Global Forest Footprints Report

Global Forest Footprints How businesses around the world contribute to deforestation – the risks of inaction and the opportunity for change

The Business Imperative for Ending Deforestation Demand from rich countries for cheaper commodities – beef, soy, palm oil, biofuels and timber – stimulates clearance of land in forested countries, in particular in rainforest nations. This demand is rising due to increasing global population and prosperity.

These products are wealth-generators in developing countries, and feature in the supply chains of countless businesses across sectors, in many nations. Whether it’s garden furniture made of illegally logged wood, an airline using palm oil in its in-flight meals, or a supermarket selling pork or chicken fed on soy, commerce has become the single biggest driver of deforestation globally.

Tropical deforestation is a major contributor to climate change, causing around 18% of all greenhouse gas emissions – more than the entire global transport sector. It also destroys critical ‘natural capital’ which underpins food, energy and climate security worldwide.

These simultaneous threats have brought deforestation to political centre stage.

Just as we are approaching ‘peak oil’, so we may now be reaching a point of ‘peak deforestation’.

New and far reaching international regulations and large scale financial mechanisms are being put in place to tackle deforestation in rainforest nations with heightened urgency. This will rapidly alter the costs and viability of businesses sourcing commodities produced on recently deforested land. © Global Canopy Foundation 2009

Increasing awareness among consumers is also heightening reputational risks for organisations with direct or indirect links to deforestation. A front page investigation by the Independent newspaper in April 2009 reported that 43 of the 100 best-selling branded consumer products in British supermarkets contained palm oil, which is linked to deforestation in SE Asia.

The Forest Footprint Disclosure Project is a special project of the Global Canopy Foundation. Registered UK Charity (No. 1089110), © 2001. All rights reserved. Incorporated as a Company Limited by Guarantee (No. 4293417), incorporated in England with registered address John Krebs Field Station, Wytham, Oxford OX2 8QJ. Acknowledgements Authors: Niki Mardas, Andrew Mitchell, Liz Crosbie, Steven Ripley, Rachel Howard, Caroilna Elia, and Mandar Trivedi. The FFD Project would like to acknowledge the contributions of Andreanne Grimard, Christoph Harwood, Jan Willem van Gelder, Malika Virah-Sawmy, and Tony Weighell.

Conversely, value creation opportunities are emerging through the creation of sustainable supply chains. These reduce pressure on forests by improving yield through agricultural intensification, use of more certifiably sustainable approaches to production, and the equitable restoration of millions of hectares of degraded land for agricultural expansion.

Special thanks to Strategic Environmental Consulting for their invaluable insight and expertise in the development of this document; and also to Dunja Ivereigh and Daphne Christelis.

Designed by The Good Agency 2nd edition July 2009 To be cited as: Mardas, N; Mitchell, A; Crosbie, L; Ripley, S; Howard, R; Elia, C; and Trivedi, M (2009) Global Forest Footprints, Forest Footprint Disclosure Project, Global Canopy Programme, Oxford.

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© 2002 Andrea Artaxo et al, SMOCC

This Report has been produced with the generous support of the David and Lucile Packard Foundation and the European Climate Foundation. The Forest Footprint Disclosure Project is funded by the Global Canopy Foundation with support from the UK Department for International Development (DFID), The Esmée Fairbairn Foundation, The David and Lucile Packard Foundation, The Waterloo Foundation, and the Rufford Maurice Laing Foundation.

For investors, businesses, and consumers, reducing the drivers of deforestation is one of the most effective ways to have an immediate and large-scale impact on slowing climate change, as well as protecting biodiversity, and maintaining the livelihoods of millions of the world’s poorest people.

The Forest Footprint Disclosure Project enables companies to begin recognising, managing and eventually quantifying their forest footprint through a process of disclosure. This is an essential step towards understanding the immediate risks associated with deforestation, as well as the longer term implications for their business models.

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Contents Creating Wealth that’s Worth Having I am delighted that the ‘Forest Footprint Disclosure Project’ is creating a new starting point for business engagement in line with the call by HRH The Prince of Wales for emergency action on deforestation. Already at its launch, investors with $1.3 trillion in assets under management are backing the project’s request for disclosure to companies. Participation will help businesses to minimise their impact, direct and indirect, on forests. Those that do should see their values rise and may protect themselves from future earnings risks.

A century and a half ago, Charles Dickens wrote about a political revolution in ‘A Tale of Two Cities’. Today we are undergoing a revolution in our financial system, which is forcing us to reconsider what we really value. To avoid a repetition of the recent turbulence, forward thinking businesses are coming to terms with a ‘tale of two economies’, one that is seen and another unseen.

The unseen economy includes natural capital, an immense subsidy that nature provides, underpinning global food, energy and climate security. It is a benefit we can no longer bank on with certainty. As we grow from 6 billion to 9 billion people on this planet, the ‘seen’ economy will increasingly need to take account of the ‘unseen’ economy. Global commodity markets will have to accommodate even more demand in a world where climate change may constrain their ability to act as they have in the past. That is why every one of us needs to understand our ‘Forest Footprint’.

The Business Imperative for Ending Deforestation

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Creating Wealth that’s Worth Having

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1. What is a ‘Forest Footprint’?

6–7

2. The Global Community’s Forest Footprint

8–9

Forests contain more than twice the amount of carbon currently present in the atmosphere. Carbon emissions from deforestation – more than from the entire global transport system – are speeding global warming. Forest clearance directly and indirectly also threatens the provision of hydropower upon which many nations depend.

Biodiversity, everything from apes to ants, is being lost, leading us into a potential evolutionary cul-de-sac at a pace and scale that is unknown in history.

3. Forests are Global ‘Eco-Utilities’ of Immense Value

10 – 11

4. Forest Risk Commodities - Timber

12 – 15

The profits that come from this process cannot be sustained either. Millions of the world’s poorest people that live in and near these forests will lose their land and livelihoods, creating conflict over the remaining resources, especially the fresh water that tropical forests provide in abundance. In tropical nations, rainforests deliver billions of tonnes of rainfall daily for agriculture that provides food, and increasingly bio-fuels, to consumers across the world.

5. Forest Risk Commodities - Beef

16 – 19

6. Forest Risk Commodities - Soy

20 – 23

7. Forest Risk Commodities - Palm Oil

24 – 27

8. Forest Risk Commodities – Biofuels

28 – 29

9. The Role of Markets

30 – 33

10. Investment Risks from ‘Peak Deforestation’

34 – 37

11. Why Forest Footprint Disclosure?

38 – 39

Sources

40 – 41

The production of key global commodities – beef, soy, palm oil, timber and biofuels – now often occupies land once filled with forests and developed with financing from cities thousands of miles away. The purpose of this report is to highlight the chain of supply from once standing trees to supermarket shelves, board room tables, and the halls of government.

To deal with deforestation, markets need to alter the economic drivers that make forests worth more dead than alive; forest-owning nations need to receive practical incentives to expand their economies without destroying their forests; and agriculture needs to restore vast areas of degraded land for its purpose and increase yields, so taking pressure off forests. Understanding your ‘forest footprint’ whether you are a consumer, business or investor, is an urgently needed step in managing our planet’s land resources in a way that supports our global climate.

We do not have time to wait. Unlike a factory, the immense complexity of a forest cannot be rebuilt inside a century. Its value as a carbon capture machine, water utility, weather moderator, and biodiversity bank is something the world simply cannot afford to live without. In the emerging 21st century economy, halting the erosion of natural capital is sound finance and could create immense ‘wealth that’s worth having’ for everyone, by underwriting the sustainable businesses upon which our future wellbeing depends.

FFD Steering Committee

42

Andrew Mitchell Steering Committee Chair, Forest Footprint Disclosure Project

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1. What is a ‘Forest Footprint’?

The pattern of deforestation in the Amazon clearly demonstrates the link between land clearance and global commodity markets. After 3 years of decline, it soared in the second half of 2007 fuelled by spikes in the price of agricultural commodities.2 As the price of commodities goes up, pressure on forests increases.

However, the long-term costs of converting tropical forests to pasture and crops far outweigh the short-term benefits. Deforestation has enormous environmental costs because of the massive carbon emissions it generates, the irretrievable erosion of ecosystem services these forests provide, and the impacts on human livelihoods dependent on forests for survival. It also has indirect financial costs for agribusiness, because tropical forests regulate rainfall, stabilise soil, and moderate the climate. Agricultural productivity is directly dependent on these ecosystem services.

© Daniel Beltra/Greenpeace

Growing global demand for timber and agricultural commodities – primarily soy, beef, palm oil, and more recently biofuels – presents forestowning nations with an incomparable opportunity to generate wealth by converting forests into agriculturally productive land. It generates jobs for local populations, tax revenue for governments, and considerable wealth for a relatively small number of large corporations that manage large tracts of land and control access to the global commodities markets.

