The global agricultural sectors, which contribute to 23 percent of anthropogenic greenhouse gas (GHG) emissions, are similarly exposed - and that is particularly true of palm, beef and soy agriculture, which jointly account for 36 percent of global deforestation.
A recent report by climate transition risk think tank, Orbitas, says, among other things, that understanding of the risk attached to these industries is not understood. Of 24 capital providers with tropical commodity exposure, surveyed for a recent report, not one had screened their loan books and/or investments for agricultural transition risks.
According to Orbitas’s report, these sectors are facing stranded asset risk, with palm oil firms with concessions on high carbon stock forests or high conservation value lands having to write off 9.2 million hectares of concessions that cannot be developed under sustainability commitments. Sixteen major palm oil producers and refiners operating in Indonesia have no deforestation, no peat, no exploitation (NDPE) pledges in place, including Wilmar, the world’s largest palm oil trader, Golden Agri-Resources (GAR) and Musim Mas. GAR has the largest potential stranded asset area.
"HOW GOVERNMENTS, CONSUMERS AND BUSINESSES RESPOND TO CLIMATE CHANGE MATTERS. THE NATURE AND SCALE OF THEIR RESPONSES WILL DETERMINE THE IMPACTS OF BOTH THE CLIMATE EMERGENCY ITSELF AND THE DISRUPTION FELT BY THE ECONOMY AS A RESULT OF NEW POLICIES, COMMITMENTS AND CONSUMER PREFERENCES."
The report’s findings demonstrate that climate transition risks – and opportunities – are as material in agriculture as they are in the energy and transportation sectors. Analysis shows that under climate transitions:
With sovereign wealth funds divesting palm oil companies over deforestation concerns, companies like PepsiCo and Nestle severing ties with Indonesian palm oil producer Indofood, and the European Union phasing out palm oil in biodiesel because of the crop’s environmental impact, the sector is under enormous pressure.
Indonesia’s 52 million tons of palm oil production represents 72% of the global supply chain. This makes it the global hub for the palm oil sector. Some of the biggest agri-business companies generate substantial revenues trading palm oil and laurics related products including oleochemical and biodiesel. The result is a multi-billion dollar industry, but whose growth has occurred alongside major contributions to global greenhouse gas emissions.
Between 2001 and 2019, clearing of primary tree cover for the production of palm oil released the equivalent of 11 gigatons of CO2 emissions – more than China’s annual CO2 emissions in 2018. As climate transitions accelerate, from policies to consumer sentiments, we see material risks that threaten this existing business model.
ORBITAS' MARK KENBER BELIEVES THAT WHILE CLIMATE CONCERNS WERE ALREADY MAKING DEFORESTATION IN THE PALM OIL SECTOR UNCOMPETITIVE, FIRMS THAT TAKE CLIMATE TRANSITION RISKS SERIOUSLY WOULD CONTINUE TO SEE GROWTH.
The price of palm oil is projected to rise by 29 per cent by 2040, and restrictions on land use will boost revenue for companies that have strong climate policies in place that rule out deforestation in their concessions, the report finds. Higher land costs will force companies to use their land more efficiently, switch to technologies that drive up yield and rein in greenhouse gas emissions from fertiliser, diesel fuel use, and mill waste.
Orbitas is an initiative established by Climate Advisers Trust (CAT) and was established in 2020 as a centre of excellence that examines climate transition risks for capital providers financing tropical commodities. According to Orbitas, these risks are currently not factored into the financing of companies within the tropical commodities sector.
Orbitas believes all capital providers need to understand how society's transitions in solving climate change will affect the future of tropical commodities and adjust their financing strategies to this new reality.
Orbitas to help the producers of internationally traded agricultural commodities and their capital providers to anticipate and adapt to the new government policies, corporate commitments and changing consumer preferences that the imperative to protect the world’s forests will undoubtedly bring.
Indonesian Palm Oil: Climate Transition Risk Analyst Brief
Agriculture in the Age of Climate Transitions: Stranded Assets. Less Land. New Costs. New Opportunities (Full Report)
Agriculture in the Age of Climate Transitions: Stranded Assets. Less Land. New Costs. New Opportunities (Executive Summary)
Information and Images: Orbitas