Transcript by Kensho. 

Lindsey Hall: I'm Lindsey Hall, Head of thought leadership at S&P Global Sustainable1.  

Esther Whieldon: And I'm Esther Whieldon, a senior writer on the Sustainable1 Thought Leadership Team  

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy. 

Esther Whieldon: In late December 2022, nearly 200 countries at the UN biodiversity conference known as COP15 reached a landmark agreement for protecting and restoring nature by 2030. This new global biodiversity framework included nearly two dozen goals and targets. One of those targets aims to "Ensure that areas under agriculture, aquaculture, fisheries and forestry are managed sustainably."

Lindsey Hall: Deforestation was a big topic of conversation at COP15. For example, During the conference, we heard Mark Carney talk about the importance of addressing deforestation to achieve climate targets. Carney is Co-Chair of the Glasgow Financial Alliance for New Zero, or GFANZ, and also UN Special Envoy for Climate Action and Finance. And he said that "There is no path to net zero that does not address deforestation and support nature-based solutions."

So Esther, there are a lot of reasons forests are important for both biodiversity and climate change. They're an important source for absorbing carbon emissions, first off. Forests cover nearly a third of global land area. They absorbed about 7.6 gigatonnes of CO2 annually from 2001 to 2019.  Forests are also key to preserving ecosystems and can help lower the overall ambient temperatures of regions.

And while the global rate of deforestation has slowed in recent years, the world still experienced a net loss of about 100 million hectares of forests over the past two decades. And for reference, that's a surface area more than double the size of California — over the past two decades. So where do companies stand on this Esther?  

Esther Whieldon: Yes. It turns out that addressing deforestation is a priority for only a small fraction of companies. Research by S&P Global Sustainable1 found that just over a third of the largest companies in the S&P Europe 350 index have set targets to reduce, offset or end deforestation in their operations and/or supply chains. An even lower share of companies in the S&P Asia Pacific LargeMidCap index -- have set deforestation-related targets. While in the U.S., only about 13% of companies in the S&P 500 have set deforestation-related targets. And we'll include a link to that research in our show notes.

Our episode today is focusing on the largest driver of forest loss -- that is, commodity driven deforestation. Commodity driven deforestation refers to the clearing of forests for things like farming and mining. About three-quarters of commodity driven deforestation is for agriculture such as cattle ranches and the production of soy, palm oil, cocoa and coffee. 

Lindsey Hall: Today we're going to hear from two asset managers that are part of an initiative aimed at eliminating commodity-driven deforestation from their portfolios. I'm referring here to the Finance Sector Deforestation Action initiative, which launched in 2021 at COP26 -- that's the UN's big annual climate conference. This deforestation initiative is currently comprised of more than 30 financial institutions with nearly $9 trillion in assets under management. The initiative's members aim to eliminate commodity-driven deforestation from their lending and investment portfolios by 2025 and also drive progress towards a net zero, nature-positive economy. 

Esther Whieldon: I spoke with Jan Erik Saugestad, who is the CEO of Storebrand Asset Management. Storebrand has about US$100 billion in assets under management, making it Norway’s largest private asset manager.

We'll also hear from an asset manager that has been active on deforestation for a number of years. I spoke with Lauren Compere. She is Managing Director and Head of Stewardship and Engagement at Boston Common Asset Management. Boston Common had about $4.3 billion in assets under management as of September 2022.

First up, here's Jan Erik talking about how nature loss is a systemic risk to the economy. By the way, you'll hear him mention the IPDD, which Storebrand is a member of. IPDD stands for the Investors Policy Dialogue on Deforestation. Jan Erik will give some details about that initiative but, in a nutshell, it was created in 2020 as a way for investors to engage with governments such as Brazil and Indonesia on deforestation. And as of October 2022, the IPDD was comprised of 65 global investors with a collective USD $10 trillion of assets under management. Ok here's Jan Erik. 

Jan Erik: Well, we know that nature loss is a systemic risk. And increasingly so, after COP15 in Montreal, it has been recognized that there is a systemic risk. And at the same time, we know that land use and deforestation is a key driver in terms of nature loss. So that's a pretty evident connection. And the reason why we addressed deforestation as one of the first steps in our nature engagement.

Esther Whieldon: And what are some of the the specific goals you've set under your participation? And what have you done thus far to implement those goals?

