Unpriced nature and climate risk could wipe $ billions off world’s food and agriculture companies, as investors urged to eliminate deforestation from investments
By Climate Champions | September 20, 2022
- Ground-breaking report from the UN Climate Change High-Level Champions finds some of the world’s most valuable food and ag companies could lose up to 26% of their value by 2030, with permanent sector-wide losses equivalent to the 2008 financial crash.
- Analysis prompts a united call to financiers by COP26 President and UN Climate Change High-Level Champions to eliminate deforestation from investments and show progress by 2025
- Early movers can mitigate risk of value loss across food and agriculture and pursue a share of the USD$4.5 trillion opportunity that will accompany a land use transition that is as profound as the energy transition
Tuesday 20th September: Banks and investors have today been called on to end deforestation and nature loss to protect shareholder value and deliver on their net zero commitments.
At Climate Week in New York, COP26 President Alok Sharma and UN Climate Change High-Level Champions, Nigel Topping and Dr. Mahmoud Mohieldin urged all financial institutions to use best efforts to eliminate commodity-driven deforestation from their portfolios and to report on credible progress by 2025, as well as increasing investment in nature-based solutions for climate change.
Alok Sharma will say: “Due to the unique role of deforestation in driving emissions, and the role of the standing forest and terrestrial ecosystems in mitigating carbon, the financial sector must front load its transition to net zero, with a swift move away from deforestation-related emissions. Signing the Financial Sector Commitment Letter on Eliminating Commodity-Driven Deforestation sends an important signal to your supply chains, and harnesses the power of collective action. The physical risks to finance given the decline of both natural assets and ecosystem services is acute. The benefits of action are transformative. The right choice to protect our precious planet is clear.”
Nigel Topping will say: “We’re seeing some leadership from investors on nature and deforestation, but frankly, not enough. Over 30 financial institutions with more than USD$8.7 trillion in assets under management have already signed the Financial Sector Commitment Letter on Eliminating Commodity-Driven Deforestation, with a target date of 2025. These leaders are showing what’s possible, and as our new analysis underlines, protecting themselves against financial, regulatory and reputational risk in their portfolios.”
Dr. Mahmoud Mohieldin adds: “By COP27 in November, we need investors and businesses to help accelerate the shift to a more resilient economy by investing in high-integrity carbon credits supporting nature-based solutions which put smallholders, indigenous peoples and local communities at the centre.”
It comes as new pioneering analysis published by the UN-backed Race to Zero campaign highlights the land transition as a major blind spot for investors and business. The report modelled the financial impact of realistic nature and climate transition risks for 40 systemically significant food, land and agriculture companies worth USD$2 trillion. Published today, the report warns:
- Markets are failing to adequately price in the financial impact of an inevitable and accelerating transition in land use as profound for key investee companies as the energy transition.
- Incoming policy and demand shifts could drive permanent value loss across the food and agriculture sector equivalent in scale to the 2008 financial crisis.
- Individual firms at the centre of the global food supply system could lose up to 26% of their value by 2030, with a sector average hit of over 7%. This is equivalent to USD$150 billion in losses to investors.
- Unlike one off cyclical shocks, this will be a permanent, non-cyclical loss if they do not act now to protect value.
- The analysis reveals significant variation between winners and losers within the sector, and between companies relative to their positioning on nature and net zero.
- The good news: the analysis shows rapid and effective company responses including developing more sustainable products and entering new markets, making operational efficiencies and ensuring suppliers source inputs from deforestation-free markets can protect value, mitigating all potential losses.
Early movers who accelerate the transition by developing solutions for a net zero and nature positive future can gain a share of the USD$4.5 trillion opportunity that will accompany the coming land use transition, for example, by entering new markets for bio fertiliser, alternative proteins, and nature-based carbon credits. The research looked at the potential upside opportunity for companies across the food and agricultural sector.
