The global inability to see the dangers posed by deforestation and our ability to find endless counter-arguments to addressing biodiversity issues needs to end. The political and industrial denials reached new heights this week and this push back doesn’t make any sense to me, particularly in light of existing biodiversity commitments and emerging business models for natural capital.
Stop Trying to Dilute Anti-Deforestation Legislation
Although the EU spent the last years going through the legislative motions necessary to equip itself with a tool to stop deforestation, these efforts appear to be increasingly in danger. Following pressures from industry and Brazil in the middle of September, the European Commission decided to postpone its implementation of the EU Deforestation Regulation (EUDR) by 12 months. The announcement was made in earnest but now, conservative members of the European Parliament including the European People’s Party (EPP) appear to be adding amendments to this delay bill to further water down the EUDR.
I can’t help but agree with the WWF’s and Greenpeace’s reaction. “This is completely unacceptable. Citizens have called for a new and strong law against deforestation, and this was democratically adopted, with the support of the EPP. With this move, the EPP betrays trust in EU policy, and starts to deregulate key environmental legislation – a massive embarrassment just ahead of the COP!” said Anke Schulmeister-Oldenhove, Manger, Forests, at the WWF European Policy Office. “The proposed changes make a mockery of the EUDR’s objectives, removing critical elements such as traceability for many products, and allowing products to be placed on the EU market without proper checks. Instead of curbing the EU’s impact on global deforestation, such a law would be hollow like a tree without its core. This move also betrays all those companies that have already invested to prepare for the EUDR and are now faced with far-reaching changes and loss of their investments,” she continued.
“All this week, we’ve heard EPP MEPs tell commissioner candidates that they want to simplify environmental rules. But the changes to the EU deforestation law proposed on behalf of their group won’t simplify anything: they’ll only create confusion, chaos and forest destruction. The frontrunner companies that have been preparing for this law since its adoption must be furious at this last-minute fiasco, which is entirely of the EPP’s making. MEPs must reject all these amendments, whose clear aim is to weaken and make a mess of the deforestation law. They must also reject the Commission’s initial proposal to delay the application of the law, which needlessly opened the door to this meddling in the first place. We cannot afford delay in protecting forests in the light of the climate emergency we’re facing,” Greenpeace EU forest policy director Sébastien Risso added.
Deforestation Matters to Investors
The issue of deforestation is incredibly problematic and one that is increasing on the agendas of asset managers and asset holders, particularly after the 2022 Biodiversity COP15. “According to the IPCC, the scientific consensus suggests that agriculture, forestry and other land use are responsible for approximately 23% of global emissions. Of that total, 5.8 gigatons is occurring through forestry and other land use and 6.2 gigatons through agriculture,” Andrew Dreaneen, then Head of Natural Capital at Schroders told a panel organised by NordSIP in November 2023.
Sweden’s buffer pension AP2 is also focusing on deforestation, featuring it prominently in its 2024 half-year interim report. “Together with the think tank Climate & Company, AP2 has developed a model for identifying deforestation risk in listed portfolios, which is open for other investors to use. The Fund is working towards a target of engaging with 100 per cent of the companies, identified by the model as having very high deforestation risk and insufficient management of the risk, before the end of 2025. During the annual general meeting season, AP2 has marked its dissatisfaction by voting against general meeting proposals in companies with high risk and inadequate handling of the deforestation issue,” the report explains.
It was also one of the main topics of interest among the participants in the 2024 Global Impact Investing Network (GIIN) Forum. When we met at the conference, Dr Stephanie Bilo Chief Client & Investment Solutions Officer at responsAbility noted that a “major theme was the protection of biodiversity and the resilience of natural ecosystems, and in particular sustainable agri & food systems. Many attendees have emphasized the urgency of addressing biodiversity loss, a challenge compounded by the fact that the external costs of nature loss are not accurately priced.”
More and Better Timber is the Way Forward
Addressing this issue will require consumers to change their habits and producers to adjust their production. I find incredible the perniciousness of deforestation into our life. Palm oil and its role in deforestation is but an example. “Palm oil is pervasive in so many of our consumption goods that it would be impractical to expect consumers to avoid it. It would also probably be unjust to lower-income consumers who would have to bear an added cost. Instead, the burden should fall on companies to ensure sustainable production practices and on investors to incentivise these practices,” David Seekell, PhD, Head of Sustainable Investing and ESG at Atle told the participants in a panel on this topic in August 2023.
The natural capital (as biodiversity is also known) business model is complex but we are increasingly able to glimpse opportunities. “Underlying that shift [against deforestation], there is a 10 gigaton opportunity from natural capital, five gigatons through avoided emissions and about five gigatons through enhanced removals and carbon sinks,” Schroders‘s Dreaneen added during the 2023 NordSIP event.
Several sessions at the 2024 GIIN Forum also focused on this topic. For the most part, the issue was to show the pervasiveness of timber-related products and their importance as carbon sinks. One of the panels illustrated this argument, not only by the range of furniture and housing that uses timber, but also by new projects such as the Portland International Airport (Pictured), in Oregon, USA, which is mostly made of wood. It was inspiring! Bergen Airport in Norway is another case study in the use of timber. As long as we do not burn these structures, they continue to act as carbon sinks, long after the wood has been harvested.
The business case is difficult due to the long lead times between planting and harvesting in the forestry/timber industry. But opportunities are evolving and the future seems encouraging, assuming the carbon credits industry can start to deliver on its promise. “The main concern we have encountered is with the ability to find liquid and profitable models that internalise biodiversity beyond risk mitigation. It should not just be about avoiding doing harm, but also about promoting biodiversity while generating profits. However, natural capital can have long lead times that require patient capital. This has generated many conversations about carbon credits, their ethics, controversies and their ability to generate cash flows in the lead-up to the culmination of forestry projects. There are ways to invest profitably in biodiversity but this is still a growing field,” Anne Valto, Senior Development Impact Adviser at Finnfund told me on the side of the conference.
According to the discussion in which Valto participated, biodiversity is typically seen as a risk-management issue and not a profit-driving opportunity. Now, carbon credits provide a way for timber producers and forest managers to generate cash-flows during the production period in order to finance operations.
The emerging business model would not only be consistent with decreased net emissions but also be supportive of farmers, a group that has felt sorely left out of the climate transition in Europe. Of course, we all know that carbon credits can easily be misrepresented and misused. They can be a wonderful tool, but only if we build the necessary oversight and tight rules to ensure its lasting credibility. What we need is more supportive regulation, more funding and more ethically-driven innovation in this sector, not less.