However, these costs are not yet reflected in the actual prices paid for products grown on deforested land. Why? Because recognition of environmental risks is low, the land conversion process is often illegal or not fully paid for, environmental damage may receive perverse government subsidies, and the sale of logged timber can help finance further forest clearance. This unsustainable process, sometimes referred to as the ‘forest gold rush’, erodes natural capital upon which business depends and has enabled the cheap commodities produced to flourish in global markets.

These multinational businesses make a direct operational contribution to deforestation. However, ultimate responsibility is spread throughout a globalised market that has come to rely on cheap commodities of often untraceable origin. It links financial institutions, that bankroll production, to businesses that depend upon them in their supply chains, and ultimately to all of us as consumers. Demand from populations growing in size and affluence around the world is increasing, and Governments facilitate the process through perverse subsidies and poor implementation of existing legal frameworks.

As international political pressure mounts to halt deforestation, increasing focus will fall on these primary commodities and the goods and services derived from them. When evaluating policy options to deal with deforestation, legislators and regulators are now paying increasing attention to land management and its forest footprint. This has direct implications for businesses and investors, who need to be aware of how their portfolios link to deforestation. Companies that understand their forest footprints will be better equipped to manage the unexpected risks and mitigate the climate change impacts caused by their operations.

What drives the chainsaws?

Though often unseen, these commodities are the building blocks of millions of products traded globally.

From hamburgers to hair conditioner, muesli to margarine, chocolate, crisps and sausages, to lipsticks, lubricants, instant noodles and paint. Palm oil is present in around 1 in 10 processed food products in the UK1 and its derivatives are used in cosmetics and detergents, as well as in the metal and leather industries. Both palm kernel meal and soy are used as feed for livestock around the world, which in turn feeds growing global appetites for meat and dairy products.

Your Forest Footprint A ‘forest footprint’ is the total amount of deforestation caused directly or indirectly by an individual, organisation or product.

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As a business: your supply chains may depend on forest-risk commodities sourced from deforested land, or you may be buying products derived from them.

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As a consumer: you eat products sourced in rainforests but hidden in your food, and everyday products like soap and lipstick may contain forest risk commodities. Timber used in your home may be illegally sourced.

As a financial institution: your loans or project finance may be directly funding the production and trading of commodities grown on agricultural land where tropical forests once stood.

Sources: INPE;IMF. Cited in The Economist, June 5 2008

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The Netherlands:

2. The Global Community’s Forest Footprint Global drivers of deforestation The industrialisation of agriculture has accelerated forest conversion in developing countries. Forests once cleared by hand by small-scale subsistence farmers over hundreds of years are now bulldozed or burned to the ground in months. Every year, 13 million hectares of tropical forest are destroyed, an area the size of Greece.3 Infrastructure expansion also indirectly speeds up the deforestation process, as new roads and infrastructure facilitate access for settlers, speculators, and illegal loggers.

Increasing wealth in developed and developing countries has incentivised markets to deliver the goods demanded by more prosperous consumer lifestyles often at the expense of former forests.

Since 1960, global meat production has more than trebled, milk production has nearly doubled, and egg production has increased nearly four times.4 This sharp increase in industrial meat and dairy production has fuelled the expansion of cattle ranching on cheap formerly forested land and of vast plantations of soy, which is used as livestock feed.

Palm oil used as an additive to food, cosmetics, and for cooking has boomed, and plantations are rapidly replacing natural forests in Asia. In addition, policies to promote biofuels as an alternative to fossil fuels have exacerbated the pressure on land, displacing agriculture to areas adjacent to tropical forests.

Perversely, initiatives such as the EU Biofuels Directive have triggered a boom in demand for palm oil, which is one of the most economically productive oils for bio-diesel production but which releases far more CO2 than it saves when grown on former forests and peatlands.5 Combined these drivers help release almost one fifth of global greenhouse gas emissions into the atmosphere each year through deforestation.

China:

Many forest-risk commodities enter Europe through Rotterdam in the Netherlands, to be processed and distributed to the continent’s food industry. A recent report estimated that the Netherlands may have contributed to approximately 1.56 million hectares of deforestation and forest degradation worldwide between 1996 and 2005.19

Britain: The UK is the 2nd biggest importer of palm oil in Europe, using it largely for food and industrial production.20 Palm oil is contained or suspected in 43 of Britain’s 100 top consumer brands.21

China is the world’s largest consumer of palm oil, importing 18% of global supply.13 It is also the largest importer of soybeans, importing twice as much as all the EU-27 countries combined.14 It imports half of all internationallytraded tropical logs, with a value of $8 billion, and has become the world’s largest exporter of secondary wood products.15

EU: SE Asian Forests:

USA:

The EU consumes about 16% of global palm oil production;16 34% of Brazil’s beef17 and 32% of its soy.18 Less than 5% of wood consumed in Europe is from certified sources and at least a third of its illegal timber imports come from South-East Asia.

Expansion of soy plantations in Latin America has been led by US-based multinationals22 that have so far shown limited commitment to sourcing certified products. US Government subsidies on corn production for ethanol have also helped displace soy production to other countries.

Over 80% of palm oil production takes places in Indonesia and Malaysia, where at least 55% of plantation expansion has occurred at the expense of forests.8 Production has been increasing by 9% every year, prompted by increasing global demand.9 If the drivers of deforestation cannot be stemmed, a United Nations report suggests that 98% of Indonesia’s forests will be destroyed by 2022.10

Congo Basin Forests:

The United States is by far the world’s largest importer of wood and paper products, accounting for 20% of global trade in 2006.

The American fashion, furniture and car industries are believed to be major consumers of leather from Amazon cattle.23

Central Africa lost around 9.1 million hectares to deforestation from 1990-2000.11 Deforestation in Africa’s forests has been largely driven by poverty as people cut down trees for fuel and to make way for smallscale agriculture.

Now, heightened global demand for productive land for food and biofuels is stimulating ‘land-grabbing’ and bringing ever more commercial pressure to bear. The Chinese Government recently announced a commitment of US$5bn for Chinese corporations to invest in African agriculture over the next 50 years through the new China-Africa Development Fund.12

Amazonia: More than 10 million hectares have been cleared in the Amazon over the past decade for cattle ranching,6 and soy production in the world’s largest tropical forest increased 15% per year from 1999 to 2004.7

South America

Western and Central Africa

3%

South, South East Asia and Pacific

5%

5%

Drivers of deforestation and forest degradation by region: Key to pie charts opposite

5%

12%

20%

15%

20%

Commercial crops

5%

Cattle ranching

5%

24% 1%

Shifting cultivation / small scale agriculture Fuelwood and NTFP harvest

25%

40%

20% 50%

5%

40%

Commercial non-sustainable wood extraction Fuelwood and charcoal (traded) Source: Blaser and Robledo (2008) cited in ‘An Emergency Package for Tropical Forests’. The Prince’s Rainforests Project 2009

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3. Forests are Global ‘Eco-Utilities’ of Immense Value Biodiversity is natural capital upon which business depends •

At least 6 million species live in the world’s tropical forests.30 Deforestation is creating species loss at a scale and speed unknown in the planet’s history. The evolutionary impacts and genetic commercial potential lost are unknown.

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Biodiversity has a commercial value, but to date this has not been enough to overcome the opportunity costs of deforestation. The total value of international trade in non-timber forest products such as rattan, guarana, Brazil nuts, and latex is estimated at between $7.5 and $9 billion per year.31

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Medicines derived from tropical rainforests are worth an estimated $108 billion annually, roughly the same as the amount spent on the UK’s National Health Service.32 Less than 2% of plants have been thoroughly tested for medicinal applications, yet 25% of prescription medicines derive from plants.33

Tropical forests can help win the fight against climate change •

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Clearing forested land is responsible for releasing 7 billion tonnes of CO2 into the atmosphere every year, which is comparable to the total emissions of the US or China24 and is more than the entire global transport sector. Stopping deforestation could offer almost 40% of the emissions reduction the world needs between now and 2030 and is one of the most cost-effective and immediate ways of doing so at scale.25

Tropical forests support the livelihoods and homes of over a billion people

Standing tropical forests absorb around 4.4 billion tonnes of CO2 a year,26 a service valued at $45-$80 billion annually at the IPCC’s social cost of carbon.

Deforestation – and indeed the loss of other natural habitats such as peatswamps and grasslands – is removing one of the world’s most cost-effective carbon capture and storage (CCS) systems. To invest in expensive industrial CCS technology for the future and not also to invest in maintaining this natural low-cost service which is already in place makes no economic sense.

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1.4 billion of the world’s poorest people depend on forests for their livelihoods and food security.34 Forests are also home to 60 million indigenous people – roughly equivalent to the population of the United Kingdom.

