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By Sharon Kimathi, Energy and ESG Editor, Reuters Digital

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This week, companies and countries are struggling to comply with a recent wave of European Union climate change legislation. Investors in consumer goods makers are threatening to quit their investments if firms cannot comply with the new deforestation law, whilst Poland continues to argue against the EU’s recent ban on combustion engines by 2035.

As a new European Union zero-tolerance deforestation law looms, several major investors told Reuters they are concerned about their exposure to the issue, with some saying they could quit consumer goods makers with “risky” supply chains.

The EU agreed in December a new rule to prevent companies from selling into its market coffee, beef, soy, rubber, palm oil and other commodities linked to deforestation.

The legislation is expected by lawmakers to be implemented by the end of 2024 for “big operators”. Companies must prove their supply chains aren’t contributing to the destruction of forests or be fined up to 4% of their turnover in an EU member state.

Charred logs are seen on a stretch of the Yari plains, recently burned for pasture, in Caqueta, Colombia March 3, 2021. Picture taken March 3, 2021. REUTERS/Luisa Gonzalez/File Photo

“The fines can be a risk for the performance of these companies in the stock market,” said Henrik Pontzen, head of ESG at Union Investment, which has about 424 billion euros ($467 billion) in assets under management and stakes in Nestle, Pepsico, Danone, Beyond Meat and L’Oreal.

An internal Union Investment document seen by Reuters shows that the firm received just 30 responses to its outreach. Of those, only 14 companies said they had zero-deforestation goals.

“As a major investor, this is very atypical,” said Pontzen. “Typically, we receive an answer from any company we write to. Maybe the reason for not answering is they don’t have anything to say.”

Magdi Batato, head of operations at Nescafe and Kit Kat owner Nestlé, thinks the rules are “maybe” a little ambitious. “There is still work to be done (in the industry),” he said.

Norway’s sovereign wealth fund, NBIM, one of the world’s largest investors with over $1.3 trillion in assets under management, said the rules will impact firms that haven’t prepared for it.

“If things don’t change, we can exclude companies,” said Arild Skedsmo, a senior analyst at Norway’s largest pension fund KLP. “The EU rules make deforestation a financial risk as well as an environmental risk.”

Meanwhile, Poland is appealing against European Union rules to end the sale of fossil fuel cars across the bloc from 2035 to the top EU court within days, according to the country’s climate minister Anna Moskwa.

A package of EU regulations approved earlier this year aims at launching a new carbon market to rein in emissions from buildings and transport, cutting carbon emissions from passenger cars and vans to zero from 2035.

Poland has been the only country consistently opposing the proposal and voted against the rules, arguing they lacked a proper analysis of market and social consequences of the ban.

A demonstrator looks on during a rally to mark the International Women’s Day in Buenos Aires, Argentina, March 8, 2023. REUTERS/Cristina Sille 

ING Economist Thijs Geijer shares his research findings on the EU deforestation law’s impact on commodities companies’ sourcing:

“The EU’s deforestation regulation raises the bar for sustainable sourcing of several commodities and will impact many food companies in some way.

“Deforestation in large countries such as Brazil and Indonesia often attracts headlines because both countries are major agricultural exporters and have high absolute levels of forest loss. Meanwhile, other countries have much higher relative deforestation rates.

“As such, the regulation could have a more pronounced impact on European leather imports from Paraguay and coffee imports from Uganda than on soy imports from Brazil or palm oil imports from Indonesia.

“It’s good to keep in mind that the rate of deforestation will be one of the criteria used to determine the country’s risk classification. Other criteria include the effectiveness of national policies and the participation in international agreements against deforestation.

“However, deforestation is often very concentrated in so-called ‘deforestation fronts’ within countries (see WWF). So national risk classifications only tell part of the story – even in high-risk countries there will be regions where risks are low or negligible.

“We don’t expect major geographical shifts in trade flows towards the EU in the short term. But when retrieving origin information from current suppliers proves too costly, or when deforestation risks are too high, companies will have to adapt their sourcing.”

Members of Climate Action 100+ (CA100+), the largest investor coalition focused on convincing the corporate world to act on climate change, rarely flex their muscles to pressure the worst polluters, an analysis of shareholder voting records and interviews with members show.

Shareholder voting data reviewed by Reuters shows that investors in the group refrain from using the biggest weapon in their arsenal – the ability to vote against board directors – even when the polluting companies refuse to act.

A young grey mangrove can grow in highly saline water most commonly in the UAE, at the Eastern Mangrove National Park, in Abu Dhabi, UAE, June 5, 2023. REUTERS/Rula Rouhana

Today’s Spotlight focuses on the efforts to save coastal mangroves in the United Arab Emirates, while a drugmaker switches to biogas to cut its emissions in the United States.

Against the heat, urbanization and sand of the United Arab Emirates, the placid, muddy waterways of the Gulf state’s coastal mangroves are being restored and planted in an ambitious fight against climate change.

Tropical mangrove forests are complex ecosystems anchored around mangrove trees that thrive in inhospitable hot, muddy and salty conditions. They protect coastal communities against storms and floods, host diverse and threatened species and can soften climate change by capturing atmospheric carbon.

A company logo is seen at the AstraZeneca site in Macclesfield, Britain, May 11, 2021. REUTERS/Phil Noble/File Photo

Drugmaker AstraZeneca is switching to biogas produced from cow manure and food waste in the United States, it said, in a deal to cut its carbon emissions there.

The Anglo-Swedish drugmaker said the long-term agreement with Massachusetts-based Vanguard Renewables would enable it to transition to biogas from natural gas and cut its emissions across its U.S. research and manufacturing sites.

“Doing the right thing costs a little bit more, but it is not punitive,” said Pascal Soriot, chief executive of AstraZeneca, which makes 26 medicines in the United States.

“Young people are not only future world leaders but also today’s leading voices for sustainability and climate justice. But they need the help of older generations, educators and corporations to learn how to become more knowledgeable through trusted sources, how to advocate effectively and how to partner with allies.”

Asheesh Advani, CEO of global non-profit, JA Worldwide 

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