The understanding of forests' importance and the associated risks and opportunities for businesses and financial institutions, based on their impacts and dependencies on these ecosystems, continues to improve each year. The role of forests, along with other natural ecosystems, in climate mitigation, adaptation, and resilience is now widely acknowledged in the fight against climate change.
Forests hold a central position in both our economy and the environmental challenges we confront. Neglecting to manage deforestation risks could lead to significant revenue losses for companies and financial institutions. In 2022, 60% of companies disclosing through CDP acknowledged some level of forest-related risks. The potential financial impact of these risks averaged $330 million per disclosing company, while the projected costs of mitigation were considerably lower, at an average of just $17 million per company.
Taking action to manage these risks is crucial for companies and investors. Failure to do so could result in substantial financial losses over the next decade. Recent analysis suggests that deforestation could become a significant financial risk, akin to the risks associated with coal in financial institutions' portfolios. Exposure to companies contributing to deforestation could leave them vulnerable to considerable financial, regulatory, and reputational risks.
The CDP Global Forests Report 2023, provides insights into the reasons why eradicating deforestation from supply chains remains a challenge for most companies. Despite over 1,000 companies disclosing their efforts towards no deforestation, the report reveals that only one in ten companies adequately manages their deforestation risks. While companies recognize the risks and make commitments to address them, these risks and commitments remain largely unaddressed. The report emphasizes the need for a holistic approach to tackle environmental challenges, as all environmental risks are interconnected and stem from the fundamental issue of supply and demand. Addressing deforestation will be a vital component of future environmental strategies, impacting climate, water security, biodiversity loss, and social benefits. The report predicts that as pressures continue to grow, companies that are already managing their risks will have a significant advantage.
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