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The political and human rights of local populations are frequently denied as developers clear their land for agribusiness. Vulnerable populations are forced to migrate, exacerbating poverty, increasing conflict over land use, and threatening indigenous cultures with extinction.35

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Forest communities can help to maintain the forest ‘eco-utility’ and the services it provides, as long as it is worth more to them standing up than cut down.

Ecosystem Services are essential to global food and energy security •

Tropical forests provide vital ecosystem services that underpin economic value creation, particularly in the agricultural and energy sectors.

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Brazil’s billion-dollar soy, beef, hydropower and biofuel industries all benefit from rain generated

by Amazonian forests which evaporate some 20 billion tonnes of water into the atmosphere each day.27

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Loss of tropical forests could affect rainfall patterns globally, especially in food growing regions in Latin America, the American mid-West and Central Asia.28

© Global Canopy Programme / Katherine Secoy

All forests, and tropical forests in particular, play a vital role in maintaining the ecosystem services upon which global food, water, energy, and climate security depend.

This is ‘natural capital’ whose value is still largely unrecognised.

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Halting deforestation could save the global economy between $2 and $5 trillion per year in lost ecosystem services.29 In the future governments and market actors may value a tonne of ‘living carbon’ in a forest, very differently from a tonne of ‘dead carbon’ captured and stored underground.

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4. Forest Risk Commodities - Timber

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and Asia Pulp and Paper in Indonesia and China.

The latter have been accused of encroaching on protected areas and being engaged in illegal logging in Yunnan.40 •

Illegal logging is estimated to cost developing nations close to $15 billion annually in lost assets and revenues – over 8 times the amount spent on sustainable management in the world’s forests.41

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The flow of illegal timber into the global market has a downward effect on timber prices by 7-16% (depending on the product). A recent report estimates $1 billion in lost revenues for US companies through a combination of these price distortions and lost export opportunities.42

© Gabriel Eickhoff

At present no-one knows how much industrial timber consumption worldwide is actually sustainable.

Illegal logging and over extraction is occurring in some 70 countries, and accounts for approximately half of all traded timber production in tropical forest nations. Demand for paper, plywood and other wood products is expected to continue to rise, driven by growing and increasingly affluent populations around the world. While this demand will be met in part through sustainable sources and industrial efficiency, the pressure on natural forests worldwide, particularly in developing countries, will also continue to rise.

Demand for Wood and Paper •

Industrialized nations, with only 20 percent of the world’s population, consume the vast majority of industrial wood output. Paper is used widely in all industrialised societies from printing and packaging through to hygiene and food preparation. Growth in global demand for paper is projected to increase by 77% from 1995 levels by 2020.43

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The United States is by far the world’s largest importer of wood and paper products, accounting for 20% of global trade in 2006. This represented $50.6 billion in value, of which $15.7 billion was for wooden furniture and $20.8 billion in paper products and pulp.44

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According to WWF, as much as 28% of the EU’s timber imports could be from illegal sources.45 The majority comes from Russia, but at least a third comes from the tropical forests of South-East Asia.

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China has emerged as a global intermediary for wood products, growing its exports to over $17 billion in 2005 – a fivefold increase in under a decade.46 Half its timber requirements are met by imports, but the proportion is higher in exportoriented sectors – like plywood, furniture and flooring – where tropical wood is favoured. Half of all internationally-traded tropical logs are bought by China for a total value of $8 billion.47 Up to 40% of its imports overall are thought to be from illegal sources.

The US market alone imported 21% of China’s plywood and 40% of its wooden furniture with a market value of $8.8 billion.48

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The Global Market Supply of Timber and Fibre

• Of the global wood harvest for industrial uses, it is estimated that 42% is used to make paper.38 Most of that fibre comes from wood specially harvested for this purpose from industrial plantations or within managed semi-natural forest. Existing industrial forestry in North America and Europe is primarily targeted at meeting this demand.

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Before the financial crisis, global pulp and paper production was expanding rapidly into developing countries to meet increasing regional and global demand while taking advantage of lower production costs, and the availability of natural or industrial forest resources.

New pulp and paper mills are planned for Australia, Brazil, China, Indonesia, Laos, South Africa and Uruguay.39 As new processing capacity comes on line it must be matched by new plantations that are often created at the expense of natural forests, including tropical rainforest. There has been a great deal of controversy surrounding the development of the Indonesian and Chinese paper industry, in particular the rapid development of APRIL in Riau, Indonesia

Reported Estimates of Illegal Logging

Tropical Imports only

Tropical Hardwood only Imports only

Source: Seneca Creek Associates (2004)

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Impacts & Their Management Future Options: Increase Capacity or Reduce Demand through Active Management •

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A global consensus on how to respond to increasing global demand for paper in the developing world is required and poses complex challenges. Should governments and business promote managing down demand for pulp and paper in developed nations or dramatically increase investment in sustainable forestry globally?

The latter is problematic as paper is currently seen as a commodity with little commitment to traceability. This makes investments in sustainable sourcing difficult to justify commercially unless customers start to show willingness to pay a premium.

The sector is also subject to major price and investment cycles that discourage longer-term investment planning.

sustainability challenges of large scale forestry monocultures using non-native species. Extensive plantations for paper in the developing world have raised concerns around the impact on water resources and loss of agriculturally productive land.

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Logging for high-value species in remote areas has a high impact on biodiversity, including threatened species, and hillsides illegally stripped of their trees throughout SE Asia have exacerbated flooding and landslides that have caused thousands of deaths.49

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Illegal logging promotes corruption, and undermines the rule of law, and a number of reports have connected large scale illegal logging around the world with organised crime syndicates.50 Revenues from illegal logging have also been used to fund conflict, most recently in Liberia and the Democratic Republic of Congo.51 Illegal logging also deprives governments of much needed revenue to grow and develop the legitimate economy.

Government Regulations

• Industry’s response to sustainability issues has

The EU’s FLEGT: The EU’s Forest Law Enforcement, Governance and Trade (FLEGT) policy is a voluntary measure designed to help rainforest nations halt deforestation. FLEGT supports improved governance and capacity building in timber producing countries, but also tackles problems at home by ensuring illegallyharvested timber is not admitted to the EU market.

FLEGT enables businesses to exclude illegal products from their own supply chains and encourages financial institutions to investigate flows of finance to the forestry industry. A majority of African timber exporting nations are now planning to sign Voluntary Partnership Agreements (VPAs) with the EU.

been to develop third party certification systems.

Amongst the largest are two multi-stakeholder initiatives, The Forest Stewardship Council (FSC) established in 1993, and the Programme for the Endorsement of Forest Certification schemes (PEFC) established in 1999.

FSC certified forest area growth •

• Source: Forest Stewardship Council (2009)

Sustainability Impacts

• There is widespread stakeholder concern around the

Extent of Third Party Certification

Below: 42% of the global wood harvest is for industrial use as paper but new regulations will make the importation of illegal wood harder.

Globally the majority of certified wood is temperate softwood, but market coverage overall is poor. In Europe and Canada it is estimated that less than 5% of forest products are certified by volume, in the US less than 2%, and in Japan around 0.02%.52 Tropical certified wood is available in much smaller quantities and from a less stable supply base.

The FFD Project recommends that companies with timber and paper products in their supply chains should require all suppliers to provide evidence of third party certification to ensure legality and sustainability.

The USA’s Lacey Act: In 2008, the USA became the first country to ban the import, sale or trade of illegally harvested wood and wood products. Importers of wood products must declare the species and country of origin.

There are strong penalties for knowingly sourcing, or failing to exercise due care when sourcing, illegal timber.

The US market for eco-friendly timber products is expected to be worth tens of billions of dollars by 2010.

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5. Forest Risk Commodities - Beef Expansion of cattle-ranching is the key driver of deforestation in the Amazon. In the 1980s, well-known environmentalist Norman Myers coined the phrase “the hamburger connection” to describe deforestation resulting from the rapid growth of beef exports from Central America to fast food chains in the United States. At the time Brazil exported very little beef, but exports have tripled since the late 1990s and 80% of the growth in production has been in the Amazon.

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Demand •

Huge growth in demand for beef is projected, due to increases in population and shifts in consumer preference linked to growing affluence in emerging markets. Brazil has a large domestic market, but between 1990 and 2001 the percentage of Europe's processed meat imports that came from Brazil rose from 40 to 74 percent. Markets in Russia and the Middle East are also responsible for much of this new demand for Brazilian beef.60

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Increased international demand for Brazilian beef has been explained by the devaluation of the Brazilian currency and culling of livestock in Europe and around the world to combat diseases such as foot and mouth, BSE, and avian flu.61

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Some of the major players on the supply side of this business are big Brazilian slaughterhouse groups, who distribute globally and are responsible for more than 50% of the processed beef sold worldwide. They have made large investments in modern new slaughterhouses and meatpacking and dairy plants inside the Amazon region.62 The main buyers are believed to be large supermarkets, butchers, restaurants and fast food chains.63

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The Global Market Supply

• Today, Brazil has the world’s biggest commercial herd with the lowest production costs, due in large part to grass grazing and the illegal use of land in the Amazon.

