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BlackRock, BNP Paribas push deforestation as urgent climate change risk

BlackRock Inc. and BNP Paribas SA are among the financial institutions pushing consumer companies to more comprehensively incorporate the substantial financial risks from deforestation in their climate-risk models.

In recent years, asset managers have had some success getting food, clothing and luxury goods companies to acknowledge the physical, regulatory and market risks that come with sourcing commodities grown on previously forested land. But the continuing loss of tree cover in large swaths of the world has convinced asset managers to redouble their efforts by linking deforestation more specifically to climate change, a subject that tends to receive more attention in corporate boardrooms.

Despite a global economic slowdown triggered by the COVID-19 pandemic, deforestation in the Amazon rainforest jumped more than 50% in the first four months of 2020 compared to the year-earlier period. Deforestation had been decreasing since the early 2000s, but in 2019, Amazonian deforestation in Brazil hit an 11-year high with smoke from fires darkening the skies of Sao Paulo, more than 1,700 miles away.

"The Amazon fires last year created a moment where a lot of additional investors became focused on the link to climate change," said Julie Nash, program director of food and forests at sustainability group Ceres, in an interview.

Most big consumer companies "have a climate strategy," the non-profit group's director of food and forests, Meryl Richards, added. "Investors now want them to make deforestation a key part of that strategy and have a deeper engagement with their supply chain" to alleviate financial risk.

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Ceres on June 29 published a report on the subject of deforestation and climate change, developed with input from investors including BlackRock, BNP Paribas and the Office of New York City Comptroller. According to the report, commodity-driven tropical deforestation — clearing and burning forests for agricultural production — is responsible for about 2.6 gigatons of carbon dioxide emissions annually, or 5% of global greenhouse gas emissions. About 33% of GHG emissions from commodity-driven deforestation occurs in Indonesia and 27% in Brazil.

A separate report published in June by the group CDP, which tracks the environmental impact of companies, said that to eliminate deforestation from commodity production, companies must eliminate 5 million hectares of deforestation annually from their supply chains.

A broader push on deforestation provides other benefits. For example, protecting and restoring forests and other natural ecosystems could provide 16% to 30% of the climate change mitigation needed to limit warming to 1.5 degrees to 2 degrees Celsius, the goal of the Paris Agreement on climate change, the Ceres report said. That works out to nearly three-quarters of the mitigation potential of all renewable energy technologies combined.

Food companies are among those most exposed to deforestation risk. So are makers of household products such as soap, detergents and cosmetics, who use palm oil grown at the site of cleared forests. Clothing and shoe companies get leather from cattle and make fabric from wood pulp. Hotels and restaurant chains are exposed to deforestation risk because of their food sourcing arrangements.

Investor concern is ramping up. In 2019, following the devastating Amazon fires, 251 investors with $17.7 trillion in assets under management called on exposed companies to take urgent action. In the past six months, several investors have pushed harder against large Brazilian companies such as meat processors JBS SA and Marfrig Global Foods SA and meat exporter Minerva SA.

Seven major European investment firms with more than $5 billion in investments linked to Brazil have threatened to divest from beef producers, grains traders and government bonds in Brazil if they do not see a reduction in the destruction of the Amazon rainforest, Reuters reported June 19.

In its first-quarter report for 2019, BlackRock said it had "engaged constructively with three Indonesian, two Malaysian, one Korean, and one Liberian palm oil producer." In 2017, BNP Paribas said it was participating in banking industry practices with the objective of achieving zero net deforestation by 2020 in the palm oil sector.

"Investors have to ask hard questions about traceability [of products] because companies have a responsibility to clean up their supply chain" from climate change and other risks posed by deforestation, said Nash of Ceres.

Banks are exposed because they finance the industries that rely on commodities grown in the tropics. But progress on that front appears to be especially slow. According to a 2019 study by Boston Common Asset Management, cited in the Ceres report, only 16% of 58 banks required clients to adopt no-deforestation policies and even fewer had expanded policies covering all soft commodities beyond palm oil.

"The data showed a systematic reluctance by banks to demand higher client standards," Ceres concluded.