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Exploring the investor types with most significant levels of deforestation risk exposure

New data on deforestation risk exposure builds the case for investors elevating deforestation in their risk management priorities.

5 Jul 2021

Helen Bellfield

Photo credit: Aerial city view // Brendan Church, Unsplash

In 2020, deforestation in the Amazon hit a 12-year high. As deforestation has increased, many investors have become aware that they may be exposed to deforestation via their investments in companies that produce, trade or use agricultural commodities.

Pinpointing risk hotspots

Investors looking to take the first steps in managing their deforestation risk can start with their investments in commodity traders of beef, soy and palm oil. For these commodity traders, Trase Finance provides investors with the data to pinpoint the main sources of their deforestation risk exposure. Understanding which commodity traders in their portfolios are hotspots for deforestation risk and how those risks are changing over time enables investors to focus their risk management efforts.

Most exposed investors include asset managers, governments and families

New data from Trase Finance shows that a range of investor types have deforestation risk exposure, even when looking at only a subset of risk via their equity investments in companies trading specific forest-risk commodities. Governments, institutional investors, private corporations, and individuals/family members are all exposed through their holdings in commodity traders across the key forest-risk commodities of Brazilian beef and soy, and Indonesian palm oil.

Investor type influences exposure pathway

Diving deeper into the data, Trase Finance shows that the most exposed investors can be divided into two main exposure pathways when it comes to risk distribution linked to commodity traders.

Focusing in on the 15 investors with the largest equity exposure to deforestation risk, the type of ownership influences their risk exposure profile.

The first group comprises investors that have a large shareholding in a single commodity trader which contributes the vast majority of their deforestation risk exposure. Many of these investors are families who founded the firm before taking it public and who still retain significant shareholdings and involvement, including Batista Family (JBS), Kuok Group (Wilmar), and Vilela De Queiroz Family (Minerva).

A number of government-owned banks and investment funds are also exposed via large individual holdings in commodity traders including BNDES’s stake in JBS, and Saudi Agricultural and Livestock Investment Company’s stake in Minerva.

The second group is made up of banks and asset managers like Vanguard and BlackRock, which have a wide range of smaller stakes in many different commodity traders, meaning their deforestation risk exposure is spread across commodities and countries.

Vanguard, for example, is exposed to 4,400 hectares of deforestation risk. Trase Finance shows that its holdings contributing most to this risk are Bunge (accounting for 1,100 hectares linked to Brazilian soy exports), followed by Archer-Daniels-Midlands (700 hectares linked to Brazilian soy exports), Golden-Agri Resources (650 hectares linked to Indonesian palm oil exports) and JBS (480 hectares linked to Brazilian beef exports).

Data-driven engagement

Once investors have identified the company hotspots in their portfolios, the next step is understanding the origin of that deforestation risk within that company’s structure and operations, as well as the policies and practices in place for managing that risk. Detailed data can help drive more targeted engagement focused on high-risk subsidiaries and high-risk sourcing regions.

In many cases, deforestation risk is concentrated in only one or two subsidiaries. For example, of the more than 300 entities in the Bunge Group, 17 are exposed to deforestation risk via their trade in Brazilian soy. Ninety percent of this risk is concentrated in two exporters (Bunge Alimentos and Pedro Afonso) and Bunge International Commerce (an importer).

Investors can also explore the source of deforestation risk for these subsidiaries with the majority of risks concentrated in a handful of production municipalities. More than half of Bunge Alimentos’s total deforestation risk is from 3% of its sourcing regions (5 of 174 municipalities).

Finally, investors can assess the company’s deforestation policies and reporting. This will indicate how the company is managing its deforestation risks. In a landscape riddled with data gaps, having new data on deforestation risks alongside information on targets, policies and governance is an important step forward for investors.

Trase Finance contains data on 5,000 companies exporting Brazilian soy and beef, and Indonesian palm oil, as well as 12,000 financial institutions with equity or debt in these companies.
The tool was created by an independent, not-for-profit partnership including Global Canopy, Stockholm Environment Institute and Neural Alpha.

To reference this article, use the following citation: Helen Bellfield. (2021). Exploring the investor types with most significant levels of deforestation risk exposure. Trase.

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