COP27

Dependent on Nature

COPs 27 and 15 can embed link between land use and climate change in policy and finance flows.

Land provides the principal basis for human livelihoods and well-being. It also plays an important role in regulating climate change.

According to an Intergovernmental Panel on Climate Change (IPCC) special report on Climate Change and Land from 2019, agriculture, forestry and other land use account for around 23% of total net anthropogenic emissions of greenhouse gases (GHG). Most of this contribution to global warming comes from deforestation and emissions from agricultural livestock.

“Forests are essential both for preventing dangerous climate change, catastrophic biodiversity loss, and for securing the human rights and livelihoods of more than a billion people,” said Vemund Olsen, Senior Analyst – Sustainable Investments at Storebrand Asset Management. “They are essential to make sure we stay within planetary boundaries.”

The importance of reversing deforestation, managing agricultural supply chains and preserving biodiversity in limiting global warming to the 1.5-degree target and achieving net zero emissions by 2050 is clear.

It explains the Glasgow leaders’ declaration on forests and land use at COP26, where signatory countries committed to halt and reverse forest loss and land degradation by 2030, and the launch of the Global Methane Pledge, whereby countries vowed to reduce methane emissions by at least 30% below 2020 levels by 2030.

What it doesn’t explain is the absence of major progress in achieving those aims.

“It’s worth noting that commitments and promises are not obligations,” said Tanya Khotin, Head of US Outreach for the Inevitable Policy Response (IPR), a project of UN Principles for Responsible Investment, and founder of Khotin Impact Strategies. “The world has changed with the war in Ukraine as well as other global economic and political pressures. And we have not made enough progress toward establishing the sort of supportive context that can turn promises into obligations that can be fulfilled.

“We have to understand all the blocks to progress if we are to achieve the kind of change needed to stop deforestation and protect nature and biodiversity,” she said.

Methane emissions continue to rise and deforestation continues in the tropics as a whole. The fact that Amazonian deforestation rates have been increasing  under the leadership of Brazil President Jair Bolsonaro illustrates the importance of political alignment to the cause.

Natural risk

Carbon emissions hog the limelight due to the attention brought to climate change by the Paris Agreement, while nature and biodiversity risks and impacts are several years behind in terms of awareness, both in the public and private sectors. There is also a problem around the complexity of reporting.

“Climate is by no means a simple issue, but at least you can approximate it to a carbon metric,” said Olsen. “Whereas there are many different drivers of biodiversity and nature loss. It certainly requires a broader understanding of the issues at hand and an ability to assess the data.”

Just as commitments on nature made at COP26, and a growing cohort of investor groups targeting biodiversity, deforestation and sustainable agriculture, are responsible for raising awareness of the topic, so the quality of data and methodologies for measurement are improving.

Building on the progress and principles of the Task Force on Climate-related Financial Disclosures (TCFD), established by the Financial Stability Board in response to the Paris Agreement, the Taskforce on Nature-related Financial Disclosures (TNFD) is taking an iterative approach to developing its risk management and disclosure framework, including a collaborative data integration project.

The Science Based Targets initiative (SBTi), which enables the private sector to set emissions reduction targets in line with science, recently launched Forest, Land and Agriculture (FLAG) Science Based Target Setting Guidance, which sets science-based targets that include land-related emission reductions and removals.

“Although FLAG is climate related, by focusing on how you can set targets and reduce emissions from forestry and land use change, you will also be able to address the most potentially significant drivers of biodiversity loss by proxy,” said Olsen. “There’s a greater understanding of the interdependence of climate and nature and it’s clear that we have to address both these challenges jointly.”

And that realisation needs to manifest itself quickly as time is running out for the world’s biodiversity.

“We really hope that nature gains the same importance as climate change. And quickly,” said Anita de Horde, Co-Founder of the Finance for Biodiversity Foundation, which coordinates efforts by financial institutions to develop models and strategies to tackle biodiversity loss. “It needs to because biodiversity is rapidly declining.”

Biodiversity decline

The World Wide Fund for Nature’s (WWF) Living Planet Report 2022 revealed global wildlife populations have plummeted by an average 69% since 1970.

“The staggering rate of decline is a severe warning that the rich biodiversity that sustains all life on our planet is in crisis, putting every species at risk – including us,” it said. It warned that the climate and nature crisis is not only an environmental issue, but an economic, development, security, social, moral and ethical issue with those least responsible at greatest risk.

