The Potential Financial Impact of Forests-Related Risks in Indonesia Total US$10 Billion

  • The financial impact of forests-related risks estimated by companies producing, sourcing, or using palm oil from Indonesia has doubled in 2020 compared to the previous year.
  • From the 27% of companies providing financial estimates, the value of forests-related opportunities adds up to US$4.2 billion, of which 31% (US$1.3 billion) is reported to be very likely realized in the next few years.
  • 30% more companies disclosed through CDP in 2020, but this increased transparency amongst downstream companies has yet to cascade to upstream producers in Indonesia.
  • Of the palm oil companies located in Indonesia, only 9% reported their actions in a standardized way, providing limited visibility to assess implementation against corporate sustainability commitments on the ground.
  • Traceability to the plantation is critical for companies to effectively implement No Deforestation, No Peat, No Exploitation (NDPE) commitments. To date, not one company with 2020 target to trace 100% of their supply to the plantation has hit this goal.
  • Despite being a new approach, 8% specify using Jurisdictional/Landscape Approaches to promote the implementation of their policies and commitments.
  • 14% of companies are supporting or implementing ecosystem restoration and/or conservation projects in Indonesia. To improve the capacity of Indonesia’s forests to act as a carbon sink and biodiversity store, greater participation in restoration is needed.

Jakarta, 25th November 2020: New research from global environmental non-profit CDP finds that companies linked to the Indonesian palm oil supply chain estimate forest-related risks to potentially cost a total of US$10 billion in 2020. To mitigate these risks and access the financial opportunities that deforestation-free value chains offer, companies need to pair clear target-setting with collaborative implementation on the ground.

“Raising ambition towards sustainable palm oil in Indonesia” is the third instalment of CDP’s analysis of forests-related commitments and actions, based on self-reported data from 125 companies that produce, source, or use palm oil from Indonesia, out of the 687 companies that responded to CDP’s Forests questionnaire in 2020.

CDP unveiled its findings at the “Achieving a resilient and sustainable palm oil supply chain through private – public collaboration for sustainable development in Indonesia” webinar today. The webinar was held in partnership with Lingkar Temu Kabupaten Lestari (Sustainable Regency Platform/ LTKL) and highlighted the importance for companies to work in lockstep with regency governments towards shared sustainability goals.

Most companies (78%) identified at least one forest-related risk that has the potential to have a substantial financial or strategic impact to their business. The associated business risks of deforestation are significant, totalling more than US$10 billion. Given that less than half of companies disclosed financial information, this is likely to be an underestimate of the true potential impact.

However, mitigation responses cost an average of just 3% of the potential cost of the corresponding risk. Furthermore, risks can transform into opportunities: from the 27% of companies providing financial estimates, the value of forests-related opportunities adds up to US$4.2 billion, of which US$1.3 billion is very likely to be realized.

Traceability is critical in providing a degree of certainty that companies are not sourcing palm oil products from high-risk areas, consequently becoming a prerequisite for many corporate sourcing policies. More companies can trace their supply to the plantation level, from 10% in 2018 to 19% in 2020. Companies set ambitious targets as a guide to achieve greater traceability – however, companies aiming to trace 100% of their supply to the plantation by 2020 have yet to hit this goal.

To bridge the gap, companies need to consider the actions of all stakeholders within the palm oil supply chain. At present, 26% of companies sourcing palm oil products from Indonesia are not working with their direct suppliers to improve their capacity to supply sustainable palm oil, while 42% have yet to engage with smallholders to improve the sustainability of supply.

Companies seeking to remove deforestation from their value chains consistently reported the inherent complexity of the palm oil supply chain as a significant challenge, cited by 39% of companies in 2020. Jurisdictional Approaches are a promising tool in addressing this challenge, as this form of landscape approach unites all relevant actors within a political administrative boundary to co-develop goals, align activities and share monitoring and verification. The participation of jurisdictional governments reduces regulatory risk as companies are more likely to be aligned with upcoming regulatory requirements.

Although being a nascent approach, there are encouraging early signs that companies are using these initiatives in tandem with certification tools to increase the sustainability of their supply. 8% of companies had engaged specifically in a form of Jurisdictional Approach, predominantly through the RSPO Jurisdictional Approach to Certification and Produce, Conserve and Include (PCI). Such collaborations hold great promise in uniting cross-sector efforts to tackle deforestation and scale sustainable practices across Indonesia.

Restoration approaches such as set-aside land and agroforestry, which are often able to restore the natural function of ecosystems, increase biodiversity and improve their ability to provide essential ecosystem services complement such efforts to halt deforestation. 50% of companies producing, sourcing or using palm oil products from Indonesia are supporting or implementing initiatives that focus on ecosystem restoration and/or protection within some part of their global operations – 14% reported implementing or supporting 22 initiatives specifically in Indonesia, covering a total area of more than 17.8 million hectares.

Morgan Gillespy, Global Director, Forests at CDP, commented: “The rapid destruction of tropical forests and its ramifications is one of the most urgent environmental issues of our time; but efficient remedies cannot be formulated without a clear, data-based understanding of deforestation sources and impact measurement. Self-disclosure and transparency are not only at the heart of environmental protection but are business imperatives for companies to amplify competitive advantage and build resilience for a forest positive future.”

Pratima Divgi, Director, Hong Kong, Southeast Asia, Australia & New Zealand at CDP, commented: “Greater collaboration and innovative, multi-stakeholder approaches are necessary to achieve a sustainable palm oil value chain in Indonesia, and beyond. Through our data and insights, CDP aims to not only empower investors, companies, cities, national and regional governments in better understanding their deforestation risks, but more importantly highlight corrective remedies to build a thriving economy that benefits people and planet for the long term.”

Gita Syahrani, Head of Secretariat at Lingkar Temu Kabupaten Lestari, commented: “Our partnership with CDP underlines LTKL’s strong emphasis on multi-stakeholder, collective action to facilitate Indonesia’s sustainability journey. Building bridges between key stakeholders in sustainable commodities– including palm oil– at sub-national, national and global levels is achieved based on agreed shared targets and contributions. Strong stakeholder cooperation is the basis of reporting on shared progress and jurisdictional sustainability achievements, as mandated by national SDGs policy.”


This blog was originally posted in CDP Website. You can read it here. 

Suggested Impact Stories