Investors are becoming increasingly aware of supply chain issues in their companies, whether it is through conflict minerals, poor working conditions, deforestation or any number of other concerns, and are focusing on what company management is doing to recognise and address these risks. CDP’s Forests program works alongside our signatory investors to help them understand the business case for sustainably sourced commodities and to communicate that case to companies who are not yet addressing the problems. Evidence that investors are taking this on board is shown by the increasing number of shareholder resolutions filed against companies on deforestation and commodity-related issues, in particular palm oil and paper.
CDP is asking about deforestation risks, but the implications spread much further than a single issue. Essentially we are asking companies about traceability and sustainability – how do they know where these products come from and how they have been produced? While this can be time-consuming for companies to understand, the current issues facing the food industry, with the European horse-meat scandal and further reports suggesting a third of UK food products do not contain the products stated on the label, are clear examples of risks which can destroy shareholder value. Health and safety are major issues, as are climate change and extreme weather events, with their potential to disrupt supply in the face of rising demand from population growth and changing diets. The UK’s Met Office has modelled the effects of deforestation on rainfall in Brazil and predicts a significant probability that deforestation will lead to a drop in rainfall which will be enough to make soy production impossible within 30 to 40 years. This is a slow suicide by the agriculture sector and investors will ultimately pay the price if it is allowed to continue.
Legislation is also beginning to move quickly: illegal timber laws are already in force in the US and the European Union, shifting the liability onto companies to show that they have done due diligence on their supply chain back to source, while in biofuels, legislation has embedded sustainability criteria for the first time within a legal framework and so companies who have not previously had to think about these factors are now shifting the way they operate to take them into account.
Supply chains are complex but leading companies are acknowledging and tackling risks in a variety of ways. Some companies, most notably Unilever, are tracing their raw materials right back to the field or farm of origin. This is commendable but also hugely difficult for some commodities. An alternative is to specify certified materials, such as RSPO palm oil or FSC timber. This does not provide assurance of origin, but it does help to reduce many risks. Many investors are using our company reports as the basis for discussions directly with companies, to understand how they are managing risks and what their roadmap to sustainability looks like. These dialogues highlight forward thinking management teams and enable investors to identify which companies understand the shifting environment in which they operate. But what should investors be asking their companies?
We have three key questions to ask corporate management:
- What is your strategy to manage risks in your supply chain?
- Do you undertake risk assessments of suppliers beyond your first tier?
- For key, high risk commodities, what traceability information do you hold, to what tier, and is that information verified in any way – e.g. by certification or third party audits?
Answers to these questions will help to define how companies have assessed their risks and whether they have a holistic strategy to manage them. They should enable investors to identify those management teams who understand the risks and opportunities available and to engage with those companies who have not yet understood the link between supply chain management and value creation.
The CDP Forests team is happy to assist investors with their engagement – please contact firstname.lastname@example.org for more information.
CDP Global Forests Report 2013 – https://www.cdp.net/CDPResults/CDP-global-forests-report-2013.pdf
James Hulse, is Head of CDP’s forests program & Head of Investor Initiatives. James joined CDP in February 2013 following the transfer of the Forest Footprint Disclosure (FFD) project, where he was Director, into CDP’s Forests program. Prior to FFD, James worked in the City for almost 20 years as a trader and fund manager, setting up and running the first climate change hedge fund.