This helps to make it the largest exporter of beef in terms of volume, even though in some places intensity is as low as one cow per hectare.54 The next largest beef exporter in South America is Argentina (with around a quarter of Brazil’s export volume), followed

by Uruguay, Paraguay and Columbia.55 •

It is estimated that nearly 80% of land deforested in the Amazon between 1996 and 2006 is now used for cattle pasture.56 Over the past decade, more than 10 million hectares of forest in the Brazilian Amazon have been cleared for ranching,57 and, according to Greenpeace, grass-fed beef production is the largest driver of deforestation in the region.

Total herd and total deforestation The growth in Brazil’s cattle herd is closely linked to deforestation

The soy-beef-deforestation interaction cycle59

Facilitates market access

Cattle (x 1,000,000)

Deforestation (x 1,000km2)

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Cattle ranches occupy forest lands

Infrastructure opens up more forest land

Policies promoting development

Source: Imazon

Brazil has good forest laws but has lacked resources to implement them. It has made an ambitious commitment to reduce deforestation by 70% by 2017. Poor state control over public land in the Amazon still facilitates land grabbing in the rainforest, which is seen as free. Those that clear the land first make money by selling the timber.

Cattle ranching then follows on, and when the land is further degraded it is illegally sold, often to soy producers with access to international credit. This allows ranchers to finance their operations without relying on expensive domestic loans, and they move deeper into the forest to clear more land and expand their businesses.58

Extensive farming method

Deforestation of frontier

Soy producers occupy pastureland

Farmer sells off pastureland

Source: Keeping Amazon forests standing: a matter of values WWF (2009)

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Meat imports often remain strong despite any economic downturn. Faced with financial pressures consumers don’t switch away from meat, but tend to trade down to lower cost products, which are actually more likely to contain forest risk commodities.

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The provenance of beef produced on deforested land is easily concealed within ready meals, and canned and pre-packed goods. Currently labelling requirements for meat in the EU do not include its place of origin, allowing imports packaged in Europe to be labelled as European.

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In many poorer countries beef consumption is still low, but as their economies improve so will demand for meat.

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According to a recent Greenpeace report, slaughterhouses on the frontier of deforestation are also major suppliers of leather to businesses in Italy, the US and China that supply top global fashion, furniture and car brands.64 This is believed to contribute up to a quarter of the profits from brazil’s cattle industry.

Impacts & Their Management Land Conversion & Wider Sustainability Challenges

• The UN Food and Agriculture Organization (FAO) has estimated that livestock-related emissions account for about 18% of the world's total greenhouse gas emissions, due to deforestation, energy use, and methane emissions from cattle.65 Beef production has other sustainability impacts that will also become harder to justify economically in a resource-constrained world: 1kg of beef requires 15,500 litres of water to produce, versus 4,900 for Pork, 3,000 for Rice and 900 for Maize.66 •

Studies by the Brazilian Agricultural Research Corporation (EMBRAPA) indicate that the restoration of degraded lands could potentially allow for 100 million head of cattle to be raised on 40 million hectares of pasture, representing a 42% increase in the herd size compared to 2007 numbers, and a 35% reduction in land use compared to 2006. However, the lack of investment in the restoration of degraded pastures and the lack of a focus on small-scale production impede the spread of sustainable practices.67

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To minimise the forest risk associated with beef requires traceability and labelling of meat products with their place of origin. This comes back to whether consumers are prepared to pay for the unseen costs of their food: higher-priced land, better welfare standards, and traceability costs will inevitably lead to higher costs of production but lower environmental costs.

Standards Setting and Third Party Certification •

At present there are few choices for companies using beef to work within multi-stakeholder or third party certification systems. Those that wish to avoid beef from deforested land tend either to develop bi-lateral relationships audited to their own standards or to source more products locally.

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Recently Bertin, one of Brazil’s largest beef exporters that has been heavily criticised by NGO’s for its practices in the Amazon region,68 partnered with sustainable ranchers’ association Aliança da Terra to establish new criteria for sustainably produced beef.69

Left: Brazil is responding to increasing global demand for beef and leather offering huge earning potential.

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6. Forest Risk Commodities - Soy The soybean is an extremely versatile commodity. It’s used for vegetable oil, as a source of protein in meat and dairy substitutes, and as a hidden ingredient in many processed food products. Overwhelmingly, though, it is found in livestock feed, and global demand is rising fast as meat consumption continues to grow, particularly in China. Brazil is on the point of overtaking the US as the world’s largest soy producer and exporter and production is booming along the southern border of the Amazon rainforest, where the low cost of deforested land makes production highly competitive.

The Global Market Supply

• The major soy producing nations are the United States, Brazil, Argentina, China and India. Large tracts of low cost, fertile land and lower labour costs have fuelled the growth of South America’s soy industry and Brazil is expected to become the world’s largest producer for export.

• US government subsidies and incentives for the production of corn for ethanol have driven up crop prices and displaced US soy farming to other countries. In Brazil the states with the greatest soybean production are Paraná, Rio Grande do Sul and, largest of all, Mato Grosso in the Amazon region.

• In 2004-5, Brazil produced over 50 million tonnes of soy across nearly 23 million hectares - an area roughly the size of Great Britain. Between 1999 and 2004 soy production in the Amazon region increased by 15% per annum.70

• 32% of Brazilian soy exports go to Europe.71

Soy expansion in the Brazilian Amazon compared with soy price

Projected soy bean exports for the U.S. and Brazil, 2004-2016

The U.S. Department of Agriculture expects Brazil to become the dominant supplier of soy to meet growing demand over the next decade.

Source: mongbay.com Based on USDA figures

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Source: mongbay.com Based on USDA figures.

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Demand

• Soy’s primary role in the global food industry is as a feedstock in intensive animal husbandry for meat, dairy and egg production. It is estimated that 80% of the world’s soy production is fed to livestock – primarily cows, pigs and chickens.72

• Its use is increasing because fish meal costs have risen as wild caught stocks decline and other animal-based sources have been restricted over health and welfare concerns following major incidents such as BSE.

• Much of Europe’s meat production is now dependent upon soy as a feedstock. In 2007, the European Union’s 27 countries together imported over 24 million tonnes of soy meal, 15 million tonnes of soybeans (almost all of which were also processed into feedstock on arrival) and almost 1 million tonnes of soy oil. These products are mainly fed to pigs and poultry that are sold on as meat and used in multiple food products eaten by millions of people every day.

There is presently little awareness among consumers of the forest footprint this is creating.

• European soy consumption requires an estimated 14 million hectares of land in total – its two largest suppliers, Brazil and Argentina, account for 87% of this area.73

• Meanwhile increasingly prosperous consumers in developing nations are eating more meat and dairy products. Despite significant domestic production, China is now the world’s biggest importer of soy to feed its growing livestock sector.

The per capita consumption of pork in China has almost doubled since 1990 – growing from 20 to 40 kg – according to the China Meat Association.74 Meanwhile the growth of dairy consumption in India and the corresponding need for feedstock is challenging the country’s ability to sustain soy exports.

• In Europe, soy is also used in 60% of processed food - including cereals, biscuits, cheeses, cakes, noodles, pastries, soups and spreads - and the sector is growing rapidly worldwide.75

• Taken together, these upward pressures are expected to increase global demand for soy from 200 million to 300 million tons by 2020.76 Further development of the soy industry at this scale can only realistically come from increasing yield on available land rather than increasing the hectares under cultivation.

Below: Amazonian soy is fed to European chickens and pigs that are used in food products by businesses who may have little knowledge of the gathering reputational and investment risks associated with deforestation.

Impacts & Their Management Land Conversion

• Brazil is the fourth largest emitter of greenhouse gases globally, and 75% of its emissions are caused by deforestation.

• In 2006 the Brazilian Vegetable Oil Industry Association (ABIOVE) and the Brazilian Grain Exporters Association (ANEC) pledged not to trade soy from newly deforested areas in the Amazon. Originally agreed for 2 years, this initiative, known as the “Soy Moratorium”, has been extended to July 2009. Work is ongoing with NGOs Conservation International, Greenpeace, IPAM, TNC and WWF to develop and implement a governance structure with rules for operations in the Amazon region, and to encourage the government to comply with stated public policies regarding land use.

• This initiative has dramatically reduced land conversion within the Amazon region. Results of verification using satellite-based mapping and

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monitoring were officially announced at the Ministry of the Environment in Brasília in April 2009, and showed that of a total of 630 selected areas in which some deforestation had taken place since July 2006, soy was being grown in only 12.

• The FFD process encourages companies to support the principles, aims and objectives of the Soy Moratorium and ensure their supply chain partners comply with its commitments long-term.

