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Published 15.10.2018 by Matthew Smith. From The Solutions Magazine, Autumn Edition 2018

Deforestation is not a new issue. Great Britain lost its oak forests to the construction of ship masts for the burgeoning British shipping industry 400 years ago. However, the economic development of Emerging Markets over the last 25 years has driven deforestation on an unprecedented scale. In Brazil, 17% of the Amazon rainforest has been lost over the past 50 years. Meanwhile, in countries like Cambodia and Thailand, only small pockets of the forest that previously covered almost the entire country remain. The steadily increasing production of red meat, soya beans, palm oil and timber has meant that the negative trend of forest loss continues unabated.

Commitments to our clients over the next 20-40 years

For institutional investors like Storebrand Asset Management, the destruction of the natural environment is very much our problem. With commitments to clients over the next 20, 30 and 40 years, we as a company are not only dependent on economic growth now, but on sustainable growth throughout the century. Without it, our clients will suffer directly through lower returns on their investments and a less secure financial retirement. 

A race to the bottom?

Since the 1980s, the world economy has seen almost constant growth, thanks to a potent mix of de-regulation, free trade and efficiency gains. The main advantage of such a free and unregulated economy is competition, and its ability to channel resources to where they can be used most effectively. Unfortunately, this strength is also a catastrophic weakness. Unbridled enterprise has in many areas led to a race to the bottom, where short-term return on capital has trumped the long-term sustainable use of resources. Forests are perhaps the best example of this development. Their rapid destruction has enabled explosive economic growth in many countries in desperate need of development. The flipside is that this growth is based on the exploitation of finite resources. When the resources are gone, so is the growth, leaving local populations with a degraded natural environment that only inhibits further development. A world struggling with polluted fresh water, degraded forests, poor soil and an overheated and unstable climate is also a world that will struggle to maintain consistent economic growth, to the detriment of all.

It is easy to become disillusioned in the face of such a fundamental challenge to sustainable development. No one organisation, government or company can alone make a dent in the rate of deforestation. For Storebrand this realisation has led us to seek strength and influence in numbers. We have recently joined the PRI (Principles for Responsible Investment) working groups for soya, cattle and palm oil. This means that together with other large investors, we can put pressure on companies in these industries to manage the forests they operate in a more sustainable and long-term way.

In this edition of Solutions, we focus particularly on one of the main drivers of deforestation in South-East Asia, namely palm oil production. Two of our analysts recently toured palm oil plantations in Indonesia, met with companies operating in the area and visited indigenous peoples dependent on the forests for their livelihood. They returned with both a better understanding of the problems associated with palm oil and a renewed sense of urgency that we hope will be contagious.

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