Regional Climate Transition Risks in the FLAG Sector

India Rice – Man carrying rice plant husks

Authors: Josh McBee

Regional Variations in Climate Transition Risks in the Forest, Land, and Agriculture (FLAG) Sector

Climate transition risks and opportunities faced by businesses and investors in the forest, land, and agriculture (FLAG) sector vary widely across the globe

Regional Variations Impact the Types of Climate Transition Risks

Regions around the world and different commodities face different forms of risk from Climate Transitions, and conversely different opportunities, based on how market power is concentrated. Regions with higher concentration (fewer companies) responsible for upstream production of commodities face higher risks that they will encounter greater policy and legal challenges.

These are often driven by foreign regulators and importers restricting market access for emission-intensive or deforestation-linked commodity products. An example of this type of risk in the real world includes the European Deforestation Regulation (EUDR). By contrast, regions where concentration in the market sits with a few downstream processors are less directly affected by policies and regulations focused on preventing high-emissions commodity production.

However, these regions are more exposed to significant reputational risks. These risks come about when downstream processor brands are associated with unsustainable suppliers and regulators increasingly adopt stricter rules. This can be seen in action today where policymakers are requiring disclosure of Scope 3 value chain emissions. Since Scope 3 emissions encompass the full range of emissions from the supply chain to end-use activities, processors whose suppliers rely on unsustainable production methods face greater reputational risks of losing market share or even seeing divestment.

Regional variation in water and electricity access, internet availability, the physical impacts of climate change, as well as in social and political dynamics, will likely further shape the ways the global response to climate change is felt. In some cases, they pose greater challenges for FLAG sector businesses and investors looking to mitigate financial risks from climate change. In other cases, they pose challenges for creating opportunities.

FLAG sector investors and businesses who aim to capitalize on the opportunities presented by the societal response to climate change, known as Climate Transitions, and minimize their exposure to associated risks must keep these differences in mind as they craft investment strategies and make business decisions.

Regional Variations of Climate Transition Risks

A clear example of regional variances in Climate Transition risks are the reputational and legal risks for retailers associated with tropical deforestation. There is perceived greater risk when sourcing products from South America, Central Africa, and parts of Asia and Oceania but not when sourcing from North America or Europe. These risks often center around the higher rates of deforestation that occur in these regions, ignoring the historical deforestation that occurred in North America and Europe in the Industrial Age.

Another example is crop burning, a practice prevalent in some regions in Central America, South and Central Asia, and elsewhere. Crop burning releases black carbon, a powerful warming agent, and contributes significantly to regional air pollution and associated adverse health outcomes. Retailers should consider preferentially sourcing from suppliers who avoid this practice, and investors can reward retailers who do so.

Below is a summary of key climate transition risks by region, primarily driven by the emission intensity of top commodities and the actions of investors, supply chains, regulators, consumers and civil society.

Sub-Saharan Africa Climate Transition Risks

High exposure to deforestation-prone commodities coupled with preexisting infrastructure issues leaves FLAG sectors open to significant climate-related transition risks. A growing consumer preference for sustainable and ethnically sourced products challenges traditional practices in the coffee industry. Meanwhile, deforestation-reduction schemes threaten the expansion of cocoa and rubber plantations, and foreign regulatory restrictions may limit unsustainable producers’ access to high-income markets. Infrastructure challenges around internet access, electricity and road quality can also slow the adoption of sustainable practices and emerging AgTech.

Middle East and North Africa Climate Transition Risks

Increased risk from physical climate events may result in more aggressive responses from government organizations aiming to stem further loss of arable land. These efforts may involve reduced water access, mandated adoption of more sustainable agricultural practices and challenges expanding olive oil and date plantations. Access to affordable credit may pose additional obstacles to the use of more sustainable AgTech.

Central America and the Caribbean Climate Transition Risks

Reliance on traditional farming methods for coffee, sugarcane and cocoa production threatens market access. As traders and international retailers work to reduce their reliance on suppliers associated with deforestation, farmers practicing traditional slash-and-burn agriculture may risk damaging their reputation with downstream consumers. The government adoption of deforestation reduction schemes and growing interest in carbon and biodiversity credits may offer opportunities to diversify and de-risk revenue streams.

South America Climate Transition Risks

South America is highly exposed to deforestation-linked commodities. The region is the world’s leading producer of cattle and soybeans, both notoriously involved in the deforestation of large swaths of the Amazon and Cerrado. Traders sourcing from deforestation-linked producers have lost contracts and been subject to public scrutiny and reputational losses once exposed. Financing efforts from local credit unions and Brazilian banks have supported government targets of increasing sustainable agricultural practices and the adoption of supply chain traceability and monitoring.

North America Climate Transition Risks

North America faces transition risks throughout FLAG value chains. Upstream producers lead the world in the production of corn, soybean and livestock. However, calls from global asset managers to add sustainability criteria to subsidies threaten a paradigm change for business models reliant on historical government price controls. A thriving AgTech research environment creates major opportunities for competitive advantage through growing efficiency. Finally, downstream retailers are exposed to reputational risk as shifting consumer preferences subject unsustainable actors to intense media scrutiny.

Europe Climate Transition Risks

Europe’s FLAG sector climate transitions materialize primarily in end-stage processing. Specialized chocolate, dairy and seed oil companies are not directly responsible for high emissions activities, instead offshoring production. For these downstream companies, shifting consumer preferences for sustainable and ethically sourced products, in addition to growing regulatory restrictions, represent the most significant transition challenges, as they pressure market leaders to enact policy changes.

South and Central Asia Climate Transition Risks

South and Central Asia lead the world in rice cultivation—a process responsible for significant methane emissions. The production of sugarcane often involves crop burning to remove biomass and reduce harvest time. Downstream processors of seed oils like palm oil, face additional risks as multinational retailers and distributers move to cut contracts and terminate supplier relationships with those sourcing from producers responsible for deforestation.

East/Southeast Asia and Oceania Climate Transition Risks

Leading businesses and investors exposed to deforestation-linked commodities such as palm oil, rubber and coffee have faced intense public scrutiny and reputational damage over publicized deforestation events, while the adoption of deforestation-centric trade regulations have reduced market access to traders and companies unwilling or unable to adopt more sustainable practices.

Regional Variations in Climate Transition Risks in the Forest, Land, and Agriculture (FLAG) Sector

Climate transition risks and opportunities faced by businesses and investors in the forest, land, and agriculture (FLAG) sector vary widely across the globe

Regional Variations Impact the Types of Climate Transition Risks

Regional Variations of Climate Transition Risks

Sub-Saharan Africa Climate Transition Risks

Middle East and North Africa Climate Transition Risks

Central America and the Caribbean Climate Transition Risks

South America Climate Transition Risks

North America Climate Transition Risks

Europe Climate Transition Risks

South and Central Asia Climate Transition Risks

East/Southeast Asia and Oceania Climate Transition Risks

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