The Future of Soy: Investors See Risk on the Horizon as Critical Forest Habitats Disappear

Roughly 50 percent of the Brazilian Cerrado, a global biodiversity hotspot, has been converted to agro-pastoral lands for Brazil’s rapidly expanding soybean industry—and investors are taking notice.

They’ve sent a clear signal: it’s not sustainable, and they are calling on the $112 billion industry to eliminate deforestation losses, land conversion, and other damaging impacts in soy production. Failing to act, investors warned in a recently released statement to companies, will negatively impact society and create long term investment risks within the industry.

As we mark International Day of Forests today, there should be cause for celebration, but the rapid spread of deforestation and land conversion due to soy and other commodities is dampening the mood. Since the late-2000s, agricultural expansion in Latin America has been supported through land clearing in Brazil’s Cerrado. The Cerrado is a biodiversity hotspot made up of woodlands, shrublands and riparian forests but is also a hotspot for deforestation or land clearing. Roughly 50 percent of Cerrado vegetation has been converted to agriculture and pastures, representing almost half of Brazil’s agro-pastoral land.

Fast-growing meat consumption in many parts of the world has sparked a surge in soybean demand, a key commodity for livestock and animal feed. Soy production has more than doubled in just 20 years and it now uses more than one million square kilometers of farmland, twice the size of California.

But the industry’s expansion comes at an enormous cost, especially in regions like South America where woodlands and savannah are being cleared every year to make room for soybeans.

Greenhouse gas (GHG) emissions are one of the biggest concerns. Converting tropical forests and native vegetation into croplands releases GHG into the atmosphere – lots of it. Soybeans, palm oil and cattle grazing are the primary drivers of tropical deforestation. Agriculture, forestry, and land conversion account for roughly a quarter of net GHG emissions, second only to the energy sector in emissions.

Land conversion and deforestation have also been linked to human rights violations and social conflicts, much of it related to land acquisitions, labor conditions and environmentally-damaging farm practices.

This month, 57 investors with $6.3 trillion in collective assets under management announced to the industry that greater risk management, traceability, and disclosure of progress toward commitments to address deforestation is needed. In the two-page statement, they call on soybean producers, traders and buyers, as well as consumer goods companies, to eliminate deforestation and land conversion in their soy supply chains.

Investors behind the statement are all motivated by the same goal: protecting the long-term value of their investments in the publicly-traded companies in the soy industry, including global traders, food processors and manufacturers, and grocery retailers.

They cite the wide-ranging “material” risks in the sector, including: reputational risks, as consumers become aware that a company’s supply chain is linked to deforestation; operational risks, from potential changes in local climates and agricultural yields; and regulatory risks, as governments try to reduce deforestation and land conversion from soybeans.

These risks are real and increasingly affect the bottom line. Last year alone, Brazil’s environmental agency imposed $29 million in fines to grain trading houses, as well as dozens of farmers, for activities connected to illegal deforestation.

Political pressure is also growing. France, Germany and the United Kingdom are calling on the European Commission to launch tough new action to halt deforestation. In February, eight leading U.S. senators sent letters to a dozen leading investment managers and asset owners, requesting that they outline their strategies for reducing deforestation risks in their investment holdings.

The statement came close on the heels of the latest Intergovernmental Panel on Climate Change (IPCC) report calling for deeper, faster action by world governments to limit global temperature rise to 1.5-degrees Celsius to avoid the worst impacts of climate change.

It calls on companies to take specific steps, among those:

• Evidence of well-documented, transparent monitoring and verification systems to ensure supplier compliance with the company’s deforestation policies and goals.
• Disclosure of progress towards implementation of company commitments to achieve no-deforestation supply chains by 2020.
• Public disclosure of their direct and indirect GHG emissions (including commodity supply chains) and time-bound goals to reduce those emissions.

Given the IPCC report findings and the recognition by the world’s governing bodies and national governments of the increasing risk scenarios from GHG impacts due to deforestation and land conversion, the business-as-usual approach is no longer fiscally responsible and investors have taken notice.

While more companies are stepping up their efforts and should be applauded, investors are setting clear expectation: Deforestation creates material market and reputational risks for companies, and is a source of systemic risk across investment portfolios given its contribution to climate change. Stepped up engagement and action by companies and investors on these challenges is the sensible and successful way forward.