Climate Transition Risks For Tropical Commodities

by | May 14, 2020

Palm oil tropical deforestation faces climate transition risks

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.

Orbitas’ first report spells out how these changes, known as climate transitions, could disrupt tropical commodity production.

This report comes at a critical time. Five facts are converging that merit taking a closer look at tropical forest agriculture.

  1. Tropical commodities are a major driver of climate change, and therefore responding to climate change means disrupting practices in these industries. As the broader costs of deforestation, including links to public health in the wake of the Covid-19 pandemic, this increases the saliency of addressing the drivers of forest loss.
  2. Climate transitions are already happening and affecting the tropical commodity sector. A 2017 moratorium on palm oil expansion in Indonesia “stranded” nearly one-third of land available to producers. Plant-based meats (approximately 90 percent less water, land and GHG emissions intensive than conventional livestock farming) are threatening the size of the cattle market, and advances in synthetic palm oil could provide an attractive substitute for current production. This will only accelerate in the future.
  3. Financial institutions are exposed to tropical commoditiesthere are 44 capital providers each with at least $300 million invested in palm oil companies alone. Climate transitions make them vulnerable. Scenario analysis, in line with recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD) allow capital providers to see these risks more clearly. Capital providers can then choose to adopt risk management practices that minimize losses or capitalize on sustainable practices.
  4. Other sectors have already suffered from climate transitions, like coal or diesel fuel, where climate transitions have already imposed significant losses for firms unable or unwilling to adapt. The current issues affecting global aviation due to the COVID-19 pandemic demonstrate what can happen when demand shifts suddenly. These shocks compound longstanding environmental concerns about the aviation industry. When these transitions have occurred, the result has been material financial impacts for capital providers.
  5. Once climate transition risks are accurately priced, capital providers will have full transparency as to which alternative investments make more sense than sticking with the status quo. Analysts already see traditional animal farming as a “long-term loser” in the at least $300 billion opportunity by 2025 from reimagining production processes. These sustainable opportunities represent an important pathway for investors who seek to align their portfolios with net zero emissions targets.

This report deals with each of these in turn, demonstrating how they work in concert to make climate transitions too risky to ignore when investing in tropical forest agriculture.