Extent of Third Party Certification

• The Roundtable on Responsible Soy (RTRS) is a multi-stakeholder process with a secretariat in Argentina, an Executive Board and a membership divided between producers, traders, financiers and civil society. The RTRS is developing a set of principles and criteria for responsible soy production together with requirements for certification and a programme to support capacity within the soy sector.

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7. Forest Risk Commodities - Palm Oil for other crops but could still be significantly improved. According to the Malaysian Palm Oil Association, best-in-class plantations can generate 7 to 8 tonnes per hectare, compared to an actual average yield of 4 to 5 tonnes. Historically, however, the industry has brought more land into production rather than working to improve yields on existing estates.

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© Masakazu Kashio

Palm oil is found in around 10% of products on European supermarket shelves, from soap and toothpaste, to chocolate, bread, butter and cereal. Its success as a global commodity lies in its tremendous versatility, but also in its high yields – around seven times those of rapeseed, for instance – and low production costs. South East Asia dominates global production and plantations on deforested land (particularly on carbon-rich peatlands drained for agriculture) make palm oil production a major regional source of carbon emissions.

• Prior to the global financial crisis, palm oil

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production was increasing by 9% every year.81 More than half the oil palm expansion in Indonesia and Malaysia between 1990 and 2005 occurred in converted native forests and peatlands.82

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• With limited forest now available for conversion in Malaysia, major palm producers there have expanded into Indonesia, and some are now looking to Brazil and Africa for new land to increase production.83

• If grown sustainably, however, palm oil has many advantages. It is highly productive compared to other major oilseed crops and its cultivation and processing require less fertilisers, pesticides, and fuel energy per tonne of oil. Simple substitution with alternative crops could therefore have negative environmental and climate change impacts overall.

The Global Market Supply

• The scale of the palm oil industry is vast. Global palm oil output was 42 million tonnes in 2007, more than 80% of which was from Indonesia and Malaysia and has helped to transform the economies of these countries.80

• Palm oil also represents an economic opportunity for hundreds of thousands of small farmers who represent a significant part of the supply chain, and offers some governments a means to combat poverty.

• Other large producer countries include Thailand, Nigeria and Colombia. Brazil, Democratic Republic of Congo and Liberia are all set to expand their production.

• For these reasons penalising palm oil expansion per se, is not feasible or economically responsible.

Urgent effort must instead be focused on ensuring it comes from sustainable sources and minimising deforestation risk.

• Yields per hectare in the industry are higher than Palm oil production in Indonesia and Malaysia

Indonesian production Malaysia production

mongbay.com

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Demand

• China is the largest consumer of palm oil, importing 18% of global supply. About 16% goes to the EU, and the UK alone imported 490,000 tonnes in 2007.

A recent survey by The Independent estimated that palm oil is contained or suspected in 43 of the 100 leading UK brands.84 Most UK companies involved in the palm oil trade do not have specific policies in place to address its negative social and environmental impacts, and many do not know the origin of the palm oil they use.85

• In 1985, plantations covered less than one million hectares; today they stretch over 11 million hectares and predicted demand for edible palm oil – excluding use as biofuels – is set to double by 2050. This could require conversion of an additional 250,000 hectares of land per year to create new plantations.86

• Growth in demand is also prompted by expanding biofuel markets in the European Union87 and by demand for food in Indonesia, India and China.88

• Market demand for palm oil and its derivatives in Europe and the US has increased rapidly as food manufacturers seek alternatives to hydrogenated materials for health reasons. Palm oil is also used widely in processed foods, demand for which is growing steadily in increasingly affluent emerging markets. It is also used in other consumer products such as soaps, cosmetics and beauty items as a carrier for vitamins and for its texture and moisturizing properties, and derivatives of palm oil can be added to other ingredients to make them stable and extend their shelf life.

• Palm oil plays an important role in food and industrial production worldwide and finding a way to grow it sustainably remains a major global challenge.

longer in a peatland forest) to recoup from the emissions saved by using the biofuel.89 Simply put, the process releases far more carbon than it saves.

• Forest conversion has a major impact on biodiversity.

Palm oil plantations have replaced the habitat of many endangered species including primates such as the orang-utan. According to WWF, Indonesian lowland forest, which is at risk of replacement by palm oil and timber plantations, harbours amongst the richest biodiversity on the planet and is home to rare Asian elephants and tigers.90

• Malaysia and Indonesia have excellent forest conservation laws and vast areas of forest under protection, far in excess of those in Europe for example, but institutional weaknesses mean that even protected areas are vulnerable to land clearance. Nearly all of Indonesia’s national parks have suffered deforestation for illegal logging and palm oil plantations.91

• Many oil-palm plantations provide not only employment, but also housing, water, electricity and infrastructure including roads, medical care and schools.92 However, in the process of setting up the plantations, land inhabited by local populations is sometimes seized and livelihoods jeopardised by incomers. About 100 million of Indonesia’s population of 216 million people depend on forests and forest products for their livelihood.93 Palm oil, whilst an undoubted wealth creator and valuable foreign-exchange earner, replaces diverse farming systems with export-oriented monocultures and incomes dependent on the fluctuations of the international market. It also requires imports of food and fuel.

Extent of Third Party Certification

• In 2003, the industry and concerned stakeholders

Impacts & Their Management Land Conversion

• Cutting down or burning tropical rainforests to plant oil palm releases large quantities of stored carbon.

The conversion of lowland tropical rainforest to oil palm plantations for bio-diesel creates a ‘carbon debt’ that would take over 86 years (or up to 4 times

established a roadmap for the development of independent third party certification through the Roundtable on Sustainable Palm Oil (RSPO).

A set of standards has been established and the RSPO is now finalising its chain of custody certification system to link certified growers to consumers. The RSPO is the only major palm oil initiative of its kind, although there have been external concerns about the conduct of some members and the extent of control over new plantings and development on peatlands.

• Very little certified palm oil has entered the marketplace since the RSPO was founded.

Just 4% of the world’s palm oil is currently certified sustainable.94

• Unilever, the biggest single consumer of palm from Asia has committed itself to sourcing all its palm oil sustainably by 2013. Sainsbury’s has committed to using only sustainable palm oil by the end of 2014; Ahold by 2015; and Wal-Mart to ending palm oil use from Indonesia or Sumatra since the end of 2008.

Above: Palm oil is present in hundreds of everyday products, each of which carry an associated deforestation and climate change footprint.

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8. Forest Risk Commodities - Biofuels Global Supply and Demand

• Bioenergy plants are being developed across Europe

• Biofuels are produced from biomass, renewable organic material from plants or animals. The most commonly used biofuels are (1) fuel ethanol, made from crops like corn, wheat, sugarcane and sugar beet; and (2) biodiesel, made from vegetable oils like soy, rapeseed and palm – some of which carry high deforestation risks.

• Both the US and the EU have targets for a biofuels mix in standard fuels, and increasing use in energy production is also stimulating the market. Fuel ethanol is the most widely used biofuel globally.

More than 40% of Brazilian vehicles run on bioethanol. In Europe, biodiesel and pure vegetable oils account for 85% of biofuel use – over half of this is produced from rapeseed oil, but soy and palm oil are also used (see chart).95

and Asia. Neste Oil is building the world’s largest renewable diesel plants in Singapore using palm oil as a feedstock.

• High fuel prices in the mid 2000s lead Asian governments to turn to locally produced biofuels.

The upward effect this had on food prices lead to caps being imposed on the amount of palm oil being used for this purpose.

• The European Parliament and other institutions are promoting so-called ‘second generation’ biofuels, derived from wood fibre (cellulosic). This will require reliable new wood supply and could have a dramatic impact on natural forests, especially in regions like Africa and Asia, as they are cleared to make way for industrial wood plantations.

Biofuels and Brazil Brazil is a leader in green energy use. In 2006 40% (13.4 million cubic metres) of fuel used in motor vehicles was sourced from bioethanol, equivalent to 3% of all electric power consumed in Brazil.97 Waste from sugarcane plants (bagasse) provides the energy needed to process the crop - avoiding dependency on fossil fuels in the production of fuel ethanol.

Efficient production and use can therefore be ‘carbon neutral’, with emissions released in the process being

taken up by growing plants the following year.

Currently the sugar cane industry is located in South East Brazil and does not threaten tropical forests further north; however if demand for Brazilian fuel ethanol grows significantly, expansion in the South East carries the risk of (i) clearance of biodiverse savvana creating a carbon debt of 17 years and (ii) forcing other agribusinesses such as soy and beef further north into the rainforest.

Land Conversion & Sustainability

• Concern about biofuels largely relates to land management issues and whether agricultural land is best used for the purpose of energy generation.

Views diverge, influenced by perceptions of global food security, projected population growth and concerns about how climate change will impact the world’s major food growing areas.

