Supply chain links to deforested land are notoriously hard to decipher; some say governments need to unlock key economic data to move the needle.
The existential threat of deforestation is a well-treaded subject. Turbocharged global warming, more pandemics, and the extinction of millions of plants and animals are just some of the alarming impacts humanity could face if rampant culling of forests does not end.
A host of parties, including investors and campaigners, have been striving for years to tackle this issue, with slow results. Speaking at ESG Investor’s Nature Data for Institutional Investors event this month, Peter van der Werf, Head of Engagement at Dutch asset manager Robeco, said a decade ago agri-giant Bunge claimed to have no visibility on deforestation happening in its supply chain. Today, they have a deforestation policy and commit to be deforested free in 2025. But they still don’t disclose on supply chain links to deforestation, with Van de Werf admitting there is “still work to be done on this”.
The risk to investors is vast, with global disclosure platform CDP last year finding forest-related risk associated with company supply chains could cost over US$79.2 billion across 211 companies. The majority of these companies do not have sufficient traceability (77%) or monitoring systems (74%) throughout their supply chains to implement commitments made or assess progress against them.
“It’s not an easy thing to unpack, because of the different layers within supply chains,” Alexandra Mihailescu Cichon, Chief Commercial Officer at data science firm RepRisk tells ESG Investor.
She explains ultimate buyers of commodities heavily linked to deforestation are often disconnected from the owners, with traders operating between them. Geospatial technology, which RepRisk uses to help investors assess biodiversity risks, will help address gaps, she says, but other data is already available to help connect the dots on supply chain links to deforestation.
However, obtaining this data can be a minefield, explains Vivian Ribeiro, Senior Data Scientist for the Trase platform at SEI Headquarters, which seeks to map supply chains and the deforestation impacts associated with it and how this connects to companies.
“We investigate how much is connected not only to exporters and importers, but also the countries that are buying the goods, and related to those impacts,” she says.
But there are challenges with the transparency of data to inform its work. In Brazil for example, since 2018, there is no longer full access granted to customs declaration services like what was available before.
“It’s reduced our capacity not only to identify the final destination of commodities and also understand with more precision where the place of production is located in the country,” Ribeiro explains.
Economic data such as import data is seen as key for unlocking shadowy supply chain links, but transparency varies by jurisdiction. The EU, for example, does not release this data, despite longstanding civil society pressure.
There is also commercial sensitivity to supply chain data, but as attention on biodiversity risk rises with the likes of the Taskforce on Nature-related Financial Disclosures (TNFD) and engagement initiatives such as Nature Action 100 and the UN-convened Principles for Responsible Investment’s (PRI) Spring, pressure looks set to increase on governments to help push for greater transparency.
Not all countries in the world have a monitoring system for deforestation, says Ribeiro, with Trase relying on independent initiatives to fill data gaps. Also, different countries provide unique challenges depending on the commodity linked to deforestation.
“In some countries the connection between a slaughterhouse and an indirect supplier in the beef supply chain is easier to investigate than soy, for example, where we lack transparent data to connect indirect suppliers.”
At ESG Investor’s Nature Data for Institutional Investors event, Graham Stock, Senior Emerging Markets Sovereign Strategist at asset manager RBC BlueBay, spoke about how in Brazil during the Bolsonaro administration there were attempts to reduce the availability of deforestation-related data which investors and corporates need. The new government, however, led by Luiz Inácio Lula da Silva, is more aligned with the needs of investors and corporates, says Stock, who also Co-Chairs the Investor Policy Dialogue on Deforestation which focuses on deforestation-related engagement with governments, and has more than 70 institutional investor members across 20 countries.
Iceberg Data Lab’s CEO Matthieu Maurin says regulation is also needed to build robust datasets to understand deforestation risk. He says trade and distribution of deforestation-free commodities need to be based on end-to-end certification set by a global regulatory body.
