In the fight against deforestation, companies can turn to due diligence tools

By Nadine Kochanski

Behind every deforestation struggle is a global supply chain. The demand for commodities in one place can lead to the loss of forest in another, particularly when forest area is converted to other land uses such as agricultural production. This column looks at how the OECD Guidelines for Multinational Enterprises and related due diligence guidance can help companies understand how they can address deforestation and forest degradation in their business operations, supply chains and relationships.

According to the 2020 FAO Global Forest Resources Assessment, since 1990, an estimated 420 million hectares of forest have been lost to deforestation worldwide – of which more than 90% in the tropics. Although the rate of deforestation has slowed over time, around 10 million hectares are still being destroyed on average per year. Halting the destruction and degradation of forests remains a global challenge requiring further action from various actors, including business.

Environmental research suggests that agricultural expansion is the most significant driver of global deforestation and accounts for an estimated 73% of tropical deforestation, of which 40% is linked to large-scale commercial agriculture and 33% to small-scale subsistence farming. Recent reports illustrate that only seven commodities (cattle, palm oil, soy, cocoa, rubber, coffee and plantation wood fiber) were responsible for the loss of an area twice the size of Germany between 2000 and 2015. As deforestation results in the loss of intact ecosystems and habitats – and at the same time releases CO2 stored in forest biomass – forests play a crucial role in both the climate and biodiversity crises.

Forests are also key components of a resilient global economy. At the firm level, companies whose operations, supply chains and business relationships are associated with deforestation and forest degradation not only put the environment at risk, but rely on unsustainable practices that can pose long-term risks to their business if the nature they depend on deteriorates.  As we seek to protect forests, companies need to consider the adverse impacts that their actions and business relationships might have on these ecosystems. While conservation, afforestation and reforestation measures are needed, preventing and mitigating deforestation and forest degradation risks along supply chains is a critical part of the solution.

Increasing expectations towards business to address deforestation risks

As commodities driving deforestation are traded on a global scale, producing and importing countries share responsibility to address both legal and illegal deforestation. Current legislative developments increasingly encompass the management of environmental risks and impacts, including or specifically targeting deforestation and forest degradation and supply chain due diligence.

The European Union (EU) recently announced plans to introduce mandatory rules requiring companies to carry out environmental and human rights due diligence. In addition, the European Parliament has called on the Commission to initiate a legal framework to halt and reverse EU-driven deforestation (within and outside the EU) based on mandatory due diligence for those companies bringing forest and ecosystem-risk commodities to the EU market. The Commission is currently preparing the regulatory proposal and considers a mix of mandatory rules and voluntary partnerships, such as trade agreements, to promote deforestation-free supply chains.

Moreover, the United States is currently preparing legislation to address deforestation using a demand-side approach. The draft bill entails a prohibition on importing deforestation risk-commodities produced on illegally deforested land (applying to land deforested after the Bill is enacted), enhanced due diligence rules related to declaration requirements for importers, work with countries committed to halt illegal deforestation and a federal procurement preference for deforestation-free contractors.

In 2020, the United Kingdom also introduced legislation through the Environment Bill to prohibit business from using “forest risk” commodities or commodities that cause wide-scale deforestation, which would mandate larger companies to conduct supply chain due diligence and public reporting on risks of illegal deforestation. Other stakeholders and reports are calling for a smart mix of options going beyond regulatory approaches to account for diverse contexts and conditions across countries.

How OECD tools and instruments contribute

The OECD Guidelines for Multinational Enterprises and related due diligence guidance for responsible business conduct (RBC) provide recommendations for how companies can identify, prevent and mitigate adverse impacts of business activities across global supply chains. The sector specific OECD-FAO Guidance for Responsible Agricultural Supply Chains, provides a 5-step due diligence framework to identify, prevent and address risks in the sector. However, in practice, many businesses struggle to understand how specific risks – such as deforestation and forest degradation – can manifest through their supply chains and what practical actions they can take to address and mitigate these impacts through risk-based due diligence.

To address this gap, the OECD and FAO are developing a practical tool for the agriculture sector, with support from the German Federal Ministry for Economic Cooperation and Development (BMZ) and GIZ, to help business integrate deforestation and forest degradation considerations into RBC risk management processes. This new tool for business will be complementary to the OECD-FAO Guidance for Responsible Agricultural Supply Chains, provide practical examples of risks and due diligence actions that can be taken and refer to standards, initiatives, tools, data and other approaches that are already available.

Stakeholder discussions at the  2021 OECD Global Forum on Responsible Business Conduct advanced the development of this practical tool.

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