Why Deforestation Matters for Investors

EARTH DAY 2021: Why should investors care about deforestation and how can it can be taken into account within an investment portfolio? 

Holly Black 22 April, 2021 | 11:39AM
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Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Thijs Huurdeman. He is an analyst at Sustainalytics. Hello.

Thijs Huurdeman: Hi. How are you?

Black: I'm good. So, we're talking Earth Day this week. It's the day is upon us, and what can you tell us about this year's theme?

Huurdeman: Yeah. So, this year's theme for Earth Day is "Restore Our Earth." And given the current state of the earth, there's plenty of restoration to be done.

Black: And you've been looking specifically at biodiversity and deforestation, which all sounds quite scary and like we're going to launch into a David Attenborough documentary. But what have you been looking at specifically?

Huurdeman: Yeah. So, unfortunately, the current state of the earth is rather terrible to be honest. There's no other qualification for it. And it's been something that scientists have been warning us about for over about, let's say, half a century now. And recent reports have only underlined the bleak picture regarding deforestation and biodiversity. So, for instance, since 1990, 178 million hectares of forests have been lost, which is roughly the size of the country of Libya and primary rainforest destruction has increased in 2020 about 12% compared to 2019, with the majority of primary forest loss taking place in the Amazon and the rate of species extinction is also accelerating at an alarming pace. And a recent study found that only 3% of the earth's wilderness remains, so that's not a lot.

Black: Gosh, this is all quite a bleak start to the day. How did we get to this stage?

Huurdeman: I mean, in the end, ultimately, it's us humans that's responsible for this. I mean, it's sort of a mixed governments, companies, consumers, they all have to take part of the blame for this. You could think of sectors such as mining or infrastructure or the fossil fuels industry. But also, a large part of it is due to our global food system, which involves industrial scale agriculture, crop monocultures and also intensive animal farming.

Black: Okay, Thijs, before we depress everyone, are there any positives we can take from this?

Huurdeman: I mean, the situation is rather bleak, but there are a few positive notes to take. If you look, for instance, at the palm oil industry, which has gained a reputation of being a bit of a bad boy among the global commodities, they've really improved in the last few years, and this is due to a combination of government regulation, import requirements, investor pressure, but also a degree of self-regulation by the industry. And what helped in this regard was also the establishment of well-developed certification schemes and improved traceability in that regard. And this is something that investors should take note of that when they invest in a company they should know about the commodities the company is involved in and the degree to which they are managing their exposure to issues of biodiversity and deforestation.

Black: So, can you point us to a company that is doing well in this area?

Huurdeman: Yes. So, I would say that a company such as Barry Callebaut (BARN), which is a Swiss producer of cocoa and chocolate, is a rather good example. Obviously, Barry Callebaut is involved in a lot of issues related to cocoa, which they source and issues related to cocoa are part human rights issues, but a large part of it is also issues of deforestation, mainly occurring in Western Africa, so Ivory Coast and Ghana. And Barry Callebaut has established rather good policies on deforestation. They're really mapping out what commodities besides cocoa are also prone to deforestation. You might think of sugar or palm oil. And they've stepped up their efforts in tracing where these commodities come from.

Black: Thijs, thank you so much for your time. For Morningstar, I'm Holly Black.

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Holly Black  is Senior Editor, Morningstar.co.uk


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