Emissions from deforestation are increasingly being seen as a material risk for investors. This isn’t only because the emissions released by deforestation drive climate change, threatening global economic stability and the lives of millions. It is because society’s reactions to climate change, known as climate transitions, will impact a wide range of holdings investors may hold. Each tree felled or burned contributing to climate change will potentially hold a bigger impact on an investor’s strategy as government policies, corporate climate goals, and consumer preferences react to a warming world.
Forest loss and degradation is a major driver of climate change responsible for 11% of emissions. As such, more governments and consumers are changing how they respond to companies that contribute to climate change. For corporations whose long-term business plans rely on further deforestation, they are accepting additional risks that investment in their business plans will fail to provide returns to investors.
Financial risk from deforestation is why Climate Advisers requested that the U.S. Securities and Exchange Commission (SEC) address deforestation emissions specifically in its final climate emissions disclosure transparency rule. The SEC’s climate emissions disclosure rule aims to provide reliable and useful data about corporations’ climate emissions so investors can navigate a world with growing climate-related financial risks.
In our comment to the SEC, we highlighted why deforestation-related climate emissions in particular need to be addressed in the final rule and disclosed to investors for their benefit. Our recent analysis found that 40% of US GDP is exposed to deforestation-specific risks.
Why should the SEC include special rules around deforestation in their final rule? We’ve laid out the basis for why deforestation is a material risk to investors.
- Why deforestation matters in the context of climate change
- How deforestation emissions pose financial risks for investors
- Additional financial risks for investors from climate change
- What the SEC can do about deforestation in its final rule on emission disclosures
The nature of climate-related financial risks
Climate-related financial disclosures would be ineffective in protecting investors without specific requirements directed to agriculture, forestry, and other land use (AFOLU). Globally, the forest, food, and land sector is responsible for almost a quarter (23%) of net anthropogenic global greenhouse gas (GHG) emissions, according to the Intergovernmental Panel on Climate Change (IPCC). Moreover, in the food sector alone, if activities in the pre- and post-production systems such as processing, distribution, consumption, and food waste are included, the contribution to net anthropogenic global GHG emissions from AFOLU emissions could be as high as 37%.
A major reason that the forest, food, and land sector contributes so substantially to anthropogenic GHG emissions is through deforestation, which alone is responsible for 11% of global emissions. Maintaining healthy forests and reforesting degraded forest land are critical to achieving the goals of the Paris Agreement and the United Nations Sustainable Development Goals. Every IPCC pathway leading to average temperature increases of 1.5 degrees Celsius or less compared to pre-industrial temperatures is premised on no new deforestation after 2030. In fact, an estimated 16% to 30% of climate mitigation needed to limit global emissions to 1.5-2 degrees Celsius is based on halting deforestation by 2030 and a quarter of the 2030 climate mitigation promised in countries’ Nationally Determined Contributions comes from land-based mitigation options.
Combating deforestation is so important that the AFOLU sector is the only economic sector with its own chapter in the Paris Agreement. Political support for conserving and restoring forests globally was also on display in 2021 when President Biden joined more than one hundred and forty world leaders in endorsing the Glasgow Leaders Declaration on Forests and Land Use, which committed nations representing more than 90% of the world’s forests to ending natural forest loss this decade.
The impacts of deforestation are diverse and far reaching, and their emissions have a cascading effect on climate change resilience going forward for the following reasons:
- Indigenous People and Local Communities (IPLC): Displacement of Indigenous People risks the loss of traditional cultures and valuable expertise in maintaining healthy ecosystems that aid in mitigating climate change. Receding tropical forests have already led to frequent land disputes between commodity producers and IPLCs. Illegal encroachment onto Indigenous territories and land insecurity have also heightened violence against environmental defenders defending their homes. IPLCs are the most effective protectors of forest carbon and biodiversity, which is vital for investors given that intact ecosystems are worth $44 trillion to the global economic sector. The traditional knowledge of IPLCs continues to be the basis for medicines and foods of incalculable value. All climate mitigation measures should include these groups as important partners because at least 36% of the world’s large, unbroken swaths of natural forests, known as “intact forests,” are held by Indigenous People, along with about 80% of remaining biodiversity.
- Carbon storage: Terrestrial ecosystems release 10% to 20% of total global CO2 to the atmosphere and sequester 30% annually. Of this, gross emissions and sequestration in the tropics is about four times larger than temperate and boreal ecosystems combined. If deforestation emissions are conflated with those of other sectors in climate-related financial risk calculations, their role in sequestering carbon in future years is likely to be undervalued.
- Illegal activity: The lack of transparency into complex supply chains provides a cover for illegal activities, including deforestation, intentional fires, and human rights abuses. Most deforestation in the developing world linked to internationally traded commodities is illegal (violates local law) or is connected to organized crime. Corruption, bribery, money laundering, illegal logging, and other illegal acts referred to as “forest crimes” are common in the forest and land use sectors in many developing countries. The potential consequences, which can be widespread, include social conflict, injustice, poverty, economic stagnation, and carbon emissions.