“While conservation efforts are helping, urgent action is required if we are to reverse the loss of nature this decade,” it said. “We all have a role to play in building a better future for our wildlife, our climate and for all of us.”

Progress in protecting biodiversity will be enhanced after COP27 when parties to the UN Convention on Biological Diversity come together in Montreal for the much-delayed UN Biodiversity Conference (COP15) at which the details of the post-2020 Global Biodiversity Framework will be determined.

Financial institutions are collectively adding pressure on the parties to agree on an aspirational framework by signing the Finance for Biodiversity Pledge. The pledge, an undertaking by financial institutions to challenge the ambition of global leaders and to protect and restore biodiversity through their finance activities and investments, consists of five promises: collaborating and sharing knowledge; engaging with companies; assessing impact; setting targets; and reporting publicly on those commitments before 2025, reached a milestone of 111 financial institutions in October 2022 representing over €16 trillion in assets and 20 countries.

“In the run-up to Montreal, we hope more institutions will join us to encourage world leaders to agree on an ambitious nature agreement,” said de Horde.

The beef with farming

Traditional animal farming methods are heavily resource intensive, in terms of land and water usage, and make a significant contribution to GHG emissions. It is a particular problem for the Amazon where a large amount of deforestation is linked to cattle ranching and the cultivation of soy, the second largest driver of tropical deforestation.

“The biggest global culprit of deforestation is beef,” said Khotin. “And a substantial part of the beef and embedded soy supply chain comes from Latin America, especially Brazil.”

Brazil, under the Bolsonaro government, which is up for re-election at the end of October, leverages its natural resources to the advantage of its national economy in the present, but at the expense of the world economy in the future.

Acting in self-interest becomes a problem when done at such scale. Analysis by Kaya Advisory, commissioned by IPR, suggests that a re-election of Jair Bolsonaro means 2030 as an end date for deforestation is under threat, noting that he has shown no interested in curbing illegal deforestation. It has accelerated under his administration.

Companies with supply chains that extend into Brazil should be under no illusion as to the harm they are doing to the climate.

“Firms like McDonald’s, for which Profundo estimates almost 14% of its global operating profit is linked to beef and embedded soy from Brazil and Latin America, should be well aware that the countries from which they’re purchasing core ingredients have not made commitments to end deforestation and to protect biodiversity,” said Khotin.

Through engagement, however, investors can apply pressure on governments and corporates to align policies and operations to the Paris Agreement and the Global Biodiversity Framework. And collaborative investor engagement has arguably greater leverage in agriculture than in other sectors as the food system is controlled by a relatively small cohort of global players.

For European and US investors, exposure to deforestation, agriculture and biodiversity is taken through publicly listed companies rather than actual producers of agricultural commodities.

“It will be the traders, the restaurants, the processors, and the retailers we’ll have to engage with, not necessarily the direct deforesters,” said Olsen. “They have a massive role to play in making their supply chains fully traceable, and transparent.”

“Engagement is the answer”

It means putting in place systems that ensure companies no longer source commodities from nature sensitive areas.

“In the food chain, especially with diversified downstream companies, engagement has got to be the answer,” said Khotin. “Companies can substantially improve their footprint with respect to nature as it should not require a huge change in business models.

“It might cost more for a large global brand to shift their supply chain to regions where responsible practices can be verified, while also adding alternative protein options, but at the level of the burger, I doubt the change in price would be substantial enough for the customer to notice.”

It is not just a question of financial implications for these firms, but the risk of alienating the end customer.

“I sometimes think that the big food companies get off too lightly,” said Dawid Heyl, Portfolio Manager on the Global Natural Resources fund and strategy team at asset manager Ninety One. “Consumer pressure on the likes of Nestle and some of the other big food companies has to increase.”

As established firms adapt to evolving patterns of consumer demand, the fear of reputational risk, in turn, makes it easier for investors to get through to companies. But stronger regulation, both in producing countries and in demand-side countries, is also key if companies are to clean up supply chains.

And regulatory change has been coming, with jurisdictions including the UK and the European Union planning legislative changes that require greater corporate supply chain due diligence on environmental impacts.

More governments are likely to join them as policies evolve post-COP27 and COP15, especially once they sign up to the new Global Biodiversity Framework.

“Firms need to understand that reputational risk also affects their shareholders,” said Olsen. “And so you have a combination of pressure from civil society, pressure from the financial sector, and stronger regulation.”

 

 

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