The FOREST Act (S.2950/H.R.5508), introduced in Congress with bipartisan support last fall, would prohibit agricultural commodities entering the U.S. market from being sourced on land that was illegally deforested and require traceable supply chains. The U.S. would provide support to producing countries to improve governance and promote sustainable production. 

Complementing these federal measures, public procurement laws proposed by California and New York legislators would require products purchased by state governments to be deforestation-free and respect human rights, shifting demand to responsibly sourced products in two globally significant markets. 

Through better regulation of U.S. imports and consumption of global forest-risk commodities, the three bills are an important step towards meeting the commitments made by the U.S. alongside over 100 governments at the most recent Climate COP in Glasgow to end deforestation and land degradation by the end of the decade. The legislation would also level the playing field for leaders in this space who have already begun applying due diligence measures to address deforestation risk.

As fiduciaries, we recognize material systemic and specific risks posed by deforestation to companies, our portfolios, and markets broadly. In the US, 40% of GDP is generated from sectors directly exposed to tropical forest, food, and land risk.[1] Forests play an essential role in combating climate change, reversing biodiversity loss, and protecting human health and rights.

Deforestation is one of the largest drivers of climate change: currently an estimated 15% of all greenhouse gas emissions result from deforestation and forest degradation.[2] Evidence is emerging that we may be approaching tipping points in key forest biomes like the Amazon rainforest, where recent studies suggest portions of the forest are releasing more carbon than they store.[3] Deforestation may be a source of material company-specific risks, both for companies that impact deforestation and for those that depend on forests. Deforestation-related loss of biodiversity, especially pollinators, may jeopardize the global food system, which many of us are invested in. Agriculture depends on ecosystem services supported by forests: agricultural outputs are directly affected by the loss of forests’ cooling and water cycling services. Deforestation-related droughts have caused substantial effects to the food and agriculture industry, and this in turn affects stability of markets and our investments. We see the agricultural sector facing lower yields, stranded land assets, and market risks. Other water-intensive sectors such as tourism, metallurgy, energy and construction are also affected by droughts tied to deforestation. Pharmaceuticals also depend on forests, with over one quarter of all pharmaceuticals derived from the genetic compounds of wild plants.[4] Effects on each of these sectors hold serious consequences for global markets.

Companies involved in sourcing inputs and products from forests may face significant reputational risks associated with adverse human rights impacts. Tropical deforestation is driven primarily by the clearing for cultivation of cattle, soy, palm oil, wood products, cocoa, coffee, and rubber, and it is often associated with corruption, illegality, organized crime, and human rights abuses including violation of indigenous land tenure and rights, particularly with respect to human rights defenders. Human rights violations as agricultural expansion encroaches on indigenous territories carry a risk of social conflicts, violence and illegality, and therefore generate legal risks for companies sourcing forest risk commodities.

The global economy has been hit hard by COVID-19. It is thus noteworthy that by reducing deforestation this bill will reduce the likelihood of new global pandemics. Deforestation is linked to increased contact with wild animals, heightened risk of zoonosis, and risk of infectious diseases like COVID-19, SARS, MERS, and HIV. This reinforces the urgency of reversing deforestation. As investors, we support efforts to increase resilience against future pandemics, and this must include legislation to curb deforestation that drives outbreaks in the first place.

[1] The agriculture sector is responsible for most of the deforestation and is also the sector most reliant on other ecosystem outputs. See e.g. “Climate-Related Forest, Food, and Land Risks Threaten US Financial Stability,” by Climate Advisers. https://www.climateadvisers.org/wp-content/uploads/2022/01/Climate-Advi…

[2] Intergovernmental Panel on Climate Change, “Climate Change and Land: An IPCC Special Report on climate change, desertification, land  degradation, sustainable land management, food security, and  greenhouse gas fluxes in terrestrial ecosystems”, 2020. 

[3] Welch, Craig. “First Study of All Amazon Greenhouse Gases Suggests the Damaged Forest Is Now Worsening Climate Change.” National Geographic. Last modified March 11, 2021.

[4] See US Forest Service, https://www.fs.fed.us/wildflowers/ethnobotany/medicinal/index.shtml. “A full 40 percent of the drugs behind the pharmacist’s counter in the Western world are derived from plants.” Accessed March 2022.