- Biodiversity loss: Habitat loss is causing a biodiversity crisis and threatening valuable ecosystem services. Nowhere is this more apparent than in tropical forests, which are home to more than 80% of animal, plant, and fungi biodiversity. Wildlife populations, including mammals, birds, fish, amphibians, and reptiles, have been reduced by 68% since 1970 and about one million animal and plant species face the threat of extinction. The agriculture sector is responsible for about 80% of deforestation globally, but it is also among the sectors most reliant on ecosystem services, particularly pollination. Pollinator loss is currently placing USD 235 billion to USD 577 billion of annual agricultural production at risk. The economic cost of biodiversity loss is already estimated to be between USD 2.0 trillion and 4.5 trillion per year.
- Soil Degradation: Soil degradation costs an estimated USD 400 billion every year and has been linked to a potential 12% reduction in global food productivity and a 30% increase in food prices by 2030. Degradation is driven by the loss of organic matter and soil erosion, excessive use of fertilizers and pesticides, other types of contamination, salinization, acidification, and a loss of genetic diversity. Soil erosion, for example, is a major consequence of tropical deforestation because soil can no longer rely on intricate root structures to hold it in place or canopies to protect it from drying in the sun. Although recently deforested land may support productive agricultural activity, soil fertility decreases over time as topsoil is blown or washed away. For example, a study of deforested land in Iran measured a 70% to 82% drop in soil productivity of cultivated land and a 50% drop in organic matter overall.
- Global water cycles: As deforestation and land use change lead to the conversion of tropical forests to grasslands or savanna, less moisture is stored and released into the atmosphere. Thus, the hydrological cycle is disrupted with a major ripple effect on precipitation patterns around the world. Climate scientists have predicted a tipping point when 20% to 25% of the Amazon is cut down, warning that the rainforest’s hydrological cycle will be unable to support itself and the biome will convert to a savanna. Since the Amazon provides water to a region in South America responsible for 70% of the continent’s GDP, the risk to the continent’s financial sector is sizeable. This problem is not limited to South America. Deforestation in the Amazon could lead to a 25% reduction in rainfall in Texas, for example. Meanwhile, deforestation in Central Africa could reduce rainfall in the U.S. Midwest by 5% to 35%, and deforestation in Southeast Asia can influence rainfall in Europe.
- Clean Drinking Water and Flood Mitigation: Deforestation and land use change can have devastating implications to the availability and quality of clean drinking water to populations both locally and regionally. Forested land covers about 31% of watersheds worldwide and provides essential storage and filtration services. By absorbing nutrients and sediment, forests provide clean drinking water to large populations in urban centers downstream and can reduce infrastructure investments and water management costs. By storing water in roots, branches, and canopies, forests can also reduce the intensity of flooding and mitigate irregular rainfall patterns. Conversely, deforestation and land use change can lead to devastating flooding, increased need for costly infrastructure, and significant pollution because of the loss of ecosystem services and preventing the previously discussed runoff of agricultural fertilizers and pesticides.
- Infectious disease outbreak: Deforestation and land use change lead to habitat loss and increase the likelihood of zoonotic infectious diseases that result from proximity between humans and animals. Since infectious disease emergence is driven primarily by land use change (31%), followed by agriculture (15%), commodity-driven deforestation is a primary risk factor for future pandemics. Furthermore, according to some studies, 75% of emerging infectious diseases are zoonotic compared to 60% of all existing infectious diseases, which indicates that habitat loss resulting from land use change is playing an increasing role in infectious disease emergence over time. The Covid-19 pandemic has provided some insight into the potential costs of infectious diseases to both humans and the economy. In addition to the millions of lives lost, as early as October of 2020, the International Monetary Fund estimated that the pandemic would cost the global economy USD 28 trillion in lost output. Without halting deforestation, the likelihood of society being exposed to more costly zoonotic diseases we are unprepared to manage will continue to increase.
- Pollution: In addition to absorbing CO2, trees absorb toxic chemicals and filter the air providing noteworthy benefits to human health. Despite only covering 6% of land, tropical forests produce 40% of the world’s oxygen alongside the absorption of harmful pollutants. Furthermore, particulate matter from fires linked to longer dry seasons and land clearing for agricultural use has been shown to increase pollution-related hospitalizations by 65% and to cost the Brazilian public healthcare system the equivalent of USD 660,000 during the 2019 fire season. With wildfire seasons increasing in severity and longevity, driven by climate change and the effects of global deforestation, a major step in mitigating the potential pollution impacts must include curbing global deforestation.
- Environmental refugees and local conflict: By depleting the ecosystem services that millions of people rely on for food, clean water, and energy, deforestation and land use change are likely to create climate change refugees and exacerbate geopolitical conflict. The inevitable floods, droughts, and repeated crop failures are likely to destabilize economies as they become unable to support their populations. Over 1.2 billion people could become climate change refugees by 2050. The world is already experiencing climate refugees and will continue to see an increase of this tragedy in the near-term. For example, the 90% reduction in the size of Lake Chad has provided some insight into the scale of potential migration patterns with 2.4 million displaced people and increased geopolitical conflict in the region.
- Medical Innovation: Future medical breakthroughs are dependent on the conservation of plant biodiversity today. The market for medicinal plant products is valued at over USD 100 billion and approximately 80% of the global population is reliant on botanical drugs. Moreover, a quarter of modern medicine originates in tropical forests. Yet, scientists have only scratched the surface of cataloging and understanding the vast biodiversity of the world’s forests. It is estimated that up to 100 species of animal and plant species disappear per day as tropical forest habitats are destroyed. A loss of plant biodiversity before medicinal impacts are understood is likely to lead to adverse impacts on human health and a slowdown in innovation in the pharmaceutical industry globally.
