AGM season 2024: IROs need to recognize that deforestation is hitting their bottom line

Amid the debate on what companies should or shouldn’t be doing on ESG, some things remain crystal clear: understanding and addressing business externalities is essential, and issues that affect the bottom line cannot be ignored. Deforestation is one of these.

Investors and IR professionals are concerned about climate change, and increasingly about nature loss. More than 1,000 companies and 700 financial institutions have set net-zero targets, and many have signed up to become ‘nature positive’ and tackle their biodiversity impacts and dependencies.

Deforestation is the biggest issue sitting at the heart of all this. Net-zero targets and nature-positive ambitions cannot be achieved without eliminating deforestation, conversion and the associated human rights abuses from supply chains.

Yet over the past decade 8.4 m soccer fields of land, roughly equivalent to the size of Sri Lanka, were deforested in the Amazon. In 2023, the rate of deforestation in Brazil’s Cerrado surged by 43 percent. Around 1.6 bn people rely on forests, making the relentless destruction a significant human rights issue.

But it doesn’t have to be this way. Legislation, science, data, guidance and shareholder priorities are all converging to enable and encourage an end to deforestation. We still have time to not only prevent the worst impacts of climate change, but also protect the rivers, soils and plants that businesses – and countless livelihoods and lives – depend upon, too.

Accountable for 11 percent of annual global emissions – more than twice that of the aviation and shipping industries combined – most deforestation occurs for a handful of commodities: palm oil, soy, beef, leather, timber, pulp and paper, vital inputs to industries like food, fashion and retail. Companies including the world’s largest meat supplier JBS, shoe manufacturer Deichmann and fashion brand Nike are all exposed to deforestation risk through their supply chains.

These companies are all included in the Forest 500, which tracks the policies and performance of the 350 most influential companies and 150 financial institutions most exposed to deforestation risk in their supply chains and investments.

Deforestation in Brazil has reduced the capacity of the Amazon and Cerrado to regulate rainfall, leading to exceptional droughts with severe consequences for people and businesses. The food and agriculture sector worldwide could face losses equal to those of the 2008 financial crash if it fails to shift toward zero-deforestation practices, with the world’s largest meatpacker JBS seeing margins fall sharply. 

Despite growing threats to businesses, progress on deforestation is, on the whole, disappointing. Over the past 10 years, Forest 500 has collected 1.3 m data points charting the companies and financial institutions most exposed to tropical deforestation risk. While close to two fifths of firms now acknowledge their role in the issue, three in 10 companies still do not have a public deforestation commitment for any of the highest-risk commodities.

And despite their impacts and dependencies, 65 percent of companies assessed for beef have no public commitment to act, with only McDonald’s reporting that at least 50  percent of its beef volumes are deforestation-free. More than nine in 10 (94 percent) of the companies we assessed with net-zero commitments are likely to be off track to achieve them.

Furthermore, none of the 500 companies and financial institutions assessed have a commitment to address all key human rights issues affecting the highest-risk commodities they are exposed to. Deforestation cannot be effectively addressed without comprehensive action on the human rights abuses that often enable or accompany it.

As this year’s AGM season gets underway, meat company JBS’ bid to list in New York is putting corporate inaction on deforestation in the spotlight. A group with emissions estimated to exceed those of Spain, JBS' supply chain has been linked with human rights abuses, land grabs and labor violations. The company’s IPO plans – which have recently been delayed – may eliminate the influence of ordinary shareholders, and have met with steep criticism from politicians and financial institutions. JBS is already on the Norwegian sovereign wealth fund’s influential exclusion list.

The winds of change are set to blow. A new framework on biodiversity commits countries to protect tropical forests, the EU has brought due diligence requirements on deforestation into law and the Taskforce on Nature-related Financial Disclosures’ standardized approach for integrating nature into corporate decision-making is set to become the global norm.

It’s high time for IR managers at companies like JBS, and indeed all those with exposure, to take deforestation seriously.

Our research finds that 45 percent of financial institutions with the greatest ability to impact deforestation rates now have a public deforestation policy. While this leaves the majority still with an apparent lack of awareness, others, like Barclays, have made notable progress in the past 12 months, although there is still a long way to go. At the same time, leading investors are collaborating through networks like the $8 tn-strong Finance Sector Deforestation Action (FSDA), Ceres and the PRI to drive targeted engagement with companies.

Increasing shareholder pressure is on the cards. Investors are looking for time-bound, science-based roadmaps toward zero-deforestation supply chains, alongside evidence of on-the-ground progress. FSDA, for example, now asks for a public commitment to deforestation-free production and sourcing and investments in innovations that reduce dependence on deforestation.

With data, tools and pathways now readily available, all this is very possible, and changes in the palm oil sector show IR managers a glimpse of what to expect.

Awareness of the detrimental impact of palm oil, once the largest global driver of tropical deforestation, has surged. Thanks to global campaigns, investigations and certification schemes, three quarters of the companies we assessed for palm oil now have a deforestation commitment. And between 2018 and 2020, deforestation linked to palm oil in Indonesia was at just 18 percent of its peak between 2008 and 2012.

Other industries must follow suit. The beef industry, in particular, must stop dragging its feet. At the start of 2024, Brazil announced it had delivered the first leather cargo from 100 percent traced cattle, where the cargo contains all information about the animal the leather was produced from, traceable by a QR code, to maintain sustainability in production. 

As extreme weather impacts intensify and supply chains and infrastructure are threatened, there is no time to waste. The risks of ongoing deforestation are ever more in the public eye, a priority for policymakers and at the forefront of institutional investors’ minds.

With only 1 percent of companies on track to be compliant with incoming EU deforestation legislation, based on public commitments and reporting, a shake-up is undoubtedly on the cards. Companies like JBS can no longer continue with their business-as-usual approach. Investors are poised to raise their voices at this year’s AGM season and demand better. Companies like McDonald’s are demonstrating that deforestation is a solvable crisis.

IR managers who are keen to act on the externalities that matter most, to get on track toward their climate and nature targets and have the best interests of their shareholders and stakeholders at heart, will make deforestation – and the human rights abuses associated with it – a core agenda item in 2024.

A spokesperson for JBS says: ‘We have strict socio-environmental sourcing criteria and are engaged in wider food system supply chain initiatives to up ambition, including on non-deforestation. We are confident our dual-listing proposal will create benefits for all stakeholders.’

Deichmann, Nick and BlackRock did not immediately respond to a request for comment.

Emma Thomson leads Global Canopy’s Forest 500 and Deforestation Action Tracker projects