$900 Billion Revenue at Risk from Deforestation; Impacts Cost of Goods Sold


As reported by Chain Reaction Research, CDP recently published its annual Global Forests Report analyzing corporate risks and opportunities linked to the four commodities – soy, timber, cattle, and palm oil – that drive a significant portion of tropical deforestation. More than 200 global companies disclosed information to investors on deforestation in 2016.

Based on the disclosures from 187 companies analyzed in this report, on average 24 percent of corporate revenues depend on commodities linked to deforestation: cattle, palm oil, soy and timber. This makes these revenues vulnerable to the risks in producing and sourcing commodities that are responsible for deforestation.

But only one in five companies assess risks associated with deforestation beyond a six-year horizon across all commodities. Fewer than half of these companies have evaluated how the quantity or quality of key forest-risk commodities could affect their organization’s growth strategy over the medium-term. With such a large proportion of company revenues attached to these forest-risk commodities, companies must plan for the long-term to ensure the future sustainable supply of these commodities.

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The production of these forest-risk commodities can contribute to habitat loss, greenhouse gas emissions, and social conflict. This results in direct financial supply chain exposures for suppliers and customers alike.

Meanwhile, more than 350 global corporations have made zero-deforestation commitments. Therefore, if potential supply constraints from both physical deforestation risks and zero-deforestation procurement policies are not addressed, cost of goods sold could spike, potentially impacting revenue, profits, and future firm-wide financial valuation.

72 percent of companies report that they have identified sufficient future sustainable supply across all forest risk commodities. Meanwhile, 81 percent of companies in the Agricultural Production sector, which sits at the top of global commodity supply chains, have experienced impacts related to forest-risk commodities that have resulted in substantive changes to operations, revenue or expenditure in the past five years. But, Fewer than half – only 42 percent – of companies have accessed the quantity or quality of key forest risk commodities on their corporate strategies over the next five or more years.

For example:

  • Croda International reported the risk of increased direct and secondary operating costs from the decision to source sustainable palm oil.
  • Indonesian pulp and paper giant Asia Pulp & Paper reported potential climate-related increases in plant diseases or pests.
  • French retailer Delhaize Group reported damage to their brand after Greenpeace targeted Delhaize Group because of its deforestation.
  • Reduced fruit production at Golden Agri-Resources cited as a result of the haze from Indonesia’s forests fires.
  • Brazilian company Marfrig Global Foods has been impacted by drought, which had knock-on effects on animal costs, resulting in reduced beef production in the Brazilian industry.

Finally, the report showed that 47 percent of the companies considered deforestation as part of their enterprise risk management and operational risk strategies.

Demand for these forest risk commodities is expected to grow. Zion Market Research forecasts 7.2 percent compound annual growth rate (CAGR) for palm oil from 2015 to 2021 to a total $93 billion. This would result in additional capital and long-term equity at risk, if the more than 200 corporate zero-deforestation palm oil commitments were implemented.

Gabriel Thoumi, CFA, FRM works as Director Capital Markets at Climate Advisers where he manages global financial analytics focusing on mitigating systemic climate risk while advising on “greening” capital markets. He has 18 years of experience managing and deploying frameworks to improve global capital markets sustainability through risk mitigation and return enhancement. Previously, for Calvert Investment Management, he valued global equity, index, and fixed income portfolios and their component positions in the utilities, energy, materials, chemicals, and financial sectors. He worked on quantitative index construction and asset allocation strategies. He engaged Fortune 500 CEOs on approaches to mitigating climate risk using financial risk management tools. He led initiatives to improve financial accounting of exchange-listed products and incorporated natural capital into financial tools. He has also worked at Morgan Stanley's carbon offset company, Wells Fargo Capital Management, and American Express. He is an adjunct at John Hopkins University.
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