-agreement 
[8] Informed by the following frameworks: Global Canopy, FSDA investor expectations,  Accountability Framework Initiative, and WWF.
[9] (FSDA) Finance Sector Deforestation Action 
[10]Integration of these commodities is informed by the Investor Guide to Deforestation and Climate Change. Ceres, 2020. Available at: https://www.ceres.org/resources/reports/investor-guide-deforestation-and-climate change?utm_source=email&utm_medium=marketingcloud&utm_campaign=deforestation&utm_content=report
[11] COFFEE BAROMETER 2023 REVEALS WORRYING IMPACT ON SMALLHOLDERS’ LIVELIHOODS AND DEFORESTATION, 2023. Available at: Coffee Barometer 2023 reveals worrying impact on smallholders’ livelihoods and deforestation - Solidaridad Network
[12] Deforestation and forest degradation in coffee supply chains. Available at: Deforestation and forest degradation in coffee supply chains (wur.nl)
[13] What is the demand for cocoa on the European market? 2024. Available at: https://www.cbi.eu/market-information/cocoa/what-demand
[14] Cocoa plantations are associated with deforestation in Côte d’Ivoire and Ghana, 2023. Available at: https://www.nature.com/articles/s43016-023-00751-8 
[15] WHAT COUNTRIES PRODUCE THE MOST RUBBER? 2022. Available at: https://www.customrubbercorp.com/blog/May-22/What-Countries-Produce-the-Most-Rubber
[16] Wang, Y., Hollingsworth, P. M., Zhai, D., West, C. D., Green, J. M. H., Chen, H., Hurni, K., Su, Y., Warren-Thomas, E., Xu, J., & Ahrends, A. (2023). High-resolution maps show that rubber causes substantial deforestation. Nature. DOI: https://doi.org/10.1038/s41586-023-06642-z. Available at: https://www.sei.org/publications/maps-rubber-deforestation/ 
[17] Rubber Industry Outlook and Trends, 2023. Available at: https://www.ace-laboratories.com/2023-rubber-industry-trends/#:~:text=Even%20on%20a%20global%20scale,many%20components%20throughout%20the%20vehicle
[18] The UK’s contribution to tackling global deforestation – Report Summary, UK Parliament 2024. Available at: https://publications.parliament.uk/pa/cm5804/cmselect/cmenvaud/405/summary.html

[19] Sanction application is subject to data availability.
[20] ‘Deforestation-critical’ sectors or ‘high-risk’ sectors are defined using Ceres’ Investor Guide to Deforestation and Climate Change. We also follow Deforestation Free Finance guidance on which GICS sub-industries to cover.
[21] As assessed by Sustainalytics, using its criteria. Companies in selected sectors, where we have data, scoring 0 on either deforestation policy or programme will receive a vote against. In addition, we may use data from CDP Forests or MSCI to inform us of the existence of a public policy. Subject to data availability.
[22] As informed by the following frameworks: Global Canopy, FSDA investor expectations,  Accountability Framework Initiative, and WWF.