December 15, 2020
Investors know that deforestation creates risks in several ways, but are they aware of how non-environmental laws can impact their portfolios?
Forests are the lungs of the world, but those lungs are shrinking. Every day, we lose 81,000 hectares (200,000 acres) of rainforest. Around the world, forest peoples, biodiversity, and our planet’s climate are being threatened by deforestation.
Deforestation is more than a global climate problem that requires strong action; it also poses financial risks for all categories of asset owners and managers around the world, both because it creates significant risk to returns and because it poses potential legal liability.
Many investors never realize the fact that they provide capital to deforestation, nor the level of exposure their investments have. Many more may not understand that illegal deforestation and related forest crimes create risks to their financial, legal, and reputational standing. Despite strides forward, a persistent lack of transparency in the supply chains of sectors most at risk of illegal forest clearing – cattle, oil palm, soy and timber – means that investors may remain in the dark about the extent of their exposure to material financial risks from deforestation through the companies they invest in.
Lack of awareness does not protect investors from potential liability – either through direct legal scrutiny, the financial impacts of investigations, or litigation concerning companies to whom they provide capital. Investors should therefore take these risks seriously.
In 1931, after years of investigation by law enforcement at all levels, notorious American gangster, Al Capone, was imprisoned. He was not indicted on the grounds of his violent and murderous leadership of Prohibition-era criminal rackets, but for the financial offense of tax evasion. This is an example of “strategic litigation” – the creative use of laws to charge defendants who may be guilty of far more serious core offenses with financial crimes that are simpler to prove. It is still in use today.
This strategy is an example of litigation that can create societal change and a similar strategy can be used to go after bad actors committing forest crimes, as Climate Advisers has previously highlighted with U.S. law. Our new research, done in collaboration with ClientEarth, shows that several European jurisdictions have extraterritorially applicable laws that can also be used to hold bad actors accountable. In analyzing both civil and criminal laws in France, Germany, and the UK, certain themes emerged that investors should pay particular attention to:
Each of the jurisdictions researched poses a unique risk:
These top risks are illustrated in the table below.
In conclusion, there are two areas of significant concern for asset managers and owners – the presence of forest crime in their investment portfolio and the legal, financial, and reputational risks that forest crime presents in the U.S. and certain jurisdictions in Europe. Investors should understand these broad legal risks so they can ask more of the companies they invest in and avoid these risks before they face the ramifications of investigation or even litigation.