investment viewpoints
Finding equity opportunities in the deforestation fight
Ending forest loss is a target climbing the policy agenda. As governments adopt regulations for deforestation-free products, companies face growing pressure to disclose supply-chain data, including the volumes and origin of commodities. We use case studies, sourced from the latest annual sustainability report for our Circular Economy equity strategy, to highlight both the challenges and opportunities this presents.
| Need to know
|
|---|
Forests in focus
Forest protection regulations and other policies for preserving natural capital support our vision for LOIM’s Circular Economy Strategy, offered through holistiQ, our sustainable-investment platform. By managing their forest-related footprint, companies can alleviate land impacts through system transformations that support circularity, protect virgin resources and help develop solutions for the bioeconomy.
As such, forest management is a key component in the assessment of our investments, as we recognise that correct sourcing and practices are essential in protecting natural capital that businesses and the economy at large depend on. It has also become an area of focus in our engagement with companies, supporting our intelligence gathering and helping to fulfil our shareholder responsibility to advocate for further positive change.
The standouts
Initiatives to support the global nature agenda in recent years have included objectives to halt deforestation and to accelerate reforestation efforts.
In 2023, for example, the European Parliament adopted regulations to ensure that a range of commodities on the EU market – including cocoa, coffee, palm oil, rubber, soya, wood and cattle products – have not been obtained as a result of deforestation. We expect companies to start disclosing more supply chain data, including the volumes of commodities used and their areas of origin, and eventually significantly improve their sourcing strategies.
Within our thematic universe, we look for companies that can demonstrate an understanding of the scale of the problem and a commitment to disclosing metrics and establishing credible performance indicators to track progress. Moreover, we favour those that are researching ways to reduce the commodities they use and taking other steps that go above and beyond policy requirements. In our view, such business models will be best positioned to remain resilient in the face of the new regulation, commodity availabilities, and market demand.
Case studies
We aim to identify companies well equipped to reduce deforestation risk, and those exercising a sustainable approach to using forests as an essential input to their business, through the strength of our research and our engagement processes. These provide us with a better understanding of the competitive position of the companies, and their ambitions and plans around deforestation. We profile a selection of these firms below.
Mixed picture
Why do forests matter? Put simply, the global economy – and Earth itself – cannot thrive without them. They are storehouses of biodiversity, sustaining 80% of the world’s known terrestrial species. This biological diversity underpins vital ecosystem services – from water filtration to pollination and pest control.
Forests are also irreplaceable carbon sinks, capturing and storing 7.6 billion net metric tons of carbon – equal to 1.5 times the US’s total annual CO2 emissions. This makes them essential in nature-based solutions for mitigating climate change, providing 35% of the economically viable climate mitigation measures needed between now and 2030.
With regulations still in the early stages of development, levels of disclosure remain quite mixed. But within this mixed picture are proactive companies, such as L’Occitane, looking to preserve nature either as a risk mitigation measure, or those like Smurfit Kappa, which seek commercial opportunities in response to regulations supporting circularity and the environmental transition.
As such, the deforestation regulations are an essential catalyst for an array of investment areas for the Circular Economy strategy.
Sources.
[1] The case studies provided in this document are for illustrative purposes only and do not purport to be recommendation of an investment in, or a comprehensive statement of all of the factors or considerations which may be relevant to an investment in, the referenced securities. The case studies have been selected to illustrate the investment process undertaken by the Manager in respect of a certain type of investment, but may not be representative of the Fund's past or future portfolio of investments as a whole and it should be understood that the case studies of themselves will not be sufficient to give a clear and balanced view of the investment process undertaken by the Manager or of the composition of the investment portfolio of the Fund now or in the future.
Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document. Past performance is not indicative of future results.
important information.
FOR PROFESSIONAL INVESTORS ONLY
This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a marketing material and has been approved by Lombard Odier Asset Management (Europe) Limited which is authorized and regulated by the FCA. ©2022 Lombard Odier IM. All rights reserved.