Impacts and Their Management

Abandoned cropland in US 1yr

Marginal cropland in US No debt incurred Prarie biomass ethanol

Abandoned grassland in US Corn ethanol

1

Source: Fargione, J. et al, Science (2008)

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Prarie biomass ethanol

37yrs

48yrs

93yrs

319yrs

Central grassland in US

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Corn ethanol

Right: The bar graph represent the number of years after land conversion from former ecosystem to biofuel production required for cumulative biofuel greenhouse gas reductions, relative to the fossil fuels they displace, to repay the biofuel carbon debt.

100

Cerrado grassland in Brazil

produce biofuelss,96 are making it uncompetitive to grow soy in the US and contributing to a shift in production overseas and increasingly into areas formerly occupied by tropical forests.

is a major cause of concern where it is currently being used for food production. The loss of subsistence farming has severe social impacts, and there have been cases of displacement of entire communities, violations of human, labour and environmental rights, and violence as a means of subduing complaints.

global multi-stakeholder process, based in Switzerland, producing voluntary environmental and social standards, to help businesses and consumers identify and purchase the “better biofuels”. Members include major corporations and social and environmental advocates. The standards build upon the soy, palm oil and sugar roundtables; the draft is available for review at their web site: http://epfl.ch/biofuels.

Soybean biodiesel

• The US government subsidies on corn production to

• Large scale conversion of land for biofuel production

• The Roundtable on Sustainable Biofuels is a new

17yrs

demand for vegetable oils like soy and palm oil often leading to perverse outcomes. Converting peat swamp forests in SE Asia to oil palm plantations for biofuel creates a carbon debt by releasing 420 times more CO2 than the annual greenhouse gas reduction that the biofuel would provide.

biomass are being developed although issues related to indirect land clearance and the age of plantation sites have not yet been successfully addressed.

Cerrado wooded in Brazil

• Government biofuel targets have led to increased

in large scale agricultural monocultures which can have serious environmental, social and economic impacts on local communities. These include the depletion of water sources due to changes in the hydrological cycle, harm to rivers and streams, air and water pollution due to the unregulated use of pesticides and other agrochemicals, and the loss of biodiversity.

1000

• Sustainability criteria for biofuels, bioenergy and

Sugarcane biodiesel

Above: All the palm oil used in European biodiesel comes from Indonesia and Malaysia, and 36% of the soy oil comes from Brazil

• Many of the main crops used for biofuels are grown

Standards Setting and Third Party Certification

Tropical rainforest in Brazil

Source: van Gelder, J.W et al. Profundo (2008)

Biofuel carbon debt

Soybean biodiesel

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can make use of marginal and degraded land and a key policy and corporate strategy question is how these can be incentivised over forestrisk commodities.

423yrs

Other biodiesel feedstocks

• Alternative crop types, like Jatropha and algae,

Peatland rainforest in Indonesia/Malaysia

Palm oil

Palm biodiesel

Rapeseed oil

86yrs

1761

507

overlap and there is a lack of strategic planning for the use of land. Land is often cleared for market uses which are not sustainable longer-term, but once degraded the land is extremely costly to regenerate.

Tropical rainforest in Indonesia/Malaysia

Soy oil

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Science,98 converting rainforests, peatlands, savannas, or grasslands to produce food crop– based biofuels in Brazil, Southeast Asia, and the United States creates a “biofuel carbon debt” by releasing 17 to 420 times more CO2 than the annual greenhouse gas reductions that these biofuels would provide by displacing fossil fuels (see bar chart, below right). In contrast, biofuels made from waste biomass or from biomass grown on degraded and abandoned agricultural lands planted with perennials incur little or no carbon debt and can offer immediate and sustained emissions reductions.

• National, regional and global policy objectives

Palm biodiesel

• According to research published in the journal

Feedstocks used for EU biodiesel consumption (tonnes)

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9. The Role of Markets commodities in this way will rise. The natural fertility lost cannot be regained without major investment to improve degraded land and yields on impoverished soils. At present, it is therefore cheaper for businesses to expand into natural forest, but this option is much less likely to persist in the future as new internationally funded and regulated mechanisms to halt deforestation begin to take effect.

Globally consumers have increasingly come to rely on products that are produced in tropical countries on formerly forested land. The result is cheap timber or food for export and increasingly for local consumption, as well as considerable economic benefits for the national economies of often very poor countries. However, this prosperity is not always equitably distributed to communities whose livelihoods once depended on the forests, and comes at a high environmental cost which is not passed on to the consumers of the end-products sold. Large-scale producers and traders, public and private financial institutions, and enduser businesses and consumers all play a role in the globalised supply chains that link countless products and services to forest destruction.

Financial institutions might have a forest footprint through their purchasing and procurement policies, but their primary impact on forests is accounted for by their lending and investment activities. This includes project finance, corporate finance, trade finance, underwriting of issuances and asset management – each with its own level of exposure to risk.

Commodity production for the global market represents a large proportion of the foreign exchange earnings of many Asian and Latin American countries, but at a considerable cost to their natural capital. As new international mechanisms come into force to tackle deforestation and as awareness among consumers increases, the costs and risks associated with producing agricultural

Given the constraints on natural capital, investors are increasingly focusing their attention on the environmental credentials of companies. F&C Asset Management and Insight Investment have both developed tools to evaluate biodiversity risk within their portfolios. This process has been endorsed by the United Nations Principles for Responsible Investment (UN PRI), whose members

The Role of the Finance Sector

The global financial crisis has prompted calls for greater transparency and accountability in the financial sector to improve risk management and ensure more responsible practices across the board. Evidence of this in the forestry sector is seen in the move by some banks to promote the wider adoption of third party growing standards and use of certification schemes. Increasingly that is being applied to companies involved in the production of forest-risk commodities and in the monitoring of their wider supply chains.99

The Role of Public Financing: Export Credit Agencies Publicly financed Export Credit Agencies (ECAs) often act as a stepping stone for businesses in industrialised nations to establish themselves in emerging markets, by jointly managing the risks. ECAs underwrite around US$100 billion annually in medium and long term credits and guarantees, compared with multilateral development banks which have a combined total of US$60 billion in loans per year.

ECAs have been criticised for lacking sufficient due diligence procedures, enabling large sums of private sector capital, assisted by the taxpayer, to flow

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into businesses which may carry high levels of damaging environmental, social and economic impacts. A well publicised example is the significant support from ECAs in financing the pulp and paper sectors, facilitating a huge expansion of the industry within Indonesia. Specifically, this support enabled Asia Pulp and Paper (APP) to build pulpmills, clear natural tropical forest, and convert it to plantations.101 This investment ultimately resulted in the “largest default in emerging market history”. The ECAs involved were from the US, Canada, Japan and 6 European countries.102

manage in excess of $10 trillion and have committed to the integration of environmental, social and governance issues in their investment decisions.100 However these standards are not uniformly adopted by the sector. Many of the major financial institutions in Europe and the US knowingly or unknowingly contribute to deforestation (or have done in the past) by providing credit facilities and other financial services to companies.

The FFD Project offers these financial institutions an opportunity to improve their level of due diligence and to invite new requirements of the companies which they are financing or in which they invest. By including forests in their risk assessment frameworks, financial institutions supporting the FFD will play a role in encouraging companies to improve their performance on climate change and deforestation. In the long term this will

reduce risks to invested financial capital and prevent the erosion of natural capital on which we all depend.

The Role of Business The European Commission’s landmark report, The Economics of Ecosystems and Biodiversity,103 published in 2008, estimated that annual losses of natural capital due to deforestation are worth between $2 and $5 trillion per year.104 With climate, energy, food, and environmental security heading on a dangerous collision course, markets need to rapidly assess and manage the risks of continuing to exploit natural capital as if it were a limitless resource. At present this is poorly understood and rarely factored into economic decision making.

The failure of corporations themselves to manage their environmental risks has tangible impacts on financial performance. F&C Asset Management has identified a

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From Forest to Foodhall number of risks associated with failure to assess and manage a company’s impacts on biodiversity and ecosystem services, including: restricted access to capital, land and markets; reputation; security of supply; and liabilities and laws.105

Currently, most companies do not map their entire supply chain for key challenges. The Forest Footprint Disclosure Project is an important first step in enabling those corporations to understand the business case for implementing integrated policies for sustainable sourcing and adopting mechanisms to monitor their supply chains.

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Whilst the proliferation of certification schemes holds much promise for forests, the practical impact is still negligible as few companies have established timebound plans to achieve a fully certified supply chain. In the case of palm oil, for example, whilst a number of major companies including Sainsbury’s, The Body Shop and Unilever, have made public commitments to switch to certified sustainable supplies and bought certified material, overall uptake has been slow. Greenpalm, a company that trades RSPO certificates, under the Book and Claim supply chain option, has struggled to find sufficient corporate buyers.108 Only 1% of the sustainable palm oil that is currently available on the market has been sold as certified product according to WWF. This situation is lamentable after seven years of the RSPO’s existence. WWF US is launching a Palm Oil Buyers Score Card to raise awareness and increase public pressure on retailers to support the use of certified sustainable supply.109

Degraded land Illegal logging, fire setting

quantities of carbon and provide ecosystem services that underpin local and regional economies.

