NN Investment Partners (NN IP) has signed the financial sector commitment letter on eliminating commodity-driven deforestation. The letter commits us to making best efforts to eliminate forest-risk agricultural commodity-driven deforestation activities at the companies in our investment portfolios and in our financing activities by 2025. We believe a sustained engagement and ongoing stewardship with forest-risk sectors and regulators is the most effective approach, our focus is on inclusion, not exclusion.
Biodiversity loss and climate change are two of the most pressing, intertwined sustainability challenges for investors. Deforestation is one of the most tangible and critical elements of these twin threats. Agricultural expansion is causing 73% of deforestation worldwide, notably soft commodity production and consumption. The destruction of forests has serious impacts on society and the environment: forests provide a “carbon sink” that absorbs a net 7.6 billion metric tonnes of CO2 per year.
Irina van der Sluijs, Senior Responsible Investment Specialist at NN Investment Partners: “These societal and environmental impacts are also reflected as financially material, systemic risks to investor portfolios. Companies continuing to engage in deforestation face profound risks - including regulatory, legal, and reputational risks. These will have financial consequences for investors. These are not limited to companies directly carrying out deforestation, but rather trickle down the entire supply chain, from producers to retailers.”
Deforestation: biting the hand that feeds you
Forests cover approximately 30% of the world’s surface area and trees are vital for life on earth. They not only absorb greenhouse gases (GHG) emitted as a result of various human activities, but are also home to 80% of terrestrial biodiversity, according to the World Bank and they are the only source of livelihoods for 22% of humanity. Deforestation is the second leading cause of climate change and accounts for nearly 20% of greenhouse gas emissions [1].
Tropical tree cover could be a major solution for meeting the Paris Agreement goals set in 2015, but forests around the world remain vulnerable. In terms of biodiversity, the number of animal species has declined by 60% since 1970, primarily as a result of deforestation [2]. Agriculture is the main culprit and some of the most significant tropical deforestation is caused by production of soft commodities. We are focusing our attention on engagement on palm oil and soy bean production, the two crops that cause the most damage.
Palm oil and soy
Palm oil is a vegetable oil cultivated from the oil palm, which grows mainly in humid tropical climates. It is cheap to produce and thousands of consumer goods contain palm oil. It can also be used as a biofuel and has become a green fuel option for transportation. Indonesia and Malaysia produce about 90% of the world’s palm oil. The list of risks associated with palm oil is a long one – deforestation; air, soil and water pollution; cli-mate change; human rights challenges; and negative health effects. The biggest environmental impact is large-scale deforestation.
Soy is another difficult area. This edible bean has numerous uses: it is cultivated for its oil, is a good source of protein and is used to make tofu and soy milk, among other things. However, in a world where more and more people are eating meat, the dilemma it poses relates mainly to meat production: soy is also the most important protein source for animal feed.
According to the World Wildlife Fund, one of the main reasons for the expansion of agricultural land in the last 50 years has been the increase in soy production, which has grown tenfold – from 27 to 269 million tonnes. Increased demand has been a significant driver of deforestation in South America and particularly Brazil, now the largest export-er of soybeans globally.
Engagement in action
NN IP is a member of the PRI working group on Sustainable Palm Oil. This group focuses on palm oil growers, traders and several regional banks. In 2019, we also became a member of the Roundtable on Sustainable Palm Oil (RSPO), a multi-stakeholder forum that represents the entire supply chain. It has established a certification system for different stakeholders to ensure that palm oil is both sustainably produced and transparently traded. We lead the engagement with five growers and three regional banks. Today, we are also part of the PRI Practitioners Group on Deforestation, which has led on this recent commitment letter.
On soy, we engage with six investee companies on deforestation-related risks within their supply chains. We focus on companies with direct or supply chain exposure to soybeans and related products, with a view towards protecting long-term value and mitigating risks.
Van der Sluijs adds: “The letter commits us to assessing exposure to deforestation risk through our investments, with a focus on ‘forest risk’ agricultural commodities – palm oil, soy, beef and leather, pulp and paper. We also agree to deepen engagement on the highest risk holdings on deforestation in their supply chains, operations, and financing. We will work in the coming years, together with partners, towards the deforestation related data needed to assess our exposure. Finally, it commits us to engaging on policy to support an enabling environment for businesses to avoid deforestation risks and impacts. It is a vital step in tackling this vast challenge.”
