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How Ending Tropical Deforestation Can Keep Global Warming Below 1.5°C

In the case of global warming, a few degrees make all the difference.

The United Nations’ latest IPCC report emphasizes that the Earth is on a collision course with catastrophic climate change—that is unless, in line with the 2015 Paris Agreement, the global rise in temperatures can be limited to 1.5°C.

To achieve this however, the world will need to significantly reduce its carbon emissions. Today’s graphic from The LEAF Coalition highlights how protecting forests is essential to this process.

Tropical Deforestation: A Carbon Emissions Culprit

According to the World Economic Forum, to keep to a 1.5°C pathway by 2030, we’ll need to cut greenhouse gas emissions in half. For this trajectory to be maintained in 2050, emissions need to be completely eliminated.

However, tropical deforestation accounts for 10% of global carbon (CO₂) emissions today, which is comparable to the emissions outputs of entire countries.

In fact, combined emissions from tropical tree cover loss, including activities of deforestation, rival annual emissions from major emitters, coming in third just after China and the United States.

Protecting Forests is Key

The urgency of ending tropical deforestation to curb emissions cannot be understated. If in the previously mentioned 2030 scenario, it is assumed that emissions have already dropped steeply, deforestation today would still need to be cut by 75% in order to maintain the possibility of keeping to the 1.5°C pathway.

However, there’s a significant barrier—the FAO estimates that we are losing 10 million hectares of forests every year. To put that into perspective, that’s a loss equal to the size of New York’s Central Park every 18 minutes.

For these crucial reasons, urgent collective action is needed to protect forests. Find out how The LEAF Coalition, a public-private initiative is bringing together businesses to do more to fight climate change and halt tropical deforestation.

ESG Data: The Four Motivations Driving Usage

Data is key to the environmental, social, and governance (ESG) revolution. Access to granular ESG data can help boost transparency for market participants. Unfortunately, 63% of U.S. and European asset managers say a lack of quantitative data inhibits their ESG implementation.

Being clear on the potential application of this data is equally important.

• Investors and banks can use ESG data for risk assessment, to spot opportunities, and to push companies for change.
• Companies can publish their own ESG data, quantify progress on their ESG goals, and use data to inform decisions.
• Policymakers can use ESG data to inform regulatory frameworks and measure policy effectiveness.

This graphic from ICE, the second in a three part series on the ESG toolkit, explores four primary motivations of ESG data users.

1. Right Thing

The objective: Having a positive social or environmental impact.

For investors, this can involve screening out companies that conflict with their values and selecting companies that align with their ESG objectives.

As another example, it can involve comparing the social impact of municipal bonds. One way investors can measure social impact is through scores that quantify the potential socioeconomic need of an area, using metrics like poverty and education levels. Here are the social impact scores for three actual municipal bonds issued in Florida.

Issuer #1’s bond is projected to have a community impact that is nearly twice as high/positive as Issuer #3’s bond.

For companies, doing the right thing can include assessing their progress on ESG goals and benchmarking themselves to peers. For example, gender and racial representation is a growing area of focus.

2. Risk

The objective: Managing ESG risks, such as climate and reputational risks.

For investors, this can involve back-testing or analysis around specific risk events before they materialize. Here are the risk profiles of two actual municipal bonds in California. The shown bonds are practically identical in many ways, except their wildlife score.

Managing ESG risk can also involve analyzing a company’s policies and governance for weaknesses. This is important as an ESG controversy can have long-lasting effects on the valuation of a company.

In one study, companies with ESG controversies dropped more than 10% in value relative to the S&P 500. They hadn’t fully recovered a year after the incident.

3. Revenue

The objective: Targeting outperformance through ESG analysis.

Selecting companies with strong ESG data can align with long-term growth trends and may help boost performance. For heavy emitting industries, research indicates that European companies with lower emissions trade at much higher valuations. The chart below shows companies’ price-to-book ratio relative to the Stoxx 600* sector median.

*The Stoxx 600 Index represents large, mid and small capitalization companies across 17 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

Energy companies with low emissions trade at a valuation nearly two times higher than energy companies with high emissions.

4. Regulation

The objective: Understanding and complying with relevant ESG regulation.

The International Sustainability Standards Board has announced a global reporting proposal aligned with the Task Force on Climate-related Financial Disclosures (TCFD). In addition, a growing number of jurisdictions will require organizational reporting that aligns with the TCFD.

• Brazil
• European Union
• Hong Kong
• Japan
• New Zealand
• Singapore
• Switzerland
• UK

Not only that, a European Union regulation known as Sustainable Finance Disclosure Regulation (SFDR) came into effect in 2021. It seeks greater transparency in disclosures from firms marketing investment products. Even firms located outside the EU could be impacted if they serve EU customers. In total, the market cap of these non-EU companies exposed to SFDR amounts to $3.2 trillion.

Matching ESG Data with Motivation

There will be growing demand for transparent data as ESG investing flourishes. To remain competitive, investors, policymakers, and companies need access to ESG data that meets their unique objectives.

In Part 3 of the ESG Toolkit series sponsored by ICE, we’ll look at key sustainability index types.