To Governments and companies in the commodity business, they are worth more cut down than standing up.

and small-scale agricultural expansion set off the deforestation process and are quickly followed by new roads and infrastructure which ease access for later settlers and land speculators.

Deforested land planted with crops

© Djuna Ivereigh/www.indonesiawild.com

The challenge to brand owners and retailers is in mapping supply chains back to original source. Beyond their immediate suppliers, most companies currently have little knowledge about the origins of raw materials and the complex supply chains leading from producer to consumer. Farmers, processors, traders, wholesalers and retailers are just some of the intermediaries involved.

This is why industry-wide agreements are required to support traceability and allow organisations to manage and control their risks.

Third party certification offers consumers a real choice, and has the potential to offer producers price premium incentives and retailers and brand owners the ability to differentiate their offering. Perversely, the costs of supplying goods that are environmentally benign are higher than those which are environmentally damaging.

For instance certified palm oil costs between 10% and 35% more than uncertified, depending on the choice of supply chain model used. Achieving higher growing standards and creating a traceable supply chain from field to store needs to be far better incentivised to achieve wide acceptance

Intact forest Intact forests store vast

Transportation Commodities produced on recently deforested land do supply domestic markets, but greater economic value is generally created by exports of either processed or raw produce.

Industrialised agriculture is introduced, often managed by outside multinational organisations with access to international financing and knowledge of the global commodities market. © Masakazu Kashio

However, many of the developed world’s biggest companies and brand names continue to use products sourced from deforested land. The Independent identified that 43 of the top 100 food products in the UK contain palm oil, including Kellogg’s Crunchy Nut Cornflakes, Cadbury’s Dairy Milk, Unilever’s Flora margarine, Nestlé’s Kit Kat, and Procter and Gamble’s Ariel.107 Failure to use sustainable raw materials is a threat to those brands.

Consumers can influence the purchasing decisions of retailers and manufacturers by being vocal about what they want, but often they do not have enough information to make informed decisions about the products they buy. This is partly because companies are not legally obliged to disclose the origin of commodities such as soy or palm oil that can be simply listed as ‘vegetable oil’ in their products. Lack of information like this makes it difficult for consumers to use their buying behaviour to influence corporate sourcing policies and there is no regulatory framework in operation in much of the world to promote more forest-related disclosure. In many emergent markets, including India and China, civil society, consumer awareness and public pressure play a very limited role.

© Global Canopy Programme / Katherine Secoy

Some sectors are particularly vulnerable, primarily those that rely on the availability of natural productive capacity (e.g. forestry) and healthy ecosystems (e.g. agriculture, biofuels, food and beverages). The anticipated loss of ecosystem services will affect financial returns in all these sectors. These financial risks, combined with pressure from NGO and media awareness campaigns, have already prompted a number of companies to try and ensure the sustainability of their supply chains.

Some banks are also putting pressure on businesses to make similar commitments. Through its Soy Supply Chain Policy (2008),106 for example, the Dutch bank Rabobank determines the interest rate a company pays for access to capital according to their Corporate Social Responsibility scores.

The Role of the Consumer

Processing Plantations are established to

End products With limited traceability in

supply palm oil for processed foods, consumer products and biofuels. Soy is grown to be fed to European chickens or pigs. These commodities enter the global marketplace often without a trace of their country of provenance or growing standards.

globalised supply chains, products containing ingredients contributing to deforestation remain unknown to consumers, who cannot therefore choose to buy sustainable alternatives.

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Notwithstanding the 2008/9 credit crisis, which has temporarily reduced demand for commodities, several global trends are converging to move climate change – and now deforestation – up the agenda as an investment concern.

the successor to the Kyoto Protocol, to be agreed at the next UN climate summit in Copenhagen in December 2009. Coming into force after 2012, this could scale to generate tens of billions of dollars for rainforest-owning nations annually110 and bring a fundamental change to the economics of deforestation. For a comprehensive review of REDD proposals and a summary of other financing mechanisms please see www.littleREDDbook.org

International political pressure is mounting to halt deforestation, and new national and international mechanisms are being developed on a scale not previously seen which could radically reform the forest-dependent sectors. These mechanisms aim to incentivise tropical forest-owning nations to reduce deforestation, without negatively affecting their development aspirations, for example by providing resources to restore degraded land for agriculture or plantation forestry, and intensifying agricultural productivity – all within the context of moving to a low carbon and food-secure global economy.

Payments for Ecosystem Services

At international, national and regional levels, new policies, financial mechanisms and regulations are being developed, tailored to the legal and financial context of each region and commodity. This will have implications for business, including the future security of supply chains. It will also create new opportunities for investment, creating winners in companies that manage their resources more effectively, and losers in those that face higher prices for raw materials as the terms of trade shift.

Payments for Ecosystem Services (PES) provide a financial return for maintaining standing forests, including those which may not be immediately threatened, in order

Deforestation driven by commercial activities can create a valuation risk for companies and investment portfolios in three key ways: • Regulatory Risk: new regulations or incentive schemes threatening supply of commodities and increasing costs • Environmental Risk: direct impacts on commodity yields from loss of natural forest services and rainfall patterns • Reputation Risk: consumer awareness of the forest footprint leading to damaged reputations for poorly performing companies

New Financing Mechanisms to Maintain Forests

REDD – Reducing Emissions from Deforestation and Degradation

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to protect the services they provide at the local, regional, and global scales. The governments of Guyana, Costa Rica and Brazil’s Amazonas State have piloted successful schemes for PES, which could be rolled out in other regions as a sustainable alternative for economic development. The relationship between forests and water management is becoming better understood, for instance and this offers opportunities for many land-owners worldwide.

Rainforest Bonds In April 2009, at the highest-level meeting ever convened on this issue, HRH Prince of Wales presented an

Above: The forest footprint of everyday products now makes the front pages around the world. The UK’s Independent story on palm oil in May '09 was followed later that month by an exclusive in The Guardian reporting Greenpeace’s new expose on how beef and leather from the Amazon supply supermarkets and luxury brands around the world. The forest footprint is now front page news - and the threats to corporate reputations and brand value are clear.

‘Emergency Package for Tropical Forests’ to 18 world leaders alongside the G20 summit in London (pictured above). The Heads of State present agreed to immediately set up a working group to consider a billion dollar public/private funding mechanism including a ‘Rainforest Bond’, to rapidly facilitate large-scale payments to rainforest nations that reduce deforestation.

Underwriting governments will have time to generate revenues for repayment from clean development investments, domestic carbon permit auctions or other schemes. If agreement is reached, payments could start as soon as 2010, in advance of the REDD mechanism so accelerating the move towards ‘peak deforestation’.

Other Financing Initiatives

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The World Bank’s Forest Carbon Partnership Facility, supported by several international donors, with a proposed budget of US$300 million of which US$170 million has been pledged.

The World Bank’s Strategic Climate Fund, which has funding commitments from the G8 group of nations of US$6 billion and will include a Forest Investment Programme.

The services forests provide, such as storing and sequestering carbon, moderating weather, generating rain, stabilising soil, and storing carbon, are widely recognised but seldom given any monetary value. Now a number of major financing mechanisms are coming online which could, for the first time, give forests more value alive than dead.

In December 2007, the signatories of the UN Climate Change Convention agreed to develop a mechanism to compensate the reduction of emissions from deforestation and degradation in developing countries (REDD). A REDD mechanism is likely to be included in

© Clarence House

10. Investment Risks from ‘Peak Deforestation’

The Norway Forest Fund, which has committed US$2.8 billion over five years from 2008. The Congo Basin Fund, supported by Norway and the United Kingdom, with funding of US$195 million. The Japanese Government’s Cool Earth Partnership designed to support adaptation to climate change and access to clean energy, with some forest interest, allocating US$2 billion per year from a US$10 billion fund.

The Australian Deforestation Fund, aimed at reducing deforestation in the Southeast Asia region, with funds of AUS$ 200 million.

The German commitment of €500 million a year for biodiversity. The suggestion by the European Commission for the creation of a Global Climate Financing Mechanism, part of which could fund tropical forests.

Brazil’s Fund for the protection of the Amazon rainforest has received a commitment for an initial US$130 million from Norway (drawn from the Norwegian Forest Fund).

Guyana has offered to place its forest under international stewardship in return for compensation for development opportunities foregone.

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© Djuna Ivereigh / www.indonesiawild.com

Land Reform Much of the pressure on forests comes from outside the forestry sector. Agricultural policy reforms that will improve yields on existing agricultural land and shift production to underused and abandoned land are among the solutions proposed.

