ESG Club
INVESTORS CANNOT AFFORD TO IGNORE DEFORESTATION
Catherine Ogden is a sustainability and responsible investment manager at Legal & General Investment management, while her colleagues Emma Cameron and Cristy Rodriguez are ESG analysts
Combating deforestation is critical to addressing climate change, achieving net- zero goals and preserving ecosystems. It is a key issue for investors. We are 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 is sometimes missing from these numbers is a relatable context: 420 mil- lion hectares is an area almost equivalent to all the countries in the European Union.²
Deforestation on this vast scale is a lead- ing contributor to man-made 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 emis- sions, deforestation destroys carbon sinks and fragile natural ecosystems that are essential to limiting global warming. This important interdependency means pre- serving 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 over- look deforestation. Without addressing emissions from forestry, agriculture and
PI Partnership – Legal & General Investment Management
other land use, we simply cannot reach our climate goals.
In purely economic terms, an estimated $44trn (£36trn) of economic value gener- ation 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 by a sharpened focus on ille- gal and legal deforestation across the UK, EU and in the US at 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 our expanded Climate Impact Pledge and acting on minimum stand- ards under our deforestation policy. Through our involvement in the Finance Sector Deforestation Action Initiative, we are working with other investors to accel- erate progress in key sectors and across value chains.
What we expect from investee companies – We expect companies to proactively analyse, assess and address deforesta- tion risks within operations and supply chains
– Where relevant, we expect companies to integrate deforestation considera- tions into climate commitments, strate- gies and transition plans
– We expect climate change and the con- nected 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_Na- ture_Economy_Report_2020.pdf 5) And drawing on external frameworks: https://www.ceres. org/sites/default/files/reports/2020-06/Ceres%20Investor%20 Guide%20FINAL%20June%2029.pdf
Key risks: For illustrative purposes only. The above information does not constitute a recommendation to buy or sell any security. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. Past performance is not a guide to the future. Views expressed are of LGIM as at 21 December 2022. The Information in this article (a) is for information purposes only and we are not soliciting any ac- tion based on it, and (b) is not a recommendation to buy or sell securities or pursue a particular investment strategy; and (c) is not investment, legal, regulatory or tax advice. Legal & General Investment Management Limited. Registered in England and Wales No. 02091894. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 119272
32 | portfolio institutional | February 2023 | Issue 120
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