“The level of adoption of certification – it’s maybe 1% [of the industry],” he says, adding that the EU’s Deforestation Regulation (EUDR) – applying from December 2024 – will force change and transparency, but notes that it needs to be backed up by strong verification. The EUDR will require companies dealing in in-scope products to undertake due diligence into the source of a wide range of commodities to ensure that they have not been obtained as a result of deforestation.
Some companies are also striving for movement with the Forest Positive Coalition, formed in 2020, by the Consumer Goods Forum. It brings together 21 of the world’s largest retailers and manufacturers, with a combined market value of around US$2 trillion to take collective action to remove deforestation, forest conversion and degradation from key commodity supply chains. Last year, Consumer Goods Forum Director of Sustainability, Didier Bergeret, said all companies must commit to collaborative supply chain transparency to achieve a forest positive future.
Palm oil transparency
The seven commodities responsible for most commodity-related deforestation are timber products, palm oil, cattle products, soy, rubber, cocoa and coffee.
Observers that ESG Investor spoke with say palm oil is by far the most transparent on links to deforestation.
Christopher Wiggs, Programme Director at NGO Aidenvironment, says the palm oil sector is mainly covered by no deforestation policies, with a key part of them including supply chain transparency. “Most of the big companies, the buyers house, the public suppliers list – it has just made it much more transparent.”
Wiggs explains this was the result of intense focus and campaigning associated with the palm oil sector. “It captured people’s consciousness. It was associated with the conservation of orangutans and tigers,” he says.
He adds that the palm oil sector was perfect for public pressure because the sector works “like an hourglass with a bottleneck in the middle”.
“You’ve got thousands consumer good companies and thousands of concessions, but only about 150 companies in the midstream, which are trades and refiners of palm oil, and all traders are going through those companies because they have to refine it and extract it,” says Wiggs, “By targeting those companies, you can have such a huge impact on what is going on.”
This success with transparency in the palm oil sector has failed to materialise in other sectors heavily linked with deforestation.
Wiggs works in Indonesia, where along with palm oil, the other big deforestation-linked commodity is pulp and paper. “It just has nowhere near the level of transparency,” says Wiggs. “It’s really hard to operate in that sector because people just don’t know where they sell their products.
“You don’t have public supplier lists. You don’t really have any understanding of the genesis of supply chains and the companies that are buying these products. it’s really hard to achieve your goals in that sector as you can’t use the leverage of a particular market.”
There are also problems with companies deliberately trying to obscure supply chain links to avoid scrutiny.
“They will just try and hide some of their concessions or they will register particular companies under a different name,” says Wiggs. “A lot of our time is spent just trying to navigate an environment where companies know how to evade surveillance and are just shifting companies around – that’s the biggest challenge for transparency.”
Investor attention on the issue is mixed and cultural. In Southeast Asia, Wiggs explains, family-ownership of companies is common and can obscure supply chain deforestation links.
Guirec Thouement, Sustainability Analyst at asset manager AllianzGI, tells ESG Investor that greater transparency on supply chains is essential to truly understand a company’s exposure to deforestation risk.
“This came from an observance that while few companies disclose a direct exposure to deforestation from their direct action, the percentage of companies having a deforestation-related controversy is higher,” he says.
“A closer look shows that said controversies are generally related to supply chain issues, and not dependent of the direct action of companies. They do not deforest but use products resulting from deforestation.”
Supply chain issues are harder to track given the number of suppliers, says Thouement, and deforestation being less visible due to its lack of direct visibility for companies.
“They often lack polices, or at least disclosure of policies,” he says. “It depends on the database and the universe used, but usually there are only around 10% of companies with adequate traceability in their activities, including supply chain.”
He agrees better availability of government data and customs data is key.
“A greater access to data from governments would indeed be of great use, as it would give an independent database to compare activities’ location to areas facing deforestation,” he says. “This is something that is done with water risk, but it is not really feasible for deforestation yet.
“This is one of the results that we expect from the EUDR, the traceability that it imposes will force companies and their suppliers to improve the quality and quantity of relevant deforestation data.”