Dive Brief:
- Despite some ambitious commitments from major corporate stakeholders to reduce deforestation, awareness of the risks associated with commodities like timber, palm oil, cattle and soy is not spreading to suppliers, according to a new report from CDP.
- 38% of purchasing organizations and 77% of suppliers lack deforestation commitments. 63% of suppliers have no policy on the issue and 28% have taken no action. For buyers, those figures are 28% and 10% respectively.
- The 450 companies that have committed to ridding their supply chains of deforestation by 2020 will not meet this goal since they have not done enough to push these commitments to their suppliers, according to the report.
Dive Insight:
Deforestation, like climate change, may seem like a remote threat to supply chains, but the more advanced the problems become, the more investors and procurement organizations should be concerned that supply of crucial commodities may be in jeopardy. CDP's report indicates the sellers of products that contribute to deforestation (and therefore climate change) are largely ignoring this threat.
"Large-scale agribusiness or consumer goods companies dominate zero-deforestation initiatives," the report says, but 77% of suppliers do not have a deforestation commitment. The farther from the consumer they are, the less likely they are to take action on the issue.
The main risks highlighted by CDP are physical, when extreme weather or forest fires threaten commodities' agricultural viability; regulatory, when international law or bilateral agreements can interrupt or abruptly change markets; and reputational, associated with ignoring stakeholder and consumer concerns.
The report says the businesses that recognize the risk of deforestation reported potential total negative financial impact of $30.4 billion in 2018 — based on just 25% of the more than 306 reporting companies, 202 of which are public.
For example, L'Oreal reported to CDP "a lack of strong management of forest-related issues" would expose the company to $180 million (or 1% of 2018 operating expenses) in reputational risk. The solutions would involve purchasing certified commodities, increasing supply chain visibility and developing a closer relationship with suppliers — a total spend of $110,000 to address a risk one thousand times larger.
The report underlines the cost of responding to deforestation risk generally pales in comparison to the size of the risk, with physical risk being the most expensive to address.
Business incentives to turn this around are just as indirect as the risks, but the numbers are as large too. CDP puts the value of possible market share gains for those who meet consumer demand for deforestation-free products in the billions.
Correction: An earlier version stated the L'Oreal scenario was assessed by CDP. L'Oreal made the assessment and reported the details to CDP.
