Corporations globally have material financial risks in their supply chains associated with tropical deforestation-related agriculture commodities such as palm oil, soy, cattle, coffee, cacao, timber pulp and paper, and other products.
Financial analysts, credit analysts, commercial bankers, and institutional investors reviewing these companies often do not understand these material financial risks.
According to the Financial Stability Board Task Force on Climate-Related Financial Disclosures (TCFD), these tropical deforestation-related material financial risks exist in companies:
- Revenues
- Expenditures
- Assets and liabilities
- Capital and financing
So when companies are involved in producing, sourcing, refining and selling these tropical deforestation-related commodities and they lack an appropriate risk mitigation strategy, financial data since 2013 shows that these companies face market and credit risks – such as a decrease in equity prices, negative impacts on their debt pricing and ability to secure loans, and inability to sell their agriculture commodities.
Often, the story about where and how these commodities are being sourced is missing key elements, such as:
- Whether developing the land bank listed by the company as an asset would mean violating the law or industry standards;
- Whether it would significantly contribute to global climate change, or destroy land of high conservation value; and
- Whether governance and community engagement standards violate the human rights of indigenous peoples.
Taken together, it means that a company may have far more risk in its sourcing or its supply chain than is reported in its publicly available materials. That’s something financial analysts need to know.
Banks and investors across all asset classes, including passive asset managers that track major indices, need the best possible information about the risk in companies that deal with environmentally intensive commodities.
Investors need to determine to what extent tropical commodity risks are embedded in their current and future investments, and the potential impact of such risk. That will help them determine whether to diversify into opportunities positioned to benefit from sustainable practices, or to divest from those that embed major risks.
To make these critical decisions, financial analysts and investors need unbiased and objective information about the facts on the ground – and about where and how these companies have made choices that impact financial return. And they need it from an institution dedicated to dispassionate, credible analysis supported by thorough technical and fundamental analysis of commodity supply chains.
Chain Reaction Research has received support, in part, from the David and Lucile Packard Foundation, from the International Climate and Forest Initiative (NICFI) scheme managed by the Norwegian Agency for Development Cooperation (Norad), the Moore Foundation, the EU LIFE Programme and Ceres. Chain Reaction Research statements and materials do not necessarily reflect the standpoints of the Packard Foundation, the Moore Foundation, Norad, Ceres, he EU LIFE Programme, or Chain Reaction Research coalition partners Aidenvironment, Climate Advisers, and Profundo.