Why should saving forests be a global priority?

 by Ewelina Łukasik-Morawska, Engagement Manager at GES

 

For any company operating in the global trade in soy, palm oil, timber or cattle products, deforestation has become a crucial business issue. The production of these forest-risk commodities can contribute to habitat loss, greenhouse gas emissions and social conflict causing exposures for suppliers and customers alike. Between 1990 and 2015, tropical forest cover decreased by more than 195 million hectares, over 76% of which occurred in South America, South-Southeast Asia, and Central-West Africa[1]. The four commodities were responsible for about 113 million hectares of forest loss in tropical regions between 2000 and 2012[2].

Governments, private sector companies, and civil society organizations have tried to address the situation by endorsing the New York Declaration on Forests which sets an ambitious goal of ending natural forest loss by 2030, with a 50% cut by 2020[3]. In the Amazon, Colombia aims to achieve zero net deforestation by 2020 and Brazil commits to eliminate illegal deforestation by 2030. In addition, more than 45 tropical countries are developing programmes to decrease emissions from deforestation and forest degradation (REDD+)[4].

These commitments to forests are essential. The emissions reductions that can be achieved by ceasing deforestation and improved forest management and reforestation are vital in preventing global warming. Forests are also essential for humans to build climate resilience in order to leave the globe better prepared for future climate change impacts. These also include non-carbon climate benefits like sustaining livelihoods and ensuring water and food security. Sustainable forest management also contributes to the success of the Sustainable Development Goals giving an opportunity to eliminate deforestation, improve agricultural productivity, and reduce poverty.

Moreover, the alteration to deforestation-free agricultural commodities can create new investment opportunities while mitigating reputational and stranded asset risks. Still, investment in sustainable production is often hindered by unfamiliar risks and a limited understanding of regional characteristics. The costs and risks of the transition toward better management and sustainable agricultural practices can be collectively addressed by impact investors, governments, and private sector companies. To achieve success, enhanced action and collaboration among sectors and various supply-chain actors are needed as fewer than two years remain until 2020, the date by which the commodity production from forests is due to be transformed.

[1] Keenan et al. (2015). Dynamics of global forest area: Results from the FAO Global Forest Resources Assessment 2015. Forest Ecology and Management, 352. 9-20.

[2] Henders, S., Persson, M., & Kastner, T. (2015). Trading forests: land-use change and carbon emissions embodied in production and exports of forest-risk commodities. Environmental Research Letters, 10(12), 1-13. Retrieved from http://iopscience.iop.org/article/10.1088/1748-9326/10/12/125012/pdf

[3] http://www.un.org/climatechange/summit/wp-content/uploads/sites/2/2014/07/New-York-Declaration-on-Forest-%E2%80%93-Action-Statement-and-Action-Plan.pdf

[4] http://redd.unfccc.int/

Emerging Markets in 2018

 by Palle Ellemann, Lead Emerging Market Engagement at GES

Emerging markets (EMs) are gaining traction with investors. But, what about ESG? Should investors still consider a risk premium for ESG risks when investing in emerging markets?

Some systemic challenges in emerging markets would still suggest so. When looking at the Corruption Perception Index from Transparency International, it is clear that it continues to be dominated by developed markets in the top spots, while emerging markets are spread out in the bottom half of the list. This picture is also reflected in the Regulatory Quality and Rule of Law indices within the World Bank’s Worldwide Governance Indicators (WGI). There is remarkably little change, even over time spans of 5-10 years, with the systemic challenges related to corruption and regulation.

Of course, there are examples of countries that are making significant changes. Argentina has improved regulatory quality and rule of law dramatically since 2014, Vietnam has done the same, while Turkey has gone in the opposite direction. Argentina has changed its government, Vietnam is looking for international recognition and international investors, while in Turkey, Erdogan has taken advantage of a failed coup to crack down on all opposition and effectively take control of key institutions, including the judicial system.  Interestingly, in the places where there have been positive changes (Argentina and Vietnam), the Corruption Perception Index has also improved, but noticeably much more slowly than other indicators. Corruption seems much harder to change, because it is deeply engrained within the culture and the institutions of nations in which it resides. Another part of the explanation is that the indicator measures the perception of corruption.

