This Investor Primer builds upon Ceres’ research that explored the strengths and weaknesses of a wide range of financial mechanisms to incentivize deforestation-free commodity production in the context of Brazilian and West African cocoa supply chains, Indonesian palm oil supply chains, and the Brazilian soy and beef supply chains. It also outlines questions to ask companies during dialogues to assess the value of the incentive mechanisms in relation to the company’s overarching no-deforestation goals.
Over the past decade, nearly 500 companies have set commitments to eliminate deforestation from their agricultural supply chains as part of their larger climate goals to reduce risk and improve their reputation among consumers and investors. These company commitments come from actors across the supply chain, from commodity traders to consumer goods manufacturers.
Yet, while corporate demand for deforestation-free products is growing and investors are increasingly calling for accelerated action on stopping deforestation, the rates of agricultural expansion continue to grow. Since 2014, when leaders from across the globe signed onto the New York Declaration on Forests, tropical primary forest loss has increased by 44%. So long as deforestation continues to seep into commodity markets, companies will face a wide array of risks associated with deforestation and its role as a driver of climate change.
The barriers to shifting agricultural supply chains to deforestation-free production are complex. Financial necessity often forces producers to expand into forests. Alternative means of increasing income, such as improving yield, restoring degraded land, and incorporating new agricultural practices, require upfront investment that some commodity producers often simply cannot finance. Historically, companies that source agricultural commodities have limited their role in financing producers to offering basic input financing, payments, and price premiums. Investors, meanwhile, have identified few opportunities to scale sustainable practices because of the perceived risks in the startup financing cycle. Government regulation and concessional finance have been inconsistent in motivating the protection and maintenance of natural ecosystems.
It is clear that inaction fuels the problem of deforestation, while symbolic sustainability efforts elicits consumer concerns about greenwashing. To break through this stalemate, some companies, governments, and investors have piloted the use of innovative partnerships and financial mechanisms to incentivize deforestation-free commodity production.
This Investor Primer builds upon Ceres’ research that explored the strengths and weaknesses of a wide range of incentive mechanisms in the context of Brazilian and West African cocoa supply chains, Indonesian palm oil supply chains, and the Brazilian soy and beef supply chains. Since corporate disclosure on the full scope and effectiveness of incentive programs is limited, the Investor Primer outlines questions to ask companies during dialogues to assess the value of the incentive mechanisms in relation to the company’s overarching no-deforestation goals. Faced with growing pressure to demonstrate concrete progress, supplier engagement must catalyze positive impacts to avoid reputation risk.
Readers wishing to build background knowledge on risks and challenges in each commodity supply chain can visit Ceres’ Engage the Chain website.