As we near the end of another year into the decade of change, the world is far from reaching the goal of halting deforestation and reversing forest degradation by 2030. The latest Forest Declaration Assessment found that deforestation and resulting emissions worsened in 2022, despite international pledges and despite two thirds of companies reporting some level of forest-related risk that will impact their business through CDP, including:
- Reputational and market risks driven by increased stakeholder concerns, changes in consumer preferences, availability and increased cost of sustainable materials, and uncertainty of product origins or legality.
- Regulatory risks from changes to and non-compliance with legislation such as the recently enacted EU Deforestation Regulation (EUDR).
- Acute physical risks from short-term events (such as recent droughts in Brazil, wildfires in Canada, floods in Nigeria and China).
- Chronic physical risks from long-term changes to precipitation patterns, increased severity of extreme weather events, and vulnerability to pests and disease.
The intertwined crises of climate change and nature loss will only increase the severity of these risks, and the potential financial impact on companies greatly outweighs the cost to proactively respond to them, as indicated in CDP’s latest Global Forests Report. Considering that only 12% of reporting companies claim to be close to removing deforestation from their supply chains, it is evident that systemic and collective problems require systemic and collective solutions.
The pathway forward
Many companies turn to commodity certification schemes to address deforestation, which are important but not a panacea. Issues and risks inherent to commodity production and deforestation (as well as freshwater management) go beyond what an individual company can control and thus require solutions beyond individual company actions. A collective approach is needed for corporates to address risks nested in their supply chains and in the broader landscapes from which they source or produce, to future-proof their supply, and to meet their climate and nature targets. Such an approach is the landscape approach.
In recent years, companies and sub-national governments have increasingly disclosed engagement with landscape and jurisdictional approaches through CDP. Last year’s data shows 192 companies supported more than 200 landscape initiatives through investments, decision-making processes, and convening stakeholders. This increased visibility provides information that investors, banks, and large buyers can use to understand progress of companies on deforestation, engage and innovate solutions to incentivize further adoption of landscape approaches, and ultimately support their own net-zero, no-deforestation, and other nature commitments.
Newly released voluntary frameworks and commitments also touch upon the value of adopting landscape approaches, reinforcing the move by many leading companies towards landscape-scale action:
- Science-based Targets Network (SBTN) recently launched the first corporate Science-based Targets for Nature. To enable companies to avoid and reduce negative impacts and take regenerative and transformational actions, the SBTN Land methodology includes a trio of targets: no conversion of natural ecosystems, land footprint reduction, and landscape engagement. The landscape engagement target crucially requires company engagement in landscape initiatives.
- Taskforce for Nature-related Financial Disclosures (TNFD), with which CDP intends to align, also acknowledges the importance of taking a landscape approach and engaging in multi-stakeholder landscape initiatives in its guidance. These initiatives can play a key role in strengthening company nature risk assessments and facilitating engagement with indigenous peoples, local communities and affected stakeholders.
To further support the adoption of landscape approaches, the Business Case for Collective Landscape Action (“Business Case”) was established. The Business Case is a partnership between CDP, Clarmondial, Rainforest Alliance, and Conservation International, and funded by USAID. It leverages the strengths of its partners to facilitate landscape-level action plans and increase data availability around corporate engagements with landscape initiatives. In doing so, the Business Case aims to decrease the risks associated with commodity-driven deforestation. To support the Business Case, Clarmondial is designing and implementing investment solutions to unlock new finance for landscape initiatives, especially in relation to supply chain transitions.
Indigenous women, Peru. Images from the Business Case Initiative.
Cost of compliance and commitments
Companies must proactively address environmental and social risks within their agricultural and forestry supply chains to mitigate other material risks and business disruptions. Realizing sustainability commitments (eg net-zero commitments) and complying with existing and pending regulations requires substantial investments across supply chains and the cost is rapidly increasing, notably for companies conducting business in the EU. The EU Deforestation Regulation will require companies to prove that certain imported products to Europe are deforestation-free. The EU’s proposed Green Claims Directive requires substantiation and communication of environmental claims. The Corporate Sustainability Due Diligence Directive (CSDDD), if adopted, would apply a due diligence duty on certain companies to ensure they are accountable for adverse human rights and environmental impacts of their operations and value chains. Costs and potential costs stemming from these measures are another reason why companies need to act fast and collaboratively at landscape-scale.
Increased operating and transition costs cannot be borne entirely by a single company in a supply chain nor imposed on those least equipped to bear the risks, smallholder farmers. Therefore, companies need to find ways to address funding needs associated with increasing accountability from regulations and their nature, climate, and livelihood commitments, including mobilizing third-party finance.
So how can companies mobilize the necessary capital to actually implement a landscape approach and support their commitments and compliance?
Indigenous community, Peru. Images from the Business Case Initiative.
Financing landscape approaches
Clarmondial’s experience and research through the Business Case shows that there is no one-size-fits-all when it comes to financing the supply chain transition and applying a landscape approach to a sourcing landscape (supply shed). Each landscape faces unique issues that require diverse types of funding to advance a variety of interventions.
These types of funding can range from grants to microfinance, to debt and equity investments, and as such may involve a mix of philanthropic, concessionary and commercial funding from private and public capital. Even where commercial capital can be deployed, blended finance approaches will be required at the transaction and/or fund level. Given the increasing demands on public funding, identifying innovative ways to mobilize private sector support is required. Developing these types of strategies and structures requires dedicated teams, cross-sector expertise and networks, and knowledge of financing the value chain business rather than a carbon mitigation project.
To mobilize additional long-term investment for landscape transition, buy-in of local stakeholders is required, including local businesses with operational experience, and of international companies with supply chain sustainability commitments related to the target landscape. This should be done in a cost-effective manner that promotes accountability for all parties while observing their motivations and limitations. In other words, by sharing risks. Doing so multiplies companies’ reach as more capital is mobilized for the proposed interventions.
Clarmondial’s experience in designing and implementing risk sharing mechanisms (eg short- and long-term investment funds) indicates that long-term finance for landscape transition can be deployed in a manner that is effective for all, including companies and investors. In combination with data from CDP disclosures on company landscape engagement and investment, alignment can be drawn between the parties, achieving collective impact and mobilizing additional private capital in a sustainable manner.
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This article is co-authored by Julia Langenegger, from Clarmondial, an independent, employee-owned advisory firm established in Switzerland in 2010. Clarmondial focuses on designing and implementing financial solutions to help its clients (eg institutional investors, private and public donors, leading global companies) mobilize additional resources for sustainable management of natural resources. Please refer to www.clarmondial.com for more information.