Investors can help rid the automotive industry of its deforestation footprint
Rainforest Foundation Norway encourages responsible investors to join the Investor Working Group for a Deforestation-Free Automotive Industry.
DEFORESTATION: Deforestation in the Brazilian Amazon. Cattle ranching is the world’s largest driver of tropical deforestation. Photo: Victor Moriyama/RFN
The demand for automotive leather drives Amazon deforestation
The protection of tropical forests is crucial for the protection of global biodiversity, limiting climate change and protecting the rights of indigenous communities. There are no credible pathways to meet the objectives of the Paris Agreement without a full and global halt of deforestation, while tropical forests are also home to millions of people and two-thirds of terrestrial biodiversity. Climate change and biodiversity loss pose systemic risks to the global economy and investor portfolios.
Despite the high urgency of halting deforestation, annual global rates continue to remain high, with record numbers of forest destruction reported in the Brazilian Amazon. The production of soft commodities, including cattle, soy, palm oil, timber and rubber, constitutes the main economic driver of deforestation.
Cattle ranching is the world’s largest driver of tropical deforestation and is responsible for almost twice as much forest loss as the other top six forest risk commodities combined.
As an end product of Brazil’s cattle sector, leather hides are at risk of being linked to deforestation in the Amazon rainforest and other native ecosystems. Eighty percent of Brazilian leather is exported, and the use of leather car seats in the automotive industry accounts for half of these exports. Leather is not a waste product, but an essential part of the meatpacker value chain and many European industries.
As of 2021, the global leather industry is valued at US$408 billion. Profits from leather are crucial to businesses higher upstream in the leather value chain and play a key role in shaping the slaughter industry.
A failure to effectively address supply chain deforestation may constitute material risks to the automotive sector. These risks may include legal risks stemming from upcoming due diligence legislation in the European Union and other markets, market risks from changing consumer demands and reputation risks stemming from public perception. On the other hand, swift and meaningful action to address deforestation may create opportunities to ensure a robust supply chain, anticipate regulatory changes in key markets and enhance the sector’s public reputation. This opportunity may be greatest for the first movers.
Responsible investors have come together to collaborate on company engagements
Despite the urgency of the issue, there has been a notable lack of action from companies in the automotive supply chain. Only a few companies have made zero-deforestation commitments, and all related policies and systems fall short of best practices. There is a high level of market concentration in the car seat manufacturing sector, with only five stock-listed companies controlling a substantial market share. Institutional investors may therefore not only be exposed to deforestation risks in their portfolio through their holdings of companies in the automotive supply chain, but also have significant leverage to enhance sustainability in the sector.
Several investors have recognized this risk and have come together in the Investor Working Group for a Deforestation-Free Automotive Industry. This working group conducts collaborative engagement on deforestation risks stemming from the use of leather (for car seats) and rubber (for tires). The working group is open to new members.
The working group has formulated the following high-level asks to automotive companies, in line with the principles of the Accountability Framework:
- Publicly commit to a time-bound zero-deforestation supply chain and adopt responsible sourcing policies
- Set clear public expectations for suppliers on deforestation-risk management systems and disclosures
- Trace the leather and natural rubber supply chain beyond direct suppliers and provide transparency about the origin of leather and natural rubber products
- Systematically assess deforestation and other sustainability risks in supply origins
- Engage direct and indirect suppliers that face high deforestation risks and/or are non-compliant with sourcing policies
- Publicly disclose sufficient detail on deforestation risk management to CDP Forests or corporate reporting
RFN provides research and analysis of the deforestation risk of leather car seats
- In 2021, RFN mapped out the deforestation risk of the European car industry in the report Driving deforestation: The European automotive industry’s contribution to deforestation in Brazil. The report found that Volkswagen Group, BMW Group, Daimler, PSA Groupe* and Groupe Renault run a high risk of contributing to the deforestation of the Amazon rainforest, by sourcing leather from big clients of Brazilian companies linked to large-scale deforestation.
- Following the launch of the ‘Driving deforestation’ report, RFN developed an Investor Action Case that presents the most relevant findings of the report for institutional investors and lays out a number of key priority asks for responsible investor engagement.
- In November 2022, RFN released a scorecard together with Aidenvironment. The scorecard assessed the policies and practices of 15 companies in the automotive supply chain; 10 well-known car brands and five of its direct car seat suppliers, and systematically scored each of these companies against best practice indicators.'