mso.msc@cbs.dk

By Kristjan Jespersen and Kedar Uttam

Leading the fight against deforestation

Funded by European Commission’s Erasmus+ Programme

A concerning trend has emerged as various forests worldwide face severe deforestation to make way for the expansion of agricultural activities intended for the production of  specific commodities like palm oil, soy, beef, and coffee. These commodities, aptly termed forest risk commodities (FRCs), bear this nomenclature due to the inherent risk they pose to the very ecosystems and climate upon which we depend.  They pose a risk to the forests and the climate. Notably, the European Union (EU) stands as one of the primary consumers of FRCs, with its demand intricately linked to a staggering 16% of the global deforestation – an area almost the size of Luxemburg. Therefore, the EU needs to ensure that the FRCs it imports are not causing harm to the environment and the people who depend on it. This is not an easy task, because deforestation is often considered to be a forestry problem without acknowledging its connection to the way we grow food, trade goods, and consume products, all along the supply chains that bring them to us. Deforestation is rather a complex problem that involves many different factors, such as agriculture, trade, consumption, and governance. This complexity should also be reflected in the education and training programmes, offered by universities and vocational schools. Thus, students and professionals must be equipped with the knowledge and skills necessary to traverse these diverse domains, bridging the chasms between sectors and fundamental disciplines, including compliance, technology, and corporate social responsibility. These proficiencies are pivotal in paving the way for the creation of deforestation-free supply chains (DFSCs). Most collective commitments by both private and public entities to achieve DFSC have proven ineffective in reversing the trend. Consequently, the European Commission (EC) has recently given its approval to the EU Deforestation Regulation (EUDR), which aims to prohibit the import of FRCs) originating from land deforested after 2020. Given these circumstances, there is a clear need for innovative approaches in the realms of education, training, and capacity development aimed at mitigating deforestation risks within the supply chains of FRCs in the EU.

The pressing need to address deforestation is at the forefront of our collective consciousness, and it is this very need that drives the mission of EMMA4EU. This visionary project seeks to combat deforestation by creating an EU alliance of universities, vocational schools, businesses, public organisations and NGOs, to develop innovative training solutions for a new profession: the deforestation-free supply chain (DFSC) manager. Armed with a specialized skillset of comprehensive knowledge, the DFSC manager will possess the skillset and knowledge to ensure that the FRCs imported by the EU are produced in a sustainable way, without causing deforestation or violating human rights. The DFSC manager will also be able to use digital and green technologies to improve the efficiency and transparency of the supply chains, and to comply with the EUDR. Through the creation of this innovative profession, EMMA4EU will catalyze the transition toward a greener and more circular economy, facilitating the EU’s journey to meet its climate targets and attain climate neutrality by the pivotal year 2050.

The Copenhagen Business School (CBS) actively engages as a part of the EMMA4EU consortium, which consists of 11 partners from different countries and sectors. Our core role within this visionary initiative encompasses the assessment of training and implementation activities, as well as the critical management of process-oriented activities, including project oversight, dissemination, and communication. By diligently gathering and scrutinizing data from our fellow partners, we remain poised to offer crucial feedback and interventions to ensure the project adheres to its work plan and schedule. In tandem with our consortium counterparts, we contribute to the development of a comprehensive research and assessment framework, involving an exhaustive review of the prevailing scientific literature and knowledge related to impact assessment and Environmental, Social, and Governance (ESG) dimensions, encompassing metrics and biodiversity-related financial risks within the realm of Deforestation-Free Supply Chains (DFSCs). Additionally, we play an integral role in enhancing the training materials by constructing teaching cases centered on the intricate issue of deforestation. In a collaborative effort with the University of Freiburg, we are committed to crafting an EU innovation report that delves into the myriad factors influencing the efficacy, or lack thereof, in DFSC regulation, including the exploration of business models and associated tools. Through these multifaceted endeavors, CBS and its consortium partners are firmly committed to advancing sustainable and ecologically sound practices, aligning with the broader mission of ecological economics.

Photo Caption: First in-person EMMA4EU partners’ meeting at Villa Parlo Bolasco in Castelfranco Veneto, Italy held between 2 and