360 Report $Com panySectorName$ $StoryName$$ReportT ype$ Forest & land degradation Thematic & Impact Investing | Natural Capital 11 March 2016 Integrating landscape into investments What’s it all about? Alarming trends in global land use have been highlighted by a string of recent environmental disasters, such as Indonesia’s forest fires on palm oil plantations. This has added weight to the growing consensus that more should be done to rein in investment risks related to natural capital Main author degradation. Sustainable management of landscapes could help align the Samuel Mary economy with the 1.5-2°C goal heralded at the landmark COP21 summit, ESG Research while alleviating threats fuelled by deforestation, food insecurity, [email protected] biodiversity loss and water scarcity. We lay out a framework to navigate +44 (0) 207 621 5190 the underlying challenges for companies in the most sensitive sectors (consumer, extractives, etc.), which leads us to spot value-creation ESG research team opportunities for over 40 stocks and new impact investing vehicles. Biographies at the end of the report IMPORTANT. Please refer to the last page of this report for keplercheuvreux.com “Important disclosures” and analyst(s) certifications. This research is the product of Kepler Cheuvreux, which is authorised and regulated by the Autorité des Marché Financiers in France. Thematic & Impact Investing 360 in 1 minute Spotlight on a neglected trillion-dollar time bomb: land use About 33% of the world’s arable land is jeopardised by land degradation, triggering economic losses of USD6.3-10.6trn each year. Unsustainable trends in land use amid a deadly recent string of land-related catastrophes (BHP Billiton/Vale’s dam burst in Brazil’s worst-ever environmental disaster, Indonesia’s most severe forest fires on palm oil plantations) have led to an unprecedented recognition that the time has come to step up efforts to rein in investment risks related to natural capital degradation. Policymakers have woken up: COP21 and SDGs bolster case Against this backdrop, a series of complementary international initiatives has gathered momentum to prop up the case for both curbing the degradation of land and rehabilitating land. More importantly, sustainable management of landscapes is a pivotal cross-cutting objective to jointly tackle deforestation, water scarcity, food insecurity, biodiversity loss and soil issues using a ‘landscape approach’. Its landmark inclusion among the UN Sustainable Development Goals (SDGs) in September 2015 and landscape’s all-time-high role as part of the Paris Climate Agreement (COP21) signed in December 2015 marked major steps to galvanise bolder actions. Demystifying links with value drivers across high-risk sectors Momentum in land and forestry policy is opening up new opportunities for companies while they face mounting scrutiny on the back of natural- capital-oriented initiatives and heavily mediatised liability uncertainties. We provide a framework to map land risks and opportunities across most sensitive sectors’ value chains clustered into three groups: 1) agricultural commodities (e.g. consumer sectors); 2) land operators (e.g. construction, utilities); and 3) end-market exposure (e.g. chemicals, capital goods). Companies spearheading natural resource valuation Our thorough review of over 40 companies leads us to pinpoint cases to watch and innovative best practices paving the way for an alignment between natural resource protection and sector value drivers, through funding (e.g. Danone), restoration (e.g. April Group, SCA, Stora Enso, Suzano), state-of-the- art reporting tools (e.g. Kering), and evidence of support for sustainable land management (e.g. Iberdrola, Nestlé, Syngenta). When impact investing meets forest and landscape restoration While USD2bn is needed every year to support land restoration activities, a wave of pioneering impact investing vehicles is ramping up to foster bankable projects at the landscape scale. We highlight the most important synergy sources for companies, e.g. enhanced supply chain management. 2 keplercheuvreux.com Thematic & Impact Investing Contents Foreword 6 Monique Barbut, Executive Secretary, United Nations Convention to Combat Desertification (UNCCD) 6 Executive summary 9 An investor guide to integrating sustainable landscape issues 20 The land degradation time bomb 22 Land degradation: an underrated trillion-dollar issue 22 Mounting risks of stranded assets in forestry and agriculture 25 The case for land rehabilitation: a powerful climate lever 27 How to seize this global restoration potential? 