Commodity-driven deforestation is causing irreversible effects on people and the planet

Deforestation, primarily driven by agricultural expansion, is the leading cause of land-system change and contributes significantly to biodiversity loss and climate change. Tropical forests account for over 90% of global deforestation, with commodity production—especially cattle, palm oil, and soy—being responsible for most forest loss.

Deforested land often suffers from soil degradation and water stress, fuelling further forest clearing. In 2023, 3.7 million hectares of forest were lost, releasing 2.4 Gt CO₂e. If trends continue, 289 million hectares of tropical forest may be lost by 2050, contributing 169 Gt CO₂ emissions.

Policy responses include the EU Deforestation Regulation (EUDR), which mandates due diligence in supply chains, and initiatives such as Nature Action 100, with investors representing over $30 trillion AUM engaging with high-impact companies.

Tropical forests help society thrive but are struggling to survive

Tropical forests provide 70% of the global forest carbon sink and support 67% of all land-based biodiversity. Economically, the forestry sector is valued at $1.5 trillion, not including the value from agriculture or ecosystem services.

These forests support local livelihoods—25% of income for communities near forests comes from forest-related resources. Indigenous peoples manage 25% of terrestrial ecosystems and hold similar proportions of above-ground carbon in tropical forests.

Ecosystem services include provisioning (e.g., timber, rubber), regulation (e.g., climate stabilisation), and cultural benefits. However, increasing demand for commodities and unsustainable practices undermine these functions.

Unpacking deforestation risks: Physical, transition, and systemic

Deforestation creates three types of nature-related financial risks:

• Physical risks: Include droughts and topsoil erosion that disrupt agricultural yields and reduce asset values.
• Transition risks: Arise from regulatory shifts (e.g., EUDR), market preferences, reputational issues, and litigation, especially for commodities with high illegal logging exposure.
• Systemic risks: Include potential biome collapse (e.g., Amazon transitioning to savannah), which could result in up to $7.7 trillion in losses and affect global food and finance systems.

Deforestation risk in an investment portfolio: The layers of potential exposure

Investor exposure to deforestation risk arises from:

• Commodities: Cattle, palm oil, and timber drive 61% of global commodity-driven deforestation.
• Countries: Brazil, Indonesia, and the DRC lead in forest loss. For example, Brazil is linked to 50% of cattle-driven deforestation.
• Industries and value chains: Activities from production to retail vary in risk levels. Producers face physical and regulatory risks; retailers face reputational risks.
• Human rights issues: Up to 40% of deforestation is associated with modern slavery, especially in sectors such as agriculture and forestry.

Deforestation-related data to assess investment risks

Three types of data help assess deforestation exposure:

• Dependencies data: Measures reliance on ecosystem services (e.g., biomass, rainfall).
• Impact data: Includes biodiversity loss (using PDF and MSA metrics), GHG emissions, and pollution.
• Performance data: Covers companies’ policies, targets, and actions to manage deforestation risks. A subset—opportunity data—tracks activities like regenerative agriculture or sustainable sourcing.

Asset-level and geospatial data are increasingly used to provide location-specific insights.

An investor’s portfolio risk exposure analysis

A funnel approach helps identify and prioritise high-risk holdings. Analysis of the Nature Action 100 portfolio showed that food products constituted 28% of AUM, with cattle-related activities causing 16% of biodiversity impact.

Using region-specific and human rights data revealed that three companies in Brazil accounted for 90% of biodiversity impact there. In Indonesia, 15 issuers were flagged for deforestation risk; 53% also showed high modern slavery risk.

Deforestation-related mitigation and opportunities will continue to evolve

Investor awareness is growing, supported by regulatory developments and initiatives like the Finance Sector Deforestation Action. Still, challenges remain in data standardisation and implementation.

Nature-based opportunities—such as reforestation, sustainable supply chains, and bioeconomy growth—offer potential. The forest-based economy could contribute $3.6 trillion and 191 million jobs by 2030.