Unchecked commodity-driven deforestation can permanently “wipe off billions of dollars,” food industry warned

21 Sep 2022 --- Food and farming firms at the highest level may stand to lose up to a quarter of their shareholder value by 2030 if they fall short in their efforts to halt deforestation. Unlike one-off cyclical shocks, a delegation of COP26 and UN actors warns this will be a “permanent, non-cyclical loss” if companies do not act now to protect value.

At the Climate Week in New York, COP26 President Alok Sharma alongside UN Climate Change High-Level Champions, Nigel Topping and Dr. Mahmoud Mohieldin, urged all financial institutions to exact “credible progress” in climate action by 2025.

Forecasting potential value loss as “equivalent in scale to the 2008 financial crisis,” they further pinpoint that markets are currently failing to adequately price in the financial impact of accelerated land use for farming.

These warnings are growingly prevalent in light of endemic food chain issues reported over recent weeks, including last month’s “worst drought in 500 years” drying out food trade in Europe and acute shortages of important commodities, like coffee, in South America.

The analysis warns that individual firms at the center of the global food supply system could lose up to 26% of their value by 2030, equivalent to US$150 billion in losses to investors.

“We’re seeing some leadership from investors on nature and deforestation, but frankly, not enough,” concedes Topping.

“Over 30 financial institutions with more than US$8.7 trillion in assets under management have already signed the financial sector commitment letter on eliminating commodity-driven deforestation, with a target date of 2025,” he notes.

“These leaders are showing what’s possible, and as our new analysis underlines, protecting themselves against financial, regulatory and reputational risk in their portfolios.”

Up to nearly a quarter of a trillion in losses
The UN-backed Race to Zero campaign has released a new report that models the financial impact of climate transition risks for 40 “systemically significant” food, land and agriculture companies worth US$2 trillion.

The analysis warns that individual firms at the center of the global food supply system could lose up to 26% of their value by 2030, with a sector average hit of over 7%.

This estimate is equivalent to US$150 billion in losses to investors.

A separate paper published by Race to Zero earlier this year found that without much greater action, over 90% of major forest, land and agriculture companies committed to net-zero are at risk of missing their targets because of a lack of progress on tropical deforestation, which is critical to reducing emissions from these sectors.

These companies are responsible for one-fifth of global emissions. Moreover, half of that comes from deforestation and land conversion.

Examples of recently introduced tech-driven approaches to tackling deforestation include Barry Callebaut’s polygon mapping to bolster sustainable cocoa.Adding weight to the issue, other recent analysis led by the UN has warned that major agriculture companies committed to net-zero could have “little to no chance” of meeting their climate commitments – eliciting responses from the CEOs of Nestlé and Unilever in June.

“Due to the unique role of deforestation in driving emissions, and the role of the standing forest and terrestrial ecosystems in mitigating carbon, the financial sector must front load its transition to net zero, with a swift move away from deforestation-related emissions,” stresses Sharma.

Silver lining for early actors
On a positive front, analysis indicates that “rapid and effective” company responses – such as introducing more sustainable food products in new markets, raising operational efficiencies and sourcing directly from deforestation-free markets – can protect value, “mitigating all potential losses.”

Early movers who accelerate the transition by developing solutions for a net zero and nature-positive future stand to gain a share of the US$4.5 trillion opportunity that will accompany, for example, the entrance of biofertilizers into new markets, scale-up of alternative proteins, and nature-based carbon credits.

Examples of recently introduced tech-driven approaches to tackling deforestation include Barry Callebaut’s polygon mapping to bolster sustainable cocoa, alongside new scientific advancements in the cultivation of cell-based ingredients made without traditional farming inputs.

“The new research underscores the critical role nature must play in how we – as investors – understand risk and spot opportunities. The reality is stark: nature risk is fast becoming an integral factor to investment risk,” concludes Schroders Group CEO Peter Harrison.

“By COP27 in November, we need investors and businesses to help accelerate the shift to a more resilient economy by investing in high-integrity carbon credits supporting nature-based solutions which put smallholders, indigenous peoples and local communities at the center,” urges Dr. Mohieldin.

By Benjamin Ferrer