- The harm caused by deforestation is practically irreversible, yet there remains relatively little interest in it among the general public and investors.
- We cannot get to a net-zero world, or restrict global warming to 1.5 degrees centigrade above pre-industrial levels, without ending deforestation.
- The world has relied on two methods to reduce deforestation: technological advancement and governmental regulation. Neither has yet achieved nearly enough.
- This is where the engagement of business and financial institutions must come in: by integrating nature into decision making.
The world is full of threats that we do not take seriously. Time and again people only realise this when it is too late. In the mid-2000s some economists warned that the world was experiencing a once-in-a-generation housing bubble.1 In the years before 2020, scientists repeatedly talked about the risks of a deadly pandemic.2
You cannot, of course, worry about everything. But we believe that the destruction of the world’s forests is the latest example of myopia clashing with reality. People and firms chop down close to four million hectares of forest a year,3 equivalent to the size of Peru. The harm thus caused is not temporary but practically irreversible.
It is practically impossible to know who is ultimately responsible for this destruction.4 No methodology comparable to the “scope” system for carbon emissions exists for deforestation,5 while about 50% of tropical deforestation is done illegally.6 What we do know is that four fifths or more of deforestation is linked to the expansion of agriculture.7 Beef, by some way, is the most “deforestation-intensive” commodity.8
Annual tropical deforestation by agricultural product, hectares, 000s
Source: Our World in Data
Sit up and take notice
So deforestation is, to put it mildly, a big deal. Yet there remains relatively little interest in deforestation among the general public and investors. Global Google searches for “deforestation” are as little as one tenth as common as searches for “CO2”.9 In the past five years researchers have published under 100,000 research papers or books touching on deforestation,10 but over 500,000 on CO2.11 In 2019 and 2020 only 2% of the $600 billion of climate investments went to efforts to reduce emissions from deforestation and forest degradation.12 Financial institutions with assets of $130 trillion have committed to net zero,13 but institutions with just $9 trillion to eliminating deforestation.14
Perhaps the crisis in nature is, in some respect, less urgent than the climate crisis? Hardly. We cannot get to a net-zero world, or restrict global warming to 1.5 degrees centigrade above pre-industrial levels, without ending deforestation.15 Changes in land use, principally deforestation and agricultural conversion, account for 10-25% of global greenhouse-gas emissions.16 Deforestation has turned the Amazon rainforest from a carbon sink to a carbon source;17 it may be close to ecosystem collapse.18
In short, ending deforestation is as essential.19 To keep the target of 1.5 degrees alive, we need to halt deforestation very soon. Biodiversity and nonhuman animals also have intrinsic value, meaning that they are worth preserving.20 Roughly 80% of land-based wildlife lives in forests.21
So why, then, are people not very interested in deforestation? The fundamental reason is that it is complex. The objective regarding CO2 emissions is easy to understand (even if hard to implement). Emissions are too high, and they need to fall. An emissions cut in Europe is pretty much as useful as an emissions cut in America. CO2 is “fungible,” mixing in the air globally.
The issues at play with regard to deforestation are more subtle. There is no “net zero” equivalent. An acre of deforestation has different climatic impacts depending on where it takes place.22 Cutting down a forest, and then replanting it, does not leave the climate in the same place as it was before (new forest is less of a carbon sink than older forests) - the damage is thus irreversible. Commercial forestry is good if sustainably managed, but it is nothing like as good as virgin forest for either carbon capture or biodiversity. Some forest-based economic activities can be good, if resources are harvested in a sustainable way, promoting livelihoods and development.
With so little interest in stopping deforestation, it is hardly a surprise that tools for tackling it are underdeveloped. In recent decades the world has relied on two methods to reduce deforestation: technological advancement and governmental regulation. Neither has yet achieved nearly enough ₋ and it is naïve to assume that this will change in the future.
The limits of technology
Take technology first. Over time agricultural techniques have improved, meaning that farmers require less land to produce a given quantity of crops.23 Today, technology might also help reduce deforestation in other ways. Plant-based meats and leathers could cut demand for beef, for instance. Satellite monitoring is also improving our ability to track deforestation. Yet there is little evidence that technological progress, by itself, can bring deforestation to a halt. The incentives to convert forests to alternative uses remain.
Market failure, government failure
The second factor is regulation. Sometimes this can make a positive difference. As new research published by the London School of Economics shows, Indonesia introduced a moratorium on palm oil, logging and timber concessions in 2011.24 Its rate of deforestation has fallen by about half since then.25 There has also been progress at an international level: the United Nations Programme on Reducing Emissions from Deforestation and Forest Degradation (UNREDD)26, for instance, supports national-level programmes to reduce deforestation. It has had some27 clear28 successes.29
Yet any progress at a governmental level can be fragile. Just look at Brazil. Before the late 2010s Brazil had made decent progress in reducing annual deforestation.30 The election of Jair Bolsonaro, who took office as president in 2019, radically changed this. Deforestation began to soar once again. In addition, one perennial concern is that efforts by one government to reduce deforestation may simply result in “leaking” of deforestation to another place.31
A new path
The world needs a new approach to making forests more sustainable. This is where the engagement of business and financial institutions, including Generation Investment Management, comes in. This is not a new trend, in itself, but one where momentum is clearly picking up.32 In June 2021 the Taskforce on Nature-related Financial Disclosures (TNFD) launched. The purpose of this movement is to enable companies and financial institutions to integrate nature into decision making. The “financial-sector commitment letter on eliminating commodity-driven deforestation” is a firmer commitment to action.33 Launched at COP26 in Glasgow in November 2021, the letter commits signatories (including Generation) to seek to eliminate agricultural commodity-driven deforestation activities associated with companies in investment portfolios by 2025.