The new report published by the Race to Zero outlines five actions investors should take now:
- 1) Eliminate commodity-driven deforestation from their portfolios by 2025
- 2) Understand wider portfolio risks and opportunities arising from the land transition
- 3) Conduct company engagement to improve practices and drive shift to deforestation and conversion free sourcing (DCF)
- 4) Invest in high integrity Nature Based Solutions (NBS)
- 5) Advocate for just land transition policies
Responding to the research and call to action, Schroders Group CEO Peter Harrison, said: “Today’s new research underscores the critical role nature must play in how we – as investors – understand risk and spot opportunities. The reality is stark: nature risk is fast becoming an integral factor to investment risk. That’s why accelerating a deforestation-free and nature-positive future goes to the heart of our fiduciary duty to our clients. As an active manager, we’re determined to use new insight, our influence over the real economy and to innovate new solutions, to have a tangible impact on nature, while we deliver robust, long-term returns.”
Achieving net zero emissions is not possible without ending net deforestation and transforming the agriculture, food, and land use sectors by 2030. These sectors are responsible for one-fifth of global emissions, and fully half of that from deforestation and land conversion and three-quarters of forest loss is driven by forest risk commodities. To feasibly limit global temperature increases to 1.5 degrees, commodity driven deforestation must end by 2025, according to the Accountability Framework Initiative.
The analysis reinforces research published by the Race to Zero earlier this year which revealed an urgent need for companies in the forest, land and agriculture (FLAG) sector to make progress on deforestation. The study found that without much greater action, over 90% of major forest, land and agriculture companies that have committed to net-zero risk missing their targets because of a lack of progress on tropical deforestation, which is central to reducing emissions from these sectors.
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Notes to editors
For media enquiries, please contact:
- rtz@brunswickgroup.com
- Matthew Phillips, Communications Director, Race to Zero: matthewphillips@climatechampions.team
UN Race to Zero:
Race to Zero is the UN-backed global campaign rallying non-state actors – including companies, cities, regions, financial, educational, and healthcare institutions – to take rigorous and immediate action to halve global emissions by 2030 and deliver a healthier, fairer zero carbon world in time. All members are committed to the same overarching goal: reducing emissions across all scopes swiftly and fairly in line with the Paris Agreement, with transparent action plans and robust near-term targets. Led by the High-Level Climate Champions for Climate Action – Nigel Topping and Dr Mahmoud Mohieldin – Race to Zero mobilises actors outside of national governments.
About the research:
This new first of its kind report by the Race to Zero presents the impact that credible climate and nature transition scenarios could have on the value of 40 of the world’s largest food and agricultural firms worth over USD$2 trillion.
It estimates, for each company, the financial impact of a set of transition risks compared to a business-as-usual scenario by 2030, a short term, investor-relevant timeframe. These range from the impact of specific policies such as carbon pricing, subsidies for nature-based solutions, due diligence obligations, and bans on deforestation, to the impact of changes in consumer attitudes and technologies. This quantification approach has previously been tested with leading investors and seeks to identify the risks and opportunities from the transition and the role that well prepared companies can play in mitigating potential losses in value to themselves, investors, and the planet.
It builds on the Inevitable Policy Response’s (IPR)[1] high-confidence, realistic, policy-based scenario. Commissioned by the UN-backed Principles for Responsible Investment, the ‘Forecast Policy Scenario’ uses in-depth analysis of current policy and technology trends to illustrate a likely future with accelerating policy action and is supported by a strategic advisory group of leading investors including BlackRock, BNP Paribas Asset Management and Goldman Sachs Asset Management.
Disclaimer
This research is intended solely to prompt discussion and should in no way be construed as financial advice. The scenarios and forecasts used provide robust reference cases for realistic scenarios, aligned with science, but financial institutions can decide which forecasts and scenarios they use, and actions they take. All results are anonymised and it is not possible to infer any company specific or sensitive data from the results.
[1] UN PRI, “The Inevitable Policy Response to climate change”, https://www.unpri.org/sustainability-issues/climate-change/inevitable-policy-response
