Deforestation Transparency Reveals Reputational and Financial Risks

As described in our previous post, this article aims to connect some of the findings of the recent Climate Advisers and Orbitas report on German financiers’ investments in forest risk commodity supply chains with relevant Lucida research. The previous newsletter focused on risks associated with Indonesian palm oil companies identified by Orbitas as facing significant stranded asset risk. Here we focus on deforestation risks for manufacturers, retailers, and their financiers, including but not limited to those associated with deforestation itself.

The previous post noted that non-German financiers have considerable exposure to producers and other upstream actors in the palm oil industry. As the report makes clear, however, for German financiers in particular, indirect exposure to deforestation via manufacturers and retailers is much higher.

Because they are not directly involved in palm oil production, the financial impacts of carbon pricing, land development restrictions, trade deals, and other factors impacting palm oil production are likely to be less significant for manufacturers and retailers. However, the risks are not trivial, as French retailer Casino Group recently found when a lawsuit seeking $3.7 million in damages was filed against it. The lawsuit charges that Casino Group’s sourcing practices in Brazil and Colombia violate France’s Due Diligence law, which aims to eliminate human rights and environmental violations from French companies’ supply chains.

Moreover, since they market their products directly to consumers, reputational risks from deforestation and related activities are far more likely to affect manufacturers’ and retailers’ bottom lines, as well as those of their financiers. After all, many customers will be less likely to buy from retailers and manufacturers they view as complicit in or contributing to significant wrongdoing.

Given that tropical deforestation is responsible for more greenhouse gas emissions per year than the European Union, the reputational risks to manufacturers, retailers, and their financiers from deforestation are acute. However, the reputational risks associated with forest risk commodities include but are not limited to those directly connected to deforestation itself. This is because the same firms engaged in tropical deforestation are often engaged in other activities that can harm companies and financiers’ reputations with consumers, as Lucida’s last two stories help to illustrate.

As both our CBI and ANJ stories show, palm oil firms sometimes attempt to develop lands claimed by Indigenous communities and, in some cases, develop those lands without securing the consent of those communities or involving them in relevant land use decisions. Of course, communities often resist these efforts. It is therefore not at all surprising that palm oil firms are often accused of violence against forest communities, as is true of both CBI and ANJ subsidiaries.

In addition, palm oil firms sometimes fail to take the steps necessary to protect endangered species and ensure the integrity of ecosystems. For example, CBI’s subsidiary SML appears to have conducted the relevant assessments improperly. As a result, its plantation may threaten bornean orangutans, clouded leopards, critically endangered flora, and dozens of other endangered species in the area.

When NGOs or media outlets highlight these sorts of activities, both the manufacturers and retailers who source from targeted firms as well as their financiers can suffer financial losses just as significant as those associated with deforestation itself. This is why a coalition of retailers sent a letter to the Brazilian government expressing concern about proposed legislation that, these retailers feared, would increase deforestation, land-grabbing, and violence against Indigenous communities in the Amazon, heightening associated financial and reputational risks. Many financiers are already taking steps to mitigate these risks. As the Climate Advisers and Orbitas report shows, however, many still have significant exposure to deforestation risk, including German institutions.

Josh McBee
Josh McBee is a Senior Policy and Research Associate at Climate Advisers, where he assists the Policy and Research team on international climate policy, diplomacy projects, domestic U.S. energy/environmental policy, and financial flows of deforestation.
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