Jan Erik: Well, the ambition was, of course, to reduce the deforestation related to commodities, in particular. That was the starting point. So that would imply, of course, engaging big companies that are contributed to deforestation through their operations, supply chain or financing. We have, after that initial commitment that the COP26 followed up and through data like the Forest 500 or Trace database identified a set of companies, 109 companies and 149 financial institutions that in our portfolio, to a varying degree, contribute to deforestation. 

And we are in the process now of engaging with the top 50 of those in order to both better understand their challenges and also encourage them to take measures to reduce their deforestation risk. The ultimate goal is, of course, that we want to have investment portfolios that have deforestation-free value chains, particularly when it comes to key commodities. 

Esther Whieldon: There's a lot to unpack there. One is, so what are you hearing so far from those top 50 companies that you've started engaging with? What are they telling you are their biggest challenges? And kind of what are some asks you're giving them as first steps? 

Jan Erik: Well, traceability is, of course, a key element and in more general terms, access to data. At the same time, we now, as I said, that this is, of course, a greater challenge when we talk about dependency on nature and impact on nature. 

When it comes to deforestation, it is a bit easier. But still, that's one of the key challenges to have traceability. The other challenge is, of course, that you have a regulatory framework that will level the playing field or be supportive for companies that make the first steps into becoming deforestation-free or have deforestation-free value chains. And that is why we also not only engage with companies, but also engage with governments because ultimately, governments can help provide data, reporting and also a regulatory framework that is supportive. 

When we talk about engagement with governments, we took an initiative back in 2020 called IPDD, which is basically an alliance that started off addressing deforestation in Brazil and has now grown into an alliance with 65 other institutional investors from 19 different countries, engaging not only with Brazilian government but also governments in Indonesia and consuming countries like the EU, U.K. and the U.S. And well, I can tell you more about that. 

But the reason behind it is, of course, to get better access to data and to get stronger regulation and that the governments are supportive of companies that want to do, if you like, the right thing in terms of the regulatory framework. And I must say we -- even though we are not satisfied with the action on the ground in Brazil, there are several positive steps that have been achieved through that initiative. It's definitely gaining speed. And I think now the COP15 with the recognition of nature risk is also contributing to the fight on deforestation. 

Esther Whieldon: Would you mind mentioning some of the positive steps that you've seen coming through the initiative in Brazil or other places?

Jan Erik: Well, I would say with respect to the IPDD, we just launched a progress report. Clearly, it's been significant progress when it comes to the general awareness raising and identifying deforestation risk among the key stakeholders. 

We've sent a clear message to the governments and financial market participants. In the case of Brazil, the Central Bank has also strengthened the reporting framework, partly as a response to this. We have also been able to create a space for other stakeholders in these countries to share and voice their concern. 

In this initiative, we know have, in the case of Brazil, several Brazilian companies that have joined the initiative. So we created this space for collaborative action and open discussion even within the country. So I would say there is progress, but we will, of course, now continue and identify this engagement with the new administration in place in Brazil.

Esther Whieldon: And going back to your engagement more broadly under this financial sector deforestation action initiative. So you're engaging with these 50 companies. You've identified about 260-ish, right, both corporate and financial institutions that are in your portfolio, what's the next step beyond engagement? 

Jan Erik: It's like every engagement, I would say. Deforestation is, in that sense, no different from climate engagement. One is to have a company and a challenger company to define a long-term ambition, and that could be similar to the net zero ambition that many corporates have adopted. 

The second is, of course, to establish credible short-term goals in order to measure progress versus that ambition, whether it's a 2025 target or a 2030 target. And the third is, of course, to be able to report to us as investors in a way that makes it transparent and measurable that the company is making progress. So those are the 3 elements. -- long-term ambition, the credible short-term goals along that pathway and a reporting that is transparent and help us verify that we are moving in the right direction.

Esther Whieldon: Looking at the FSDA press release, it talks about having a goal of eliminating deforestation by 2025 from the agricultural soft commodities tied to like beef, soy, palm oil, pulp and paper. To what extent is that 2025 goal achievable, I mean we're 2 years away, right? 

Jan Erik: It is certainly ambitious. It is actually also our ambition when it comes to our own portfolio. So we're aligned in that ambition. 

And we have several cases of companies that we have engaged with, and they've actually now succeeded in achieving deforestation-free commodity value chains. So it is possible. 

And of course, now with the new regulation in the EU, which is restricting then commodities that are -- cannot be documented as having the deforestation -free value chain that is also supportive even though it's only the EU. It's definitely a step in the right direction. But it will be able to get there as fast as 2025 remains, of course, to be seen. You're absolutely right. It's only 2 years away. 