Investors can exert influence on companies in a number of ways. They can make the moral case for ending deforestation ₋ a convincing case in and of itself. But they can also highlight the material business risks that exist from taking a cavalier attitude to our planet. Companies that fail to eliminate deforestation themselves run the risk of consumer boycotts and reputational damage and, certainly in developed markets, the increasing prospect of governments requiring them to conduct due diligence to ensure no deforestation in supply chains. They also open themselves to the risk of investors divesting their holdings.
These are not the only potential costs. A recent report by the Network for Greening the Financial System, a group of central banks, acknowledged that “physical and transition risks related to biodiversity loss pose threats to financial stability.”34 For instance, countries that rely heavily on agriculture could face a severe economic slowdown because of ecosystem collapse. Another recent study should be a wakeup call for Brazil: the model suggests that without radical reform of its use of nature, Brazil’s GDP growth could be 20% lower by 2030 than in a business-as-usual scenario, due to a collapse in ecosystem services.35
We do not pretend that progress on this topic is easy. Even if companies are in principle interested in stopping deforestation, following through with commitments requires constant monitoring and enforcement. It means being transparent about suppliers ₋ and owning up to mistakes when they happen. And it means educating consumers about the damage that deforestation causes (evidence from a new paper by Harvard researchers suggest that people generally support action to cut deforestation).36 Investors can also help countries realise economic value from the ecosystem services that forests deliver, so that forests deliver financial benefits standing as well as cut down.
We expect investment in natural-climate solutions to grow significantly in the years ahead. Markets that measure and value ecosystem services are maturing, including but not limited to carbon. Investors will have an important role to play in scaling a new global industry for planetary repair, attempting to generate sustainable economic returns alongside vital climate and biodiversity outcomes, all while ensuring the active participation and consent of local and indigenous communities.
Action is urgently required ₋ in particular, the participation of more financial institutions. Without the efforts of the private sector, the world will not realise the damage that deforestation is doing before it is too late.
- See, for instance, https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp082705
- See, for instance, https://www.ted.com/talks/bill_gates_the_next_outbreak_we_re_not_ready?language=dz
- However, a letter signed at the Glasgow climate conference in 2021 hints at the answer. https://www.tropicalforestalliance.org/assets/Agricultural-Commodity-Companies-Corporate-Statement-of-Purpose_final-v2.docx.pdf
- As such, it is impossible to identify the share of global deforestation accounted for by listed companies, as Generation has done in the past for carbon emissions https://www.generationim.com/our-thinking/news/listed-companies-account-for-40-of-climate-warming-emissions/
- Xu, Xiyan, Xiaoyan Zhang, William J. Riley, Ying Xue, Carlos A. Nobre, Thomas E. Lovejoy, and Gensuo Jia. "Deforestation triggering irreversible transition in Amazon hydrological cycle." Environmental Research Letters 17, no. 3 (2022): 034037.
- An additional important point is that many parts of the 2016 Paris Agreement assume a sharp slowdown in the rate of deforestation—an assumption that is, at times, either optimistic or completely wrong. For more: https://files.core.ac.uk/pdf/23/188365783.pdf
- Singer, Peter, ed. In defense of animals: The second wave. John Wiley & Sons, 2013. And this is before getting to the economic value of ecosystem services, more on which below.
- Prevedello, Jayme A., Gisele R. Winck, Marcelo M. Weber, Elizabeth Nichols, and Barry Sinervo. "Impacts of forestation and deforestation on local temperature across the globe." PloS one 14, no. 3 (2019): e0213368.
- United Nations Programme on Reducing Emissions from Deforestation and Forest Degradation
- Efforts to “nest” REDD projects have gone some way to overcoming these problems. https://www.climateactionreserve.org/wp-content/uploads/2011/01/Key-Questions-in-Nested-REDD-Policy-Design-v4-English-_2_.pdf
- https://www.cisl.cam.ac.uk/resources/sustainable-finance-publications/banking-beyond-deforestation See, for instance, the Consumer Goods Forum (CGF) resolution of 2010.
- To be clear, the letter is not tied to TNFD—but it gives donors and other stakeholders hope we can make progress.
- Calice, Pietro, Federico Diaz Kalan, and Faruk Miguel. "Nature-Related Financial Risks in Brazil." (2021).