Companies that fail to manage their environmental performance, including deforestation, expose themselves to business risks. As consumer and investor awareness rises about the harmful impacts of deforestation, companies sourcing commodities from deforestation hotspots are under pressure to ensure that their products are not sourced with illegal or questionable environmental practices. Companies that ignore this scrutiny subject themselves to potential regulatory action or loss of customers, which can translate into negative financial consequences.
When it comes to deforestation, companies that don’t responsibly manage risk could face input or output price volatility, loss of market access, loss of reputation and reduced brand equity, operational impacts, and regulatory/litigation impacts, according to a new case study report from Ceres and Climate Advisers.
Improper Risk Management Can Crush Companies
The case studies detail some of the negative impacts companies have experienced due to improper management of environmental risk.
IOI Corporation, for example, was suspended from the Roundtable on Sustainable Palm Oil (RSPO) because of land cleared illegally by its Indonesian subsidiaries and the company was prohibited from selling crude sustainable palm oil. This prompted 27 of IOI’s largest customers – including ADM, Colgate-Palmolive, Johnson & Johnson, Kellogg Company, Nestle, Procter & Gamble, Reckitt Benckiser, and Unilever – to suspend procurement contracts with the company. The situation led to a drop in the company’s net income and market capitalization.
JBS, the world’s largest meat company and beef exporter from Brazil, is embroiled in one of the biggest corporate corruption scandals in global history, with allegations against the company including illegal deforestation, faulty meat inspections, and violating labor standards. Brazil’s environmental protection agency, IBAMA, has alleged that JBS purchased 50,000 illegal cattle since 2013 raised on protected land violating Brazilian legislation and forest laws. The revenue from this illegal sourcing was not significant to the company’s overall revenue, but the impact of this scandal (in conjunction with other allegations) has led to a decline in valuation of over $2 billion, according to the report.
But while improper risk management often has direct implications for the value of the company’s debt or equity, with pass-through to investors, businesses can measure risks for their expected outcome and the probability that they will occur, plan for them, and mitigate (or minimize) such risks.
Sustainable Supply Chain Rises to the Fore
Since 2014, more than 400 companies have made deforestation-based commitments under the New York Declaration on Forests. Major companies
such as Unilever, Procter & Gamble, and Tesco have gone further, committing to remove commodity-driven deforestation from their supply chains by 2020, as well as making No Deforestation, No Peat and No Exploitation (NDPE) commitments in their procurement policies.
These commitments are partially in response to increased pressure from consumers, investors and buyers, particularly in Europe and North America, for products that are not sourced from deforested lands, the report claims. As these stakeholders become more conscious of environmental issues such as climate change, companies must increasingly become aware of the reputational risk they face from improper risk management.