30 Towards land degradation neutrality 34 Strong policy momentum to unlock this opportunity 34 Mainstreaming the ‘landscape approach’ 37 A pivotal role to advance international sustainability goals 38 Country land use profiles: a tentative mapping 40 How to finance sustainable landscapes 43 Seizing land rehabilitation impact investment opportunities 43 The Land Degradation Neutrality (LDN) Fund project 47 Potential synergies with climate finance and companies 49 Land use business case: company focus 55 Investors increasingly looking at natural capital damage 55 How to map companies’ land use profiles? 59 Deconstructing companies’ land profiles: 1) Risk exposure 64 2) Leadership: key options to mitigate risks 71 3) Enabling factors and sustainable landscape finance 72 Agricultural and forestry commodities 77 Macro view on land materiality across consumer sectors 78 Shedding light on commodity and deforestation risks 83 Exposure: the business case for LDN 85 Outlook for land degradation and commodity prices 89 Best practices supporting Sustainable Land Management 91 Reporting KPIs: new trends making inroads 94 3 keplercheuvreux.com Thematic & Impact Investing Spotlight on commodities 103 Breaking persisting stumbling blocks to sustainable sourcing 119 Land operators and end-market exposure 122 Construction and infrastructure 122 Utilities 134 Chemicals 138 The road ahead: enabling factors 142 Regulation: main sticking points 142 Investors: towards natural capital risks portfolio assessment 147 Corporate: in transition 148 Stock profiles 155 Notes on the methodology to map company land profiles 155 Cluster 1: Agricultural and forestry commodities 158 Adidas Group 159 Ahold 160 Barry Callebaut 161 Carrefour 162 Coca-Cola Hellenic 163 Delhaize 164 Hugo Boss 165 Jeronimo Martins 166 Kering 167 Lindt & Sprüngli 168 Nestlé 169 SCA 171 Suedzucker 173 Symrise 174 Tesco 175 Vallourec 176 Cluster 2: Land operators 177 CRH 178 EDP Renovaveis 179 Elia Group 180 Enagas 181 4 keplercheuvreux.com Thematic & Impact Investing ENI 182 ERG 183 Fortum 184 Galp Energia 185 Hochtief 186 Iberdrola 187 Nordex SE 188 Skanska 189 SNAM 190 Statoil 191 YIT 192 Cluster 3: End market exposure 193 Arcadis 194 KWS Saat 195 Syngenta 196 Engagement questions 197 Appendix 204 Sources 209 Glossary 212 Research ratings and important disclosures 217 Legal and disclosure information 220 5 keplercheuvreux.com Thematic & Impact Investing Foreword Monique Barbut, Executive Secretary, United Nations Convention to Combat Desertification (UNCCD) With an expected 9.5bn people living on Earth by 2050, population pressure, higher consumer expectations and climate change will tax and degrade our natural resource base, especially land. The vast capacity to transform the natural environment and the services it provides, has already had untold repercussions for the entire planet. Faced with the challenges of land degradation and drought that is set to leave millions hungry, homeless, destitute and defenseless, this report has laid out some of the challenges for businesses in the most sensitive sectors. Our societies need us to find the will and secure the financial resources to restore degraded land. From the local to the global level, efforts to create healthy and resilient landscapes are being increasingly recognised as crucial for economic growth and prosperity. With an increasing awareness of the potential of land to meet public and private development goals, investments that restore and maintain the productive capacity of land in the framework of the Land Degradation Neutrality (LDN) target recently adopted by the UN General Assembly, become ever more attractive. Sustainable land management can be profitable at all scales, while generating considerable environmental and social benefits. However, to realise their full and true value, land-based investments have to become smarter and more effective; integrated and inclusive. By 2030, we can have a world where we no longer degrade land. Instead, we can restore more land than we use annually. It is the simplest response to our pressing global challenges. It is a recipe for sustainable growth. I invite our private sector partners to join us in this journey. 6 keplercheuvreux.com Thematic & Impact Investing Contributors Kepler Cheuvreux ESG analyst Julie Raynaud ([email protected]) contributed significantly to the macro and reporting sections on natural capital in this report, along with equity analysts covering the companies mentioned throughout this report. Additional input provided by Philippe Mizrahi. Acknowledgements For sharing their experience in interviews, and providing feedback in the writing of the report, we wish to thank: Yvonnick Huet, CEO, Agrisud. Dr Jake Reynolds, Director, Sustainable Economy, Cambridge Institute for Sustainability Leadership (CISL). A. L. Hoare, Senior Research Fellow, Energy, Environment and Resources, Chatham house. Cecile Lachaux,