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Playing with fire

The recent rise in Amazon deforestation rates is concerning, given the associated greenhouse gas emissions and the damage to biodiversity and the ecosystem. And companies exposed to deforestation – directly or indirectly through their supply chains – face increased reputational and operational risks.

The collapse of the Amazon rainforest – often described as ‘the lungs of the earth’ - is one of the most feared potential feedback loops through which modest climate change could accelerate to more catastrophic levels.

Accordingly, the debate around deforestation in the Amazon rainforest has been driven by a lot of rhetoric, including claims that the recent fires were started by environmental NGOs in order to harm Brazilian interests. The negative rhetoric from the Brazilian administration on climate change and its apparent low concern for protection of native forests, combined with budget cuts that have reduced the capacity of environmental law enforcement agencies in Brazil, have been interpreted by many as a sign that deforestation is considered acceptable.

In response, international companies that source meat, leather or agricultural commodities from Brazilian suppliers have raised concerns, and in some cases, such as H&M and Nike, suspended purchases. This, in turn, has led to a somewhat more positive response from the Brazilian administration. Given the confusing statements to date, we went in search of more objective data.

Worldwide, tropical forest loss is estimated to account for around 8% of global greenhouse gas emissions, ranking almost equal with all the emissions of the United States and significantly more than those of the EU. Meanwhile, it is estimated that rehabilitating tropical forests could provide nearly a quarter of all the cost-effective climate mitigation needed before 2030. We can conclude that emissions from deforestation really are a major concern to all those impacted by climate change, including investors.

The Brazilian Institute for Space Research (INPE) reports that the quarterly rate of Amazon deforestation increased by 25% between Q2 2018 and Q2 2019, with 95% of detected deforestation unauthorised. However, from a long-term perspective, it estimates that since monitoring of deforestation began in the Amazon in 1988, the rate of deforestation has actually reduced by around 65%, with the area of annual forest loss only 0.16% of its total area.

Although this doesn’t go far enough in terms of the required action, it seems reasonable to conclude that while the recent rising emissions in the Amazon are of real concern, the wider challenge of tropical forest deforestation is by no means limited to that area.

Investor response 

Given the global challenge to tropical forests, it is crucial that investors engage with companies whose supply chains may impact deforestation. Hermes EOS has been part of a global engagement group organised by the PRI and Ceres on deforestation in cattle and soy supply chains, targeting a range of companies from food processors to traders to apparel and footwear manufacturers.

As part of this work, we signed the “Investor Expectations on Deforestation in Cattle Supply Chains” statement, highlighting our expectations of companies on deforestation. These focus on companies providing evidence of:

1) awareness of the issues and governance;

2) risk management and traceability;

3) strategy and risk mitigation; and

4) metrics and monitoring in relation to deforestation in these supply chains.

We are also supporting the “Investor Statement on Deforestation and Forest Fires in the Amazon”, requesting that companies demonstrate a commitment to eliminating deforestation within their operations and supply chains.

Our engagement 

We have been engaging for a number of years with companies such as commodities trading houses, banks, and palm oil and rubber producers on the risks of deforestation in their value chains. We have also engaged with a major emerging market meat/protein company on its policies, procedures and systems to monitor deforestation at its suppliers.

It has explained that its tier 1 ranchers raise cattle, poultry or pigs, which are then sold to protein companies for processing. This is monitored by satellite and in cases of illegal deforestation, offenders are excluded from its suppliers’ list.

However, tier 1 suppliers often buy cattle from tier 2 suppliers, who are usually smaller ranchers.  Although the meat-packer is responsible for the whole supply chain, its capacity to enforce a no-deforestation policy is reduced as it moves along the supply chain, due to poor documentation and controls among small landowners. We have discussed industry-wide initiatives to improve the monitoring along the supply chain using technologies such as blockchain.

A further important strand of our work relates to the demand-side - engaging on sustainable protein and plant-based alternatives, which will help to reduce the pressure on the Amazon and other ecosystems under risk. We recently published a three-part EOS Insights series on this topic.

By working on a combination of responsible supply practices and more sustainable protein alternatives, investors can play their part in reversing tropical deforestation and achieving the ultimate goal of reforestation. And perhaps the improvements that occurred in the Amazon over 2000-2016 indicate that this might be possible, with a concerted effort by all stakeholders pulling in the same direction. This goal remains the focus of our engagement at Hermes EOS.

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EOS Client Service and Business Development

Amy D’Eugenio,
Head of Client Service and Business Development, EOS