Companies that fail to manage their environmental performance expose themselves to business risks. As consumer and investor awareness rises, for instance, about deforestation's harmful impacts, companies sourcing commodities from deforestation hot spots are under pressure to ensure that their products are not sourced with illegal or questionable environmental practices. Companies that ignore this scrutiny subject themselves to potential regulatory action or loss of customers, which can translate into negative financial consequences.
In this case study series, risk is broadly defined as the volatility of returns that could generate unexpected losses or profits associated with direct and indirect impacts from deforestation. These risks can be market related, such as input or output price volatility and/or loss of market access; reputational, where the firm's brand equity could be impacted; operational, within the boundaries of the firm's business activities and processes; or regulatory/litigation, where government actions could impact the firm's operations or finances.
Overall, risks impact a company's balance sheet (assets, liabilities, equity, valuation), income statement (revenues, costs, profitability, net income), and cash flow. This often has direct implications for the value of the company's debt or equity, with pass-through to investors. Businesses can measure risks for their expected outcome and the probability that they will occur, and they can also mitigate or minimize them.
This case studies series examines the potential business risks for companies that source commodities from areas with deforestation. The series spotlights three companies (IOI Corporation, JBS, and United Cacao) and summarizes the business risks and negative financial consequences that the three companies faced.