LONDON, WASHINGTON DC, November 7th, 2024 – The profitability of companies and investors operating in the forest, land and agriculture sectors globally is being increasingly threatened by the responses from government, private sector, civil society and consumers to climate change.
Known as “climate transitions”, these responses are being accelerated by four key trends: the increase of regulatory, legal and policy frameworks and obligations, the impact of new technologies and innovations, market dynamics driving sustainable alternatives, and reputational risks. These trends will accelerate material financial risks that companies and investors in FLAG sectors experience and need to contend with in their day to day operations.
These are some of the central observations in the latest report from Orbitas, a Climate Advisers initiative, examining sector-wide trends that are creating financial risks for FLAG sector companies and investors. The report assesses these risks and makes 16 recommendations on how to prepare for them.
“State of Climate Transitions: A 2024 Guide for Companies and Investors in the Land Economy”, highlights the growing action to address climate change and its impacts on capital markets globally. Mounting supply chain transparency policies and the adoption of laws in 35 regions and nations mandating climate-related financial disclosures are informing investment decisions and shining a light on emission intensive companies with higher climate risks.
Business and investor exposure to growing climate transition risks is fierce in FLAG sectors, particularly for high-emission intensity everyday commodities, such as beef, soy, palm oil, rice, coffee and cocoa. Orbitas highlights that high-emission companies are seen as riskier than lower emission competitors, which has the potential to drive up the cost of capital for heavy-emitting companies.
However, actions by companies and investors to reduce emissions, adopt climate smart technology, diversify revenue flows and lean into emerging opportunities, for example in low-carbon goods, can present opportunities to secure future financial stability by reducing transition risks, and thus the weighted average cost of capital they experience.
Companies and investors in FLAG sectors are particularly exposed to risks and opportunities as the economy transitions to a low carbon future. These sectors are both vulnerable to the physical risks of climate change and a major contributor of 23 percent of global greenhouse gas emissions, and they also offer the potential for up to 20 percent of the actions needed globally to mitigate the worst impacts of climate change by 2050.
In its research, Orbitas aligned key FLAG sectoral trends with the Task Force on Climate-Related Financial Disclosures (TCFD) framework, which is widely used within mandatory climate-related financial disclosures globally. It identifies four categories of trends are reshaping the landscape and are already impacting, or have the potential to impact, profitability of FLAG sector companies:
- Legal and Policy: With 35 regions and nations now mandating climate-related financial disclosures and growing incentives, trade policies and government commitments, companies and investors are navigating a regulatory landscape that increasingly rewards climate leaders.
- Technology: Climate-smart solutions, such as precision agriculture and methane-reducing livestock feed additives, are providing new opportunities for mitigating emissions while increasing productivity.
- Market: Shifts in consumer preferences toward sustainable products and stricter sustainability requirements are driving market leaders to adopt innovative, low-emission practices.
- Reputational: Reputational concerns around environmental degradation and deforestation, from activist shareholders to concerned consumers, are increasing the pressures businesses face from their stakeholders.
Orbitas has developed a guide that provides strategies for investors and companies to safeguard their financial futures in the face of climate transitions:
- For Investors: Eight steps to make investments and lending practices more resilient to climate transitions include assessing risks, adopting new strategies, diversifying portfolios and collaborating with stakeholders.
- For Companies: Eight steps to improve supply chain resilience and business sustainability include enhancing reporting practices, supporting innovation, adopting climate-smart technologies and exploring emerging markets.
A full list of the recommendations for investors and companies can be found here.
Niamh McCarthy, Senior Director of Climate-Related Risks and Orbitas, Climate Advisers, said: “The science is clear: mitigating the worst impacts of climate change requires systemic change across every sector of the economy. FLAG sectors, particularly vulnerable to these changes, are both major contributors to emissions and crucial to climate solutions, and it’s clear companies and investors operating in these sectors are already facing major financial risks as a result of changes underway. Our guide offers actionable insights for companies and investors operating in FLAG sectors to make their businesses and portfolios more resilient to climate risks – as inaction is not an option in a world that’s rapidly shifting toward a low-carbon future.”
About Orbitas:
Orbitas, is a Climate Advisers initiative that has been a major player in risk analysis across the agriculture, land and forestry sectors since 2020. Since then, it has developed first-of-its-kind methodologies for quantifying climate transition risks and opportunities through economic modeling and financial stress testing. In addition to publishing a ground-breaking global analysis in 2020, Orbitas has localized its analysis with country-level deep dives on Colombia, Peru, Brazil and Indonesia.
Additional information is available at orbitas.finance.