Deforestation in the supply chain

The UK government has announced proposals that would prohibit larger businesses operating in the UK from using products grown on land that was deforested illegally. Deforestation is not only a large contributor to global warming but is also strongly linked to loss of biodiversity, human rights abuses and child labour.

80% of deforestation occurs in the production of agricultural commodities

The new law is an attempt to force companies to adopt stringent procedures to ensure that their supply chains are free from agricultural products that are the result of illegal forest clearance. Companies that fail to do so will be subject to fines. It remains to be seen what level the fines will be. Palm oil is a high-profile product linked to deforestation but tree plantations for pulp and logging are bigger contributors. There are already a number of international initiatives targeting the elimination of un-certified palm oil by 2020 but this is a first in terms of creating a legal accountability.

Reaching across many industries

Liberum (an independent investment bank) have looked at the likely impact of this legislation on large UK companies. They highlight the progress that some companies have already made but also the risk of companies that are behind in implementation (through their inadequate practices) posing a risk to investors. Palm oil is used in a huge range of foods and cosmetics and the rules also impact the soy, beef and timber/paper industries. As well as manufacturers, the law will impact supermarkets and retailers.

How much of a burden will this be?

Deforestation is a well-known issue and because of various initiatives, many companies have made significant progress in creating policies and cleaning up their supply chains. The new rules will undoubtedly result in some cost and disruption to businesses, and for this reason, the new law will at first just oblige only the largest companies. There is of course an incentive for smaller companies to follow suit as they will eventually be subject to the same strictures.

Much work to do?

Forest500 and WWF produce global rankings of large companies’ policies on deforestation and pulp & palm oil usage. The rankings highlight how variable progress has been between different companies. The difference between implementation of policies and the scope and ambition of their commitment is stark. In most cases the strength of commitment far outstrips the score for reporting and implementation, some of which highlights lack of transparency in reporting. It seems clear that companies have received the message but have more work to do. The difference might also say something about companies’ willingness to enact their commitments in a timely and effective manner. In fairness to users of pulp and palm oil, the chain of supply has considerable weaknesses that result in only 16% of palm oil being segregated and traceable as sustainable. In the pulp industry, there are also serious deficiencies in the certification process and a lack of certification in general at the point of production.

For more information about our Responsible Investment Service, contact Chris Redman on 0203 750 1810.

Chris Redman, Chartered FCSI, Investment Director and Head of ESG Investments