Risk managers must intensify efforts to identify deforestation liability in supply chain

Companies involved in, or buying from, the $45bn global farmed-shrimp industry, have been warned that a lack of transparency about its role in deforestation, particularly across mangrove forests in southeast Asia, poses a massive financial risk as bodies turn their attention to implementing ecological limits and new rules to stem the destruction and penalise those responsible. The European Union is the world’s biggest market for the shrimp industry. It is stepping up efforts to stem supply of products that contribute to deforestation. Part of this will likely be to force European companies to boost supply chain analysis to make sure they are not knowingly or unknowingly supporting deforestation. Risk managers at European companies using any resources that could be extracted via deforestation in southeast Asia or any other part of the world, clearly need to keep a close eye on this area and open discussions with their supply chain, legal and procurement colleagues sooner rather than later. The warning about the exposure faced by investors, operators and customers of the farmed shrimp industry has been issued by Planet Tracker. It was launched in 2018 as a non-profit financial thinktank that aligns capital markets with planetary limits and investigates market failure related to ecological limits. The group first launched the Carbon Tracker Initiative and this was followed up by the Seafood Tracker Initiative. According to its report, mangroves are being proportionately destroyed at five times the rate of rainforests. It estimates that 30% of mangrove deforestation and coastal land-use change across southeast Asia is attributed to shrimp farming. Planet Tracker adds that if land use change is included in shrimp lifecycle assessments, shrimp places ahead of beef for greenhouse gas emissions on a per-kilogram-of-production basis. This is leading to a fast-rising financial and regulatory exposure for investors and operators in the sector, according to the report. “Historic and future mangrove deforestation, farm intensification and product oversupply are creating material financial risk for the farmed-shrimp industry, the world’s most valuable farmed-seafood commodity,” it states. “Critically, despite this risk, Planet Tracker found no evidence of reporting of either the mangrove deforestation or farmed-shrimp emissions by shrimp companies or the top 20 institutional investors exposed to these companies. This means that gross and net profit margins are unable to be accurately assessed due to low disclosure on shrimp-related revenues and costs,” it continues. As a result of this, investors face fast-rising values at risk because of recent regulatory changes, such as the EU’s communication on stepping up its action plan to protect and restore the world’s forests last July. This plan seeks to ban all deforestation-linked soft commodities, both historic and future. Many hope this will be followed up by legislation and even mandatory requirements on all EU companies to make sure they are not funding deforestation through their supply chains. Planet Tracker identified 27 publicly listed companies in its latest report that are involved in producing and processing farmed shrimp, with a combined market capitalisation of $102bn. Some $63bn of this is held by institutional investors. The majority of equity (61%) is held by the top 20 investors, primarily Japanese and North American. This includes leading Japanese and US institutional investors such as ITOCHU Corporation, Mizuho Financial Group, BlackRock and State Street. According to the paper, only four of the top 27 publicly listed shrimp-farming companies disclose shrimp-specific revenue and operating margins in income statements. “This disclosure gap could compound environment-related top-line revenue and gross profit margin risks,” according to Matthew McLuckie, director of research at Planet Tracker and one of the report’s authors. “Unless capital markets embrace greater transparency and disclosure, they risk higher exposure to production and price shocks due to nature-related supply- and demand-side constraints, exacerbating investors’ inability to calculate company valuations accurately,” he adds. The Planet Tracker briefing paper calls on investors to press the shrimp-farming industry to move to full transparency by publishing species-specific revenue and operating costs in income statements. It also calls for full traceability by providing independent accountability to clarify company exposure to mangrove deforestation, and full accountability by openly discussing the risks that companies face, from regulations to addressing deforestation-linked commodities.

Risk managers must intensify efforts to identify deforestation liability in supply chain

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