A new WWF cost-benefit analysis released today of Forest Stewardship Council (FSC) certification on a cross-section of forest operators finds that tropical and small or medium producers, regardless of geography, can benefit significantly from attaining FSC certification.
The Profitability and Sustainability in Responsible Forestry: Economic impacts of FSC certification on forest operators report found that on average, the companies examined earned an extra US$1.80 for every cubic meter of FSC-certified roundwood or equivalent, over and above costs associated with certification. The Net Present Value (NPV) of the decision to pursue FSC was, on average, $6.69 per cubic meter of roundwood or equivalent — a strong positive business case overall for the decision to pursue FSC. These outcomes were achieved through price premiums, increased efficiency and other financial benefits.
Results varied significantly by company size and geography. Tropical companies as well as small- and medium-size enterprises — regardless of geography — showed financial gains, while temperate and large producers were found to experience small losses. On average, it took the companies that were studied six years to break even on their investment in FSC.
"The results of WWF's new report challenge the assumption that the costs of FSC certification, particularly in the tropics, are greater than the benefits," said Rod Taylor, Director, WWF's Global Forests Program. "This study shows that while the investment costs of entering into an FSC certification process can be considerable, for tropical forest operators and small or medium enterprises, the investment can be good for the bottom line. This is an important finding given the crucial role of these groups in safeguarding forests for the future."
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The report is designed to help forest companies plan financially for forest certification, and provides important insight for forest companies and buyers of wood products, as well as governments, financiers and others with a stake in the impact of FSC certification.
"The methodology can be applied by a company on their own operations to do a practical calculation of what they would gain from FSC certification," Taylor said. "Advocates of responsible forestry need to support forest managers and investors with tools to assess where investing in certification brings most benefit. WWF has begun work on such tools but a broader alliance of partners is required to make these standard practice."
There is a noticeable gap in existing literature when it comes to quantitative and detailed analysis of FSC certification. WWF's report takes a new approach to analyze a wide range of quantitative and qualitative data that has been acquired in cooperation with forestry consultants Form Valuations B.V. The WWF study included research on 11 companies in seven countries, and explores whether there is an economic case for forest operators to adopt FSC certification, and for financiers to prefer it. Financial data was collected primarily through in-person interviews with company management, as well as a review of financial reports, audit reports and other supporting documentation.
Meanwhile, on the flip side, a report released last week by the United Nations Environment Program (UNEP) and and the Natural Capital Declaration highlights the critical need to fundamentally strengthen how financial institutions view, address and manage deforestation and degradation risks.
Bank and Investor Risk Policies for Soft Commodities revealed that the majority of major banks do not have policies requiring clients to comply with applicable local, national and ratified international laws and regulations related to forest conservation.
Of the 30 major financial institutions assessed by UNEP, most had had no mechanisms to promote sustainable forest conservation and only 13 percent had developed financial products specifically aimed at promoting the production of sustainable commodities. The report highlights policies that banks and investors can adopt to help reduce deforestation and forest degradation risks resulting from unsustainable practices across agricultural supply chains that are major drivers of tropical deforestation. An accompanying Soft Commodities Forest-Risk Assessment Tool provides a framework to evaluate policies adopted by banks and investors to address deforestation and forest degradation risk in the agricultural value chain.
"Addressing deforestation is high on the twenty-first century policy agenda,” said UN Under-Secretary-General and UNEP Executive Director Achim Steiner. “The continuing loss of the world's tropical rainforests represents a significant threat to the security of water, food, energy, health and climate for millions worldwide.
“Banks and investors who engage in the destruction of forests through their lending and investment practices expose themselves to potentially significant regulatory, reputational, legal, operational and market risks, which could affect the credit risks and market value of underlying assets. Financial institutions can and should be part of the solution should they decide to adopt the tools and mechanisms designed to curb deforestation and produce sustainable value chains for commodities," Steiner concluded.
The study, commissioned by the UN-REDD Program, was produced by the Natural Capital Declaration, a unique global finance-led and CEO-endorsed initiative co-convened by UNEP's Finance Initiative and the Global Canopy Program, that seeks to accelerate the integration of natural capital considerations into financial products and services such as loans, bonds and equities. The Natural Capital Declaration says the study and the tool can help financial institutions gain insight into criteria to address risks and opportunities linked to soft commodity producers, such as the potential to support sustainable production through financial products and services.
Banks and investors are encouraged to adopt internal policies and procedures to strengthen monitoring and management of risks linked to the financing of companies whose activities contribute to deforestation and forest degradation through their operations or supply chains.
Andrew Mitchell, Co-Director of the Natural Capital Declaration and CEO of the Global Canopy Program, says: "Financial institutions have a major role to play in curbing deforestation and in helping to accelerate the transition to new more sustainable practices. The NCD's new Soft Commodity Forest Risk Assessment Tool now gives them the means to update or develop soft commodity policies using the minimum and best-practice suggestions provided in the report."
Clearing forests for agriculture has become the single leading driver of deforestation globally. Recognizing the risks associated with destroying forests, a growing number of consumer goods companies have adopted no-deforestation sourcing policies for key ingredients, often in response to consumer and investor concerns. Kellogg, Procter & Gamble, Unilever, General Mills, Colgate and more have adopted no-deforestation sourcing policies for palm oil, which has been cited as the biggest driver of deforestation in Southeast Asia and parts of Africa and South America. But recognizing the need for stricter standards to ensure sustainability, institutional investors representing more than $4 trillion in assets in June joined over a dozen giants from the food/beverage and personal care industries to call on the Roundtable on Sustainable Palm Oil (RSPO) to strengthen its standards for certifying the sustainable production of palm oil.