Benxi
Problem analysis

Global deforestation, major contributor to climate change, is on a steady rise

Land-use change and agriculture combined are the second highest contributing sector to climate change, responsible for 23% of GHGs emissions globally. Further analysis estimates that food production is responsible for 26% of global GHG emissions. Of this number, land use change accounts for 24% of food-related emissions. Data trends show that population growth and increasing food demand will only increase pressure on land and forests.

2016-2018 saw the highest three-year average global deforestation rates since record keeping began in 2001.While there was a reduction in deforestation rates by 2018, the following three years (2018-2020) saw a rising trend similar to the previous years.

Forests are a critical carbon store for the planet, absorbing approximately one third of CO2 released from fossil fuels each year. Clearing forests releases CO2 into the atmosphere and leads to irreversible biodiversity loss. Population groups most directly affected are local and indigenous communities that depend on forests for subsistence. They are susceptible to land grab, violence, encroachment on their protected areas and impacts on their livelihoods.

International commodity and farmland markets drive deforestation in forest countries

Agricultural expansion are primary economic drivers of deforestation. Key sectors linked to rising deforestation are the cattle and soy supply chains and the farmland market in Latin America and palm oil and timber plantation development in South East Asia. Additional soft commodity supply chains, including coffee and cocoa drive deforestation in specific hotspots

The growing global demand for food underpins the expansion of all these sectors. Population growth and the rising middle-class access to marketable products result in increased meat demand. This results in growth markets for cattle from the Amazon and Cerrado biomes, both within Latin America and in Asia. It also results in higher demand for soymeal as animal feed, increased use of soy oil for processed foods and biofuels, and larger export markets for palm oil, coffee and cocoa. Investors aim to capture value from these trends by investing in farmland as an underlying asset.

Few corporations hold key positions over commodity supply chains and farmland markets

Majority of commodity supply chains can be characterized by a concentration of power and influence within a small number of multinational corporations or investment funds. These actors have significant leverage over the entire sector and their business strategies can define their sustainability footprints. Both the cattle, soy and palm oil supply chains have an hour-glass shape, whereby a large number of farmers supply a handful of midstream traders and processors. These powerful companies then supply a large range of downstream producers, retailers and consumer goods companies. Other commodity supply chains and the farmland investment market also see a number of dominant players.

To illustrate, the cattle supply chain in Brazil is dominated by three large meat processors – JBS, Minerva and Marfrig. These three companies hold approximately 70% of slaughter capacity within the Amazon. In the same region, five companies account for 57% of Brazil’s exports and 40% of its crushing capacity in the trade and processing of soybeans. These include the ABCD companies (ADM, Bunge, Cargill and Louis Dreyfus Company) and Amaggi. The key players in Brazil’s cattle and soy sectors have varying degrees of sustainability commitments, where gaps in implementation, differences in due diligence measures for direct and indirect suppliers and tolerance for legal deforestation continue to link largest players to fire events and land clearing.

Business models and strategies of the powerful corporate actors

Given their outsized influence, the business models and strategies of the powerful corporate actors provide significant economic incentives to the rest of the sector. Business models that rely on indiscriminate expansion and land use change increase pressure on tropical forests. At the same time, procurement practices that set strict zero-deforestation requirements and positive shifts in key companies’ business models may result in sector-wide transformation as was seen in the palm oil sector.

Institutional investors lack company-specific and actionable data to effectively engage companies and mitigate deforestation risks

International financial markets provide the financing that enables activities in soft-commodity and farmland markets. Institutional investors, asset managers, pension funds, insurers, banks, endowment funds, private equity and others, have financial ties to actors throughout deforestation-linked supply chains. With pressure for urgent climate action rising across the globe, the financial sector has increasingly recognized climate change as a systemic financial risk. Most notable, the Taskforce for Climate-Related Financial Disclosure (TCFD), set up in 2015, has been influential in furthering the thinking about climate risks. At the same time, financial regulatory frameworks are expected to further integrate sustainability requirements as central banks and regulators increasingly recognize the need to price biodiversity loss and climate change risk and have developed a number of mitigation measures.

To support the financial sector’s role as a lever for change in eliminating deforestation, investors need company-specific and actionable data. Whereas there are a range of deforestation platforms that service the financial sector with deforestation alerts and policy analyses, many investors struggle to integrate such data into their existing ESG and risk assessment systems.

Civil society actors are better able to influence the corporate sector when they have access to real-time and actionable data

CSOs also play an important role in ensuring and increasing transparency of supply chain data. As stakeholders and accountability partners to corporate actors, they are also ideally placed to call on companies to halt deforestation. While data transparency has improved significantly with initiatives such as Trase, Global Forest Watch and Mapbiomas, there remains a need to analyse supply chain linkages and integrate local and context-specific nuances behind big data.

Aidenvironment’s projects focus on engaging influential corporate actors’ stakeholders, including investors and CSOs. Our projects provide actionable information on deforestation-linked companies that are tailor-fit for the specific needs of stakeholder groups. The aim is to empower stakeholders to demand deforestation-free commodities from key companies.

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