Why deforestation policies mean stranded land assets

We’ve heard a lot about the threat of stranded assets in the fossil fuel industry with the world moving toward compliance with the Paris agreement on climate change. 

Renewables are poised to further penetrate the power sector, while electric vehicle uptake should revolutionise the transportation sector and reduce demand for petroleum-based fuels. But if this makes investors in fossil fuels nervous, will they pay attention to other sectors too? 

In fact, assets in the land sector are also likely to be at risk, as consumers, businesses and policy makers shift toward more sustainable food and agricultural development to reduce deforestation and mitigate other factors related to climate change. 

Investors are starting to become aware of deforestation as a climate risk. Major markets such as the EU are discussing bold initiatives to alter commodity trade, leading to the understanding that agriculture companies may see stranded assets as an implication of a Paris-compliant world.  

Conserving or protecting land through natural climate solutions could also change the value proposition for landowners and investors. If land has value as a forest it is less likely to be cleared for agricultural use. 

This model holds promise but needs to be scaled up from its current levels. Otherwise clearing land – where permitted – will remain the more attractive option. 

Quantifying stranded assets is a complex challenge. Work is underway to calculate the economic and financial impacts that stranded land may cause. For example, Climate Advisers Trust is working to translate the effects of the Paris agreement and Sustainable Development Goals investors in land and major commodities. 

We are beginning to see these stranded land sector assets. Undeveloped forest and peatland in Indonesia’s palm oil sector amount to stranded assets, according to a recent Chain Reaction Research report. 

And the impact is massive. More than 6m hectares in Indonesia, the world’s largest palm oil producer, are currently stranded due to the Indonesian government halting the issuance of new palm oil licenses, along with a moratorium on licenses for forest and peatland. That is 28% of the country’s landbank. 

The result: converting forest and peatland into oil palm concessions is not economically sustainable. Palm oil produced on this land carries the risk of being excluded from “no deforestation, no peat, no exploitation” (NDPE) markets. 

Companies could also face possible legal liabilities. As the risk of stranded assets materialises, the Indonesian palm oil industry may see lower growth and equity revaluations in the coming years. Illegal land conversion is a possibility, but fast-moving consumer goods companies and their consumers are becoming more aware of products that can be traced to deforestation. Therefore, they are becoming increasingly vigilant in keeping products connected to deforestation out of their supply chains.

The combination of Indonesia’s policy changes and companies adopting stricter sustainability measures has contributed to a decline of 50% in deforestation in the past two years, a large success story. 

This bucks the global trend, where deforestation is currently on the rise in key producer countries – as illustrated by the recent fires in the Amazon. But if other producer countries replicate Indonesia’s progress tackling deforestation and other climate risks from land use, and if consuming markets get even stricter about importing deforestation in consumer goods, the stranded land risk will only become a bigger challenge for global investors to contend with.