Investor Primer on Financial Mechanisms to Incentivize Deforestation-Free Commodity Production

Over the past decade, nearly 500 companies have made commitments to eliminate deforestation from their agricultural supply chains as part of their broader climate goals to reduce risks and improve their reputation among consumers and investors. These business commitments come from players across the supply chain, from commodity traders to consumer goods manufacturers. However, while corporate demand for deforestation-free products is growing and investors are increasingly calling for accelerated action to halt deforestation, rates of agricultural expansion continue to rise. Since 2014, when leaders from around the world joined the New York Declaration on Forests, the loss of primary tropical forests has increased by 44%. As long as deforestation continues to infiltrate commodity markets, companies will face a wide range of risks associated with deforestation and its role as a driver of climate change.
The barriers to shifting agricultural supply chains to deforestation-free production are complex. Often, financial necessity forces producers to expand into forests. Alternative means of increasing incomes, such as improving yields, restoring degraded land, and incorporating new agricultural practices, require an upfront investment that some commodity producers simply cannot finance. Historically, commodity-sourcing firms have limited their role in producer financing to offering core financing for inputs, payments, and price premiums. Meanwhile, investors have identified few opportunities to scale sustainable practices due to perceived risks in the seed funding cycle. Government regulation and concessional funding have been inconsistent in motivating the protection and maintenance of natural ecosystems.
It's clear that inaction fuels the problem of deforestation, while symbolic sustainability efforts raise consumer concerns about greenwashing. To break this impasse, some companies, governments, and investors have tried using innovative partnerships and financial mechanisms to incentivize deforestation-free commodity production.
This Investor Handbook is based on Ceres' research that explored the strengths and weaknesses of a wide range of incentive mechanisms in the context of cocoa supply chains in Brazil and West Africa, palm oil supply chains in Indonesia, and soy and beef supply chains in Brazil. Since corporate disclosure on the scope and effectiveness of incentive programs is limited, the Investor Handbook presents questions to ask companies during dialogues to assess the value of incentive mechanisms in relation to the company's overall no-deforestation goals. In the face of increasing pressure to demonstrate concrete progress, supplier engagement must catalyze positive impacts to avoid reputational risk.