Clarifying land rights Governments assert ownership of around 70% of the world’s tropical forests, but these claims are frequently disputed by forest-dependent peoples. Tenure rights are often contested and conflicts arise over the allocation of concessions to exploit forested land and the income streams generated, without the free, prior and informed consent of community stakeholders. Unless these can be equitably resolved, it is difficult to introduce better management of natural resources. Compensation mechanisms such as REDD will not work unless ownership of the forest ‘asset’ can be determined. While legal frameworks for land tenure are essentially an issue of national and local governance, international bi-lateral agreements such as those under FLEGT can help countries to address illegal land use.

Shifting production onto degraded land

© James Aldred

There are an estimated 300-700 million hectares of abandoned croplands worldwide that are unproductive for agriculture due to soil erosion and degradation. They can, however, be used for growing palm with enrichment and biofuel crops such as Jatropha.112 Recently, Brazil's Minister of Strategic Affairs announced that Brazil could triple its agricultural output without clearing any more of the Amazon, by bringing vast tracts of under-used or abandoned pasture and agricultural land back into production. However, the high price of cleared land, coupled with poor governance and inconsistent enforcement of environmental laws, have made it more profitable to clear forest than to rehabilitate pasture.

Governments are ramping up measures to exclude illegally sourced commodities from commercial supply chains, to incentivise sustainable production, and to manage their own forest footprints.

There are certification schemes for each of the major forest-risk commodities discussed in this report, including the Forest Stewardship Council for timber, the Round Table on Sustainable Oil Palm (RSPO), and the Round Table on Responsible Soy. New initiatives are also emerging for beef, where there have been fewer third-party certification options thus far. For more information, please see each of the commodities sections in this report.

Government Procurement Standards

Import controls

36

could be extended to cover other forest risk commodities such as palm oil, soy and biofuels.

Certification Providing incentives to producers Providing incentives for good land stewardship and for maintaining forests in forest owning nations is also essential. Direct financial incentives may be in the form of tax breaks, payment/compensation, access to credit for land clearance on degraded land or for the development of niche biomass alternatives for the biofuel and bio-energy markets.

Regulation

The clearest recent examples are European and American legislation targeting wood fibre and illegal logging, which affect businesses that import or use timber products that are not certified as sustainable.

See page 14 on the EU’s Forest Law Enforcement, Governance and Trade (FLEGT) measures, and the Lacey Act in the USA, the world’s largest importer of timber.

Above: Commercial deals with impacts on forests have brought financial benefits to rainforest nations, but have also often had negative impacts on the rights and livelihoods of people who live in them.

As major buyers in their own right, governments can influence market behaviour through the introduction of clear procurement guidance on sustainability. In Europe many governments have timber procurement policies promoting the use of certified materials and requiring proof of legality, to ensure they avoid use of wood and fibre from high risk sources of supply. These policies

The practical impact of certification schemes is still low due to weak take-up, but that could change quickly following public commitments from both government and major companies to switch to certified supply, growing consumer awareness about the impact of their buying choices, and new laws requiring sustainable supply chains.

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11. Why Forest Footprint Disclosure? © Djuna Ivereigh / www.indonesiawild.com

How do companies participate?

Today, many analysts remain either unaware of • Following the model successfully pioneered by the Carbon Disclosure Project, a forest disclosure the relative risks within questionnaire will be sent to companies on behalf of the investment sectors financial institutions to help them shed light on a key that will be affected by risk area within their portfolios. the policy changes • Participating companies will be asked to disclose outlined in this report, or how their operations and supply chains are impacting underestimate their forests worldwide, and what is being done to manage those impacts responsibly. effects. As the world undergoes what Innovest’s Matthew Kiernan describes Who will be sent the FFD Company Disclosure Questionnaire? as climate driven “eco-industrial restructuring”, the Forest Footprint • The Forest Footprint Disclosure Project is relevant to global companies in sectors dependent on forest risk Disclosure Project aims to provide a commodities in their supply chains, companies in tool for investors and businesses to primary production, and companies trading in begin analysing and managing the commodities with a high deforestation risk. risks associated with deforestation.

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• These include:

This section provides a brief introduction to the project but for more detailed information please consult the FFD Guide to Disclosure and the other resources available online at www.forestdisclosure.com.

What is the Forest Footprint Disclosure Project?

• The Forest Footprint Disclosure (FFD) Project is a new initiative, created to help investors identify how a commercial organisation’s activities and supply chains are linked to tropical deforestation, and how this may affect its value.

• The launch of the FFD Project in June 2009 marks the beginning of a process, enabling businesses to move from recognition of their forest footprint to complete management and measurement as soon as this is achievable.

• The FFD Project is supported and funded by the UK Government and other foundation donors. It has the backing of an expert Steering Committee of organisations including the Carbon Disclosure Project, the FTSE Company, UNEP’s Finance Initiative, and the Prince’s Rainforests Project.

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Agribusiness and Plantation companies Automotive Building Materials Entertainment Food and Drug Retailers Food Consumer Products Food Production/Manufacturers Food Services Forest & Paper Products Household & Personal Products Petroleum Refining - Bio ethanol Speciality Retailers General Retailers Shoe Manufacturers Trading and processing groups Wholesalers: Food and Grocery Utilities - Bio-energy

How will the disclosure information be used?

• Companies that complete the Forest Footprint Disclosure Questionnaire will receive feedback on their performance and how it relates to others in their sector.

• Results will be collated in an annual report, the first of which will be produced in January 2010. It will identify companies that are best in class, those that have identified innovative strategies for managing their risk, and those that did not respond.

• As companies engage with and improve their management of these issues, the Forest Footprint Disclosure Project process will also evolve. It is the project’s aim eventually to be able to produce quantitative Forest Footprinting impact data.

• For those less secure in the quality of their systems, the Forest Footprint Disclosure Project provides a learning opportunity within a robust framework for gathering supply chain information and for tracking and managing risk related to deforestation.

Benefits of Voluntary Disclosure • Participating in the Forest Footprint Disclosure Project provides financial institutions with a tool to help measure manage and account for the valuation risk in their portfolio related to deforestation.

• For participating businesses, understanding their forest footprint will enhance their supply chain knowledge and help them identify and manage their own deforestation-related risks. These include reputational risks if they are linked to destructive sourcing practices and impacts from new regulatory frameworks to curb climate change that could affect access to resources and the cost of doing business.

• For companies that have already begun to minimise their impacts on forests, the Forest Footprint Disclosure Project showcases the strength and sustainability of their business models and helps differentiate them in the eyes of the investment community and other stakeholders.

“ I don't see this as an exercise to showcase the good and criticise the bad. Instead it is an opportunity to help companies reduce their impact on deforestation through better understanding their footprint and identifying how they can reduce it.

From that position the questionnaire is the ideal starting block. A degree of work will of course be needed but this should not be too onerous for someone with a procurement or commercial background.”

Jonathon Counsell, Head of Environment, British Airways

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Carbon Disclosure Project

Fauna & Flora International

The FTSE Company

Global Canopy Programme

" Deforestation and forest degradation has been losing us an estimated USD 2 to 5 trillion (million million) dollars worth of welfare benefits every year. Some of that is in corporate externalities, which we urgently need to measure if we can ever hope to manage. The Forest Footprint Disclosure Project is an important milestone on that path towards a sustainable world".

Š Global Canopy Programme / Katherine Secoy

FFD Steering Committee:

Pavan Sukhdev, TEEB study leader and former Head of Global Markets for Deutsche Bank

The Prince’s Rainforests Project

Strategic Environmental Consulting

UK Department for International Development

UNEP Finance Initiative

For more information on The Forest Footprint Disclosure Project, the financial institutions backing the disclosure request, or to download the FFD Guide to Disclosure, please visit:

www.forestdisclosure.com Contact: Steven Ripley, Project Manager, Forest Footprint Disclosure Project, John Krebs Field Station, Wytham, Oxford OX2 8QJ e-mail: s.ripley@forestdisclosure.com

Global Canopy Foundation: The Forest Footprint Disclosure Project was initiated in 2008 by the Global Canopy Foundation and launched in June 2009, with the support and encouragement of the FFD Steering Committee which came together to guide the project. The Global Canopy Foundation trades under the name Global Canopy Programme and is a registered UK Charity (No. 1089110), incorporated as a Company Limited by Guarantee (No. 4293417), incorporated in England with registered address John Krebs Field Station, Wytham, Oxford OX2 8QJ. www.globalcanopy.org

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Forest Footprint Disclosure Project John Krebs Field Station Wytham Oxford OX2 8QJ United Kingdom Tel: +44 (0) 1865 240090 Email: info@forestdisclosure.com Web: www.forestdisclosure.com The Forest Footprint Disclosure Projects is a special project of the Global Canopy Foundation Š 2001. All rights reserved. Registered UK Charity (No 1089110), incorporated as a Company Limited by Guarantee (No. 4293417), incorporated in England with registered address: John Krebs Field Station, Wytham, Oxford OX2 8QJ.