IN FOCUS6-8 min read

The high stakes of inaction on deforestation

We explain how deforestation poses risks to both investments and to the likelihood of achieving global climate goals.

22/04/2024
Brazil deforestation

Authors

Sarah Woodfield
Biodiversity and Nature Engagement Lead

In 2023, official statistics from the Brazilian Government revealed that there was a 43% increase in deforestation rates in one of the world’s most sensitive biomes. Home to rare and endangered species such as the giant anteater, the Brazilian three-banded armadillo and the maned wolf, their territory is being increasingly encroached upon to produce soy and rear cattle.

We are not talking about the Amazon rainforest but the Cerrado in Brazil, a vast savannah, sometimes referred to as an underground forest and home to around 5% of the world’s animals.

Forests are home to more than 80% of all terrestrial species of animals, plants and insects. Protecting this biodiversity is crucial to reversing nature loss and fighting climate change. This makes deforestation a critical issue that must be addressed to mitigate investment risk as well as helping achieve global climate goals.

Deforestation poses various risks to our clients’ investments, including regulatory, operational, and supply chain risks. To tackle this issue, in 2021 we made a commitment to use our best efforts to eliminate deforestation activities, specifically those driven by forest-risk agricultural commodities, across our investment portfolios and financing activities, by 2025.

As active owners, it is essential we are transparent about our action and that we use our voice to encourage the companies we invest in to accelerate action to zero deforestation. In 2023, our work so far was recognised in the annual Forest 500 report, where we were number one financial institution for action on deforestation for the second year running. 

Engagement insights

As part of our action to meet our commitment, in 2023 we engaged with 293 companies that we identified as our highest risk holdings. Through these engagements we have identified several areas of weakness in companies’ practices where we believe further action is needed to end deforestation.

Traceability: many companies rely on third party certification to address deforestation risk, without investing in the supply chain traceability and third-party assurance that provides robust verification of deforestation and conversion-free commodities. This leaves these companies at risk of incomplete views of their supply chain exposure.

Disruption: limited visibility into supply chains leaves many companies challenged in meeting forthcoming regulation in consumer markets. For example, the EU’s Deforestation Regulation comes into effect in 2025, with companies facing fines of up to 4% of EU turnover for non-compliance. This raises financial and investment risk for companies exposed to deforestation risk in their supply chain.

Collaboration: smallholder farmers will require more support in the transition to deforestation-free supply chains. Collaboration is urgently needed between policymakers, investors, and agricultural representatives to establish incentive structures that enable smallholder farms to maintain their livelihoods, while transitioning to regenerative and sustainable agricultural practices.

Soy: the risks associated with soy are severely underappreciated. Demand for soy-based animal feed continues to grow and so does its embedded deforestation risk. A lack of consumer demand for deforestation-free soy has the potential to incentivise unsustainable land conversion practices in ecosystems such as the Cerrado in Brazil.

Human rights: companies need to take more meaningful action to integrate human rights issues, such as land tenure and indigenous rights, into their deforestation risk management. Actions such as incorporating human rights impact assessments into deforestation due diligence programmes and enhancing transparency around credible grievance mechanisms will help to prevent and mitigate further human rights impacts.

Conclusion

As forest biomes around the world approach potentially irreversible tipping points of ecosystem decline, we know that more needs to be done to protect our investments and the planet. Where engagement does not achieve sufficient progress, we will consider escalation.

Authors

Sarah Woodfield
Biodiversity and Nature Engagement Lead

Topics

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