21 Dec 2022 3 min read

Investors cannot afford to ignore deforestation

By Catherine Ogden , Emma Cameron , Cristy Rodriguez

Combating deforestation is critical to addressing climate change, achieving net-zero goals and preserving ecosystems. It is a key issue for investors. Here's what we are doing to address the problem.

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We’re all used to seeing big numbers when deforestation is discussed. For instance, between 1990 and 2020, around 420 million hectares of forest were lost due to conversion to other land uses.1

What’s sometimes missing from these numbers is a relatable context: 420 million hectares is an area almost equivalent to all the countries in the European Union.2

Deforestation on this vast scale is a leading contributor to manmade greenhouse gas (GHG) emissions. It’s estimated that 22% of total GHG emissions originating in human activity come from agriculture, forestry and other land use (AFOLU), and around half of this is from deforestation and land conversion driven by the pursuit of commodities that provide us with food, fibre, feed and fuel.3

As well as a significant source of emissions, deforestation destroys carbon sinks and fragile natural ecosystems that are essential to limiting global warming. This important interdependency means preserving nature is a critical component of our fight against climate change.

Why does this matter for us as investors?

No credible pathway to net-zero can overlook deforestation. Without addressing emissions from forestry, agriculture and other land use, we simply cannot reach climate goals.

In purely economic terms, an estimated $44 trillion of economic value generation is moderately or highly dependent on nature4 – more than half of global GDP.

As well as the broader systemic risks related to climate change and biodiversity loss, companies we invest in may be exposed directly to deforestation-related risk, for example from reduced access to key materials or litigation and increasing regulation. This latter issue has been highlighted recently by a sharpened focus on both illegal and legal deforestation across the UK, EU and US at both federal and state levels.

What are we doing about it?

We are stepping up our efforts to limit deforestation in portfolios. In September we published our Deforestation Policy, which followed our signing of the COP26 commitment to eliminate agricultural commodity driven deforestation from investment portfolios.

To assess credit and equity exposure to deforestation risk we have initially focused on select, high-risk industries5 and are leveraging external data. We are constantly working to improve the quality and scope of data from data providers and companies.

We are also expanding our engagement focus, working directly with companies through both our expanded Climate Impact Pledge and acting on minimum standards under our deforestation policy. Through our involvement in the Finance Sector Deforestation Action Initiative , we are working with other investors to accelerate progress in key sectors and across value chains.

What we expect from investee companies

  • We expect companies to proactively analyse, assess and address deforestation risks within operations and supply chains
  • Where relevant, we expect companies to integrate deforestation considerations into climate commitments, strategies and transition plans
  • We expect climate change and the connected issue of deforestation to have a clear and formal place on the board’s agenda.

From next year, companies in high-risk sectors, where we have data, must meet the minimum standard laid out in our Deforestation Policy, to have either a deforestation policy or programme in place. Where companies fail to meet this minimum standard, we will vote against the board from 2023.

As a global investor, we are committed to assessing and addressing the risks of deforestation, which we believe to be part of our fiduciary duty to our clients.

 

1. Source: https://www.fao.org/3/cb9360en/cb9360en.pdf

2. 420 million hectares = 4.2 million square km; the European Union covers 4.4 million square km

3.  Source: https://climatechampions.unfccc.int/wp-content/uploads/2022/06/Why-net-zero-needs-zero-deforestation-now-June-2022.pdf

4. Source: https://www3.weforum.org/docs/WEF_New_Nature_Economy_Report_2020.pdf

5. And drawing on external frameworks: https://www.ceres.org/sites/default/files/reports/2020-06/Ceres%20Investor%20Guide%20FINAL%20June%2029.pdf

Catherine Ogden

Manager - Sustainability & Responsible Investment

Catherine joined LGIM in 2015 to help drive forward ESG integration into mainstream fund research and to strengthen sustainability engagements. Prior to this, Catherine spent four years working with governments in Africa and Asia on the sustainable policy, planning and management of the extractives sector, and five years in sell-side equity research. A keen linguist and sportsperson, she bemuses her colleagues with a love of Capoeira and British Military Fitness.

Catherine Ogden

Emma Cameron

ESG Analyst, Stewardship & Sustainable Investing

Emma is an ESG Analyst at LGIM America. In her role, she supports the Investment Stewardship team in developing and running thematic Environmental, Social and Governance (ESG) engagement campaigns. Emma joined LGIM America in 2019 as a Rotational Analyst before becoming a Strategy Analyst where she would focus on client engagement and ensuring our solutions continued to successfully achieve clients' long-term objectives. Emma earned a Bachelor of Business Administration in Finance from the University of Miami in 2019.

Emma Cameron

Cristy Rodriguez

ESG Analyst, Investment Stewardship

Cristy is an ESG Analyst supporting the team in ESG engagement campaigns including LGIM’s flagship Climate Impact Pledge. She is responsible for in-depth research and the assessment of companies across key sectors using LGIM’s climate assessment framework. Cristy joined LGIM in 2020 after graduating from Anahuac University, Mexico with a bachelor’s degree in Social Responsibility and Sustainability Management.  

Cristy Rodriguez