Various emerging markets have seen massive focus on corruption in the past couple of years, particularly Brazil, China and South Korea. Major scandals in these markets are driving a perception of corruption, but they are also coming in the aftermath of trends towards higher degrees of transparency and a stronger focus on accountability. The pressure for transparency and accountability comes from various stakeholders, including regulators, customers and not least investors. In general, the problem of corruption is probably improving due to growing accountability, but the increased transparency is bringing more corruption cases into public scrutiny and thereby creating the perception of more corruption.

Our experience in the Emerging Markets Engagement program after more than 500 onsite meetings over the past seven years shows that EM companies are gradually improving practices and disclosure on ESG. There are fewer laggards with a total absence of ESG awareness or disclosure and more companies are challenging the traditional frontrunners in the markets. While the old and historically dominant conglomerates in EMs have broadened out their CSR practices to also include an ESG perspective, newer and more dynamic EM companies are integrating ESG into the management structures when building the organisations.

In 2018, GES will continue to push for transparency and accountability in the companies that we engage with. There are good prospects for positive change because most EM companies recognise the value of proper ESG risk mitigation and disclosure, they are getting a better sense of what is expected from the investor perspective, and they are starting to get some practical experience with the implementation of management systems and practices. All of this is setting the scene for realising more engagement potential in emerging markets.

Real drivers behind the US nuclear arsenal expansion

  by Jędrzej Nowakowski, Inhumane Weapons Analyst GES

During the course of 2017, it seemed as if no month passed without breaking news of North Korea’s latest development in the field of nuclear weapons, followed by angry tweets from President Trump. The rhetoric was simple: the US will not back down and is ready to use the full might of its arsenal, leaving the nuclear option on the table.

The past restraint on the side of the US when talking about nuclear weapons gave way to openly unabashed verbal exchanges between Pyongyang and Washington, and on the surface, swift decisions by the US to bolster its nuclear weapons capability.

Since 2016, the US Department of Defense has announced contracts for new ballistic missile submarines: the Columbia-class, a new long-range strike bomber: the B21 Raider, new cruise missiles: the Long Range Stand Off Weapon, and new ground-based strategic deterrent ICBM’s.

All of the above developments have one common denominator: they are future delivery systems of US nuclear weapons. To a casual observer it might seem that under Trump America is preparing for a major nuclear offensive, flexing its muscle for the world to take notice. In reality, that is not the case, as most of these processes were put into motion years ago, some under the Obama administration.

Military experts may even say that these decisions are long overdue, as America’s nuclear arsenal is ageing rapidly, and is in dire need of a major overhaul.

The US, like the other four nuclear weapon states recognized by the Non Proliferation Treaty (including the UK, France, Russia and China), pledged not to produce any new nuclear weapons. However, the Treaty does not outlaw possession of what already is in stock, neither does it forbid the upkeep of safely maintaining such weapons, up until their eventual disposal and nuclear disarmament, which is the overarching goal of the Treaty.

It is here that the US found an exploit. In the 50 years that the NPT has existed, not only has the US maintained most of its stock, but it has also managed to enhance it, by developing various new, non-nuclear components. At the same time, some of the older warheads have been phased out, so in theory, America was doing its part in global disarmament. In reality though, while the number of nuclear warheads decreased, the ones that remained have become more powerful than ever, equipped with more sophisticated guidance systems, stronger rocket motors, and enhanced warheads.

Most of these advancements were developed during the Cold War, and now the US is primed to once again conduct a major overhaul of its nuclear deterrent, which coincides with the increased tensions on the Korean peninsula.

Whatever the outcome of this conflict may be, it can be said with a dose of certainty that neither Mr Kim nor Mr Trump will get to see their devastating potential, at least not while they are in office, as the US Department of Defense estimates that it will take years, if not decades, for the new systems to be deployed. For instance, the B21 Raider bomber is expected to take to the skies around 2025, and the first of the Columbia submarines is expected to enter service after 2030. Taking into consideration the delays that usually plague such massive projects, the Korean conflict may be in the history books by the time they arrive.