Deforestation Could Create a Financial Crash As Big As 2008, Report Finds

A new report from the UN Climate Change High-Level Champions warns of economic disaster as big as the 2008 financial crash—or worse—as a result of ongoing deforestation and biodiversity loss. As a result, the world’s leading food and ag companies face value declines of more than 25 percent by 2030, the experts warn.

The new report findings, presented during Climate Week in New York by COP26 President Alok Sharma and UN Climate Change High-Level Champions, Nigel Topping and Dr. Mahmoud Mohieldin, come with an urgent warning to financial institutions: eliminate commodity-driven deforestation as soon as possible. It’s the latest in a string of reports from the UN calling on industries and policymakers to address the looming climate crisis.

Deforestation impact

“Due to the unique role of deforestation in driving emissions, and the role of the standing forest and terrestrial ecosystems in mitigating carbon, the financial sector must front load its transition to net zero, with a swift move away from deforestation-related emissions,” Sharma said. “Signing the Financial Sector Commitment Letter on Eliminating Commodity-Driven Deforestation sends an important signal to your supply chains, and harnesses the power of collective action. The physical risks to finance given the decline of both natural assets and ecosystem services is acute. The benefits of action are transformative. The right choice to protect our precious planet is clear.”

The new report is a first of its kind from Race to Zero. It jumps off from the Inevitable Policy Response’s (IPR) high-confidence, realistic, policy-based scenario. Among its key findings is just how significant the global impact of nature is. The findings suggest that 40 of the world’s largest food and agricultural firms could see an impact worth over USD$2 trillion. The report assesses the financial impact of a set of transition risks, including carbon pricing, subsidies for Nature-Based Solutions, due diligence obligations, and bans on deforestation.

Markets are failing to account for the transitions in land use, the report finds. Shifts to policies and consumer demands could drive “permanent value loss” across food and agricultural sectors on par with the 2008 financial crisis. For leaders in these industries this could mean devastating losses—as much as 26 percent by 2030 with an average of more than seven percent. That amounts to more than USD$150 billion in losses to investors.

Critically, the report says, this will not be a cyclical shock but permanent non-cyclical losses if no action is taken to prevent the disaster. And that’s where there’s good news. The analysts behind the report say swift efforts to increase sustainable offerings and operational shifts that prevent deforestation can mitigate “all potential losses.”

Leadership opportunities

“We’re seeing some leadership from investors on nature and deforestation, but frankly, not enough,” says Topping. “Over 30 financial institutions with more than USD$8.7 trillion in assets under management have already signed the Financial Sector Commitment Letter on Eliminating Commodity-Driven Deforestation, with a target date of 2025.  These leaders are showing what’s possible, and as our new analysis underlines, protecting themselves against financial, regulatory, and reputational risk in their portfolios.”

“By COP27 in November, we need investors and businesses to help accelerate the shift to a more resilient economy by investing in high-integrity carbon credits supporting nature-based solutions which put smallholders, indigenous peoples, and local communities at the centre,” added Mohieldin.

The report says the opportunity to capitalize on the benefits of a nature-positive future are significant; it values the market at USD$4.5 trillion, including opportunities for bio fertilizer, alternative proteins, and nature-based carbon credits.

The report is calling on the world’s leading companies to eliminate commodity-driven deforestation from their portfolios by 2025 and find Nature Based Solutions. It’s also calling on them to understand and seize the opportunities from land transition, and advocate for just land transition policies.

“Today’s new research underscores the critical role nature must play in how we – as investors – understand risk and spot opportunities,” Schroders Group CEO Peter Harrison, said. “The reality is stark: nature risk is fast becoming an integral factor to investment risk. That’s why accelerating a deforestation-free and nature-positive future goes to the heart of our fiduciary duty to our clients. As an active manager, we’re determined to use new insight, our influence over the real economy and to innovate new solutions, to have a tangible impact on nature, while we deliver robust, long-term returns.”