Esther Whieldon: You just heard Jan Erik referred to a new regulation proposed by the European Commission. That regulation would ban the sale of certain products linked to the destruction and degradation of forests and it would require companies to trace the source of those products. The regulation specifically would apply to soy, beef, palm oil, wood, cocoa and coffee, as well as some derived products, such as leather, chocolate and furniture. In December 2022, the European Parliament and Council reached a provisional agreement on that regulation. 

All right, now next up is my interview with Lauren from Boston Common Asset Management. She starts off by talking about how the firm has been engaging on deforestation and biodiversity for a long time and what steps they've been taking more recently. 

By the way, you'll hear her mention the Cerrado manifesto. This was a statement that dozens of civil society organizations issued in 2017. They called for companies and investors to stop sourcing soy and meat that is linked to deforestation in Brazil's Cerrado, which is a fast Savanna region that was being rapidly destroyed to make room for more of those products. The manifesto was endorsed by at least 160 companies and financial institutions. 

Lauren Compere: Boston Common Asset Management has a long history over 20 years now of engaging and investing in sustainability solutions, including those that are addressing deforestation and biodiversity impacts. 

One of the reasons why we did join the Financial Sector Deforestation Action initiative was because this was a natural -- we were naturally gravitated towards a leadership initiative really looking at where we need to go by 2030. And I think that's really important. 

This builds on the history we already have of investing in good companies with good practices, but also really engaging, taking sort of a comprehensive stewardship and engagement approach, not just engaging individual holdings on these issues in terms of deforestation, but also engaging in public policy and industry leadership, like the Cerrado Manifesto and direct engagement with governments like the Brazilian and the Indonesian government in the past. 

Esther Whieldon: So why does addressing commodity-driven deforestation matter here? 

Lauren Compere: I think what we, as investors, governments and companies themselves are really understanding is that you have to take an integrated approach to addressing climate and the goal is towards net zero by 2050, really looking at the next decade, less than 15 years now where we need to pivot. 

And so addressing deforestation, biodiversity protection, as well as sort of what people feel in terms of siloed approaches to climate is really important. And we ourselves took an integrated approach back in 2021, where we decided to not only sign on to the Net Zero Asset Managers Initiative, but also to sign the deforestation free portfolio group by 2025, focused on high-risk forest commodities. At the same time, we also signed on to the finance for biodiversity pledge. So we've really looked at taking a holistic approach and an integrated approach to addressing climate, including deforestation. 

As you know, biodiversity, agriculture and related sectors account for about 11% of global GHG emissions, greenhouse gas emisions. And so it's a significant portion of overall GHG admissions that we need to manage and reverse.

Esther Whieldon: And then why does commodity-driven deforestation matter in particular? 

Lauren Compere: Because it's driven by the economic activity, right, of producing, of selling, investing in. And so we think it's really important, specifically, for the financial sector to step up and take part in reversing deforestation. And this is why we joined not only the reason why we joined the FSDA, the finance sector deforestation Action Group. We actually joined the leadership group, and I joined over the summer a very quickly evolving initiative focused on developing the investor expectations for companies that have exposure to commodities, either that are direct producers, that source them through their supply chains, or that finance them. 

This is not unusual for us as Boston Common, but also myself as Head of Stewardship engagement. I've been part of other initiatives that have looked at an engagement angle, either direct company engagement or federal policy engagement. In fact, I wanted to highlight that not only do we think it's important to engage companies we invest in that are direct producers or those that have exposure rate through supply chains, but the financial companies. And maybe just one quick example of that. Over the course of like 5 years from 2014 to 2019, I actually led a whole sort of global benchmarking of bank practices around climate risk. And in 2018, we ended up benchmarking across a series of metrics, 60 banks globally, including those in emerging market regions. 

But in 2018, in collaboration with another -- with a group I consulted with. We added 2 deforestation metrics to the bank benchmarking exercise. One was really taking an NDPE or basically a zero deforestation tolerance for key commodities, including palm oil, soy, forest, paper and some others. 

But the other thing we focused on was, so to what extent did they require certification, third-party certification of companies that they were investing in that were direct producers like palm oil producers.

That was back in 2018. We're already engaging the global banking sector, our deforestation. And I think very few investors were doing that. If I go back in my mind, I've been in this field for 30 years. The first financial sector engagement on deforestation I had was actually with HSBC when they were rolling out their requirement for their palm oil producers that they were financing to require RSPO certification. Let was back, I think, in 2005, 2006. So we're building this current initiative on FSDA is really building on a very long and deep history and focused on deforestation and biodiversity. 

Esther Whieldon: Yes, it sounds like it. Like you've been in this -- you said about 30 years. So you definitely know the ins and outs of how this has changed over time. Just a sort of side question is: Is the forestation easier than biodiversity, more broadly, to deal with? 

Lauren Compere: And let's just remind everyone, deforestation is a key pillar of the approach on biodiversity. I would agree, though, that it is a bit -- it's a bit more focused, right? It's still complicated though, because if I think about the history of engagements with the likes of Unilever, for example, or Kimberly-Clark, or Mondelez, each commodity has its own supply chain and its own challenges. 

So while it is easier to focus on deforestation, right, because it's focused on sort of agricultural commodities in that sector, it's still very complicated. Each commodity has its own supply chain and its own challenges and its own what I would consider sort of best practice certification. And I do think that with deforestation, you tend to focus more on the environmental impacts. And so I think what's important with the current investor expectations we have is that we're not just focused on the environmental impacts, but also the social impacts for the impacts to things like small former to groups like small farmer holders or indigenous peoples or human rights defenders. So it is also complicated in many ways. 

Esther Whieldon: That's interesting. You mentioned sort of the social side of the investor expectations. So it sounds like the thing you drafted up under this initiative doesn't just focus on environmental. You said it mentions these other groups. How do those things interconnect? 

Lauren Compere: Well, I think at the very start -- let's talk about the fact that our end goal is to end deforestation, right? And so we're really focused on how companies are conducting, what kind of commitments they already had to deforestation, what kind of due diligence do they have in place for reviewing vendors and suppliers, right, in their supply chain, if they're not direct producers? How are they not just sort of on a one-off basis looking at assessing risks on the environmental side, but also the human rights impacts of sourcing. And I think what's important here is a lot of the companies themselves are sourcing from the same areas, sometimes even the same producers. And so one aspect as well of our investor expectations is really to look where they can at partnership and collaboration to improve the on-the-ground conditions. 

Esther Whieldon: Yes. If they're all kind of coming from the same location, then they can collectively put pressure on the suppliers, right? 

Lauren Compere: Exactly. And reward those suppliers that have better practices. And it's not just about that carrot and stick of like looking at kind of assessing risk. I believe that it's really important for companies to not just avoid risk but invest in suppliers. And I think what we are seeing and frankly, what COP15 highlights quite significantly is the fact that we need proactive investment in supply chains, in new innovative ways of practicing regenerative agriculture and such, really to support the eradication of deforestation by 2030. 

At the end of the day, a sole investor like Boston Common can't do it, a single government, a single company, you can't do a single sector can't do it. It really requires full in coordinated engagement and action steps by all entities. 

Esther Whieldon: I wanted to know what next steps Boston Common Asset Management has in mind. For example, is divestment on the table. 

Lauren Compere: I always view divestment as the last step and frankly, not a very successful step, right? First of all, we've just begun engagement with a group of companies. And so that, I think, being very tangible and very specific on time lines and expectations will ensure that, that engagement with that group of companies is successful. I think leveraging partnership with groups like Forest 500 and Global Canopy and others will also support and accelerate action. So if we have something like Forest500, which is an entity that assesses companies on their progress, we're kind of using that carrot/stick in our engagement that you're going to be assessed at the end of 2023. How can he progress? What are the next steps companies could take? 

The other thing is, again, this idea of sort of coordinated voice, global voice through stewardship efforts like public policy, I think, are also really important. And then finally, really just demonstrating our own thought leadership and the way we invest ourselves. 

I actually should have started by saying, we start with investment guidelines. We have seek guidelines around sustainable agriculture and forestry and then we have avoidance guidelines. We ourselves are being held accountable to what we hold, and we have rationales for supporting the companies that have leading either leading practice or are progressing on their journey. We need to walk our talk. 

Esther Whieldon: So as you can hear, Lindsay, asset managers such as Boston Common and Storebrand are engaging with companies and other financial institutions in our portfolios to trace their supply chains and set concrete targets. We also heard Lauren talk about how asset managers cannot go it alone. She set a coordinated approach across all governments and companies is needed. 

Lindsey Hall: Please stay tuned as we continue tracking this evolving discussion around addressing biodiversity and climate change in tandem. 

Thanks so much for listening to this episode of ESG Insider and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.  

Copyright ©2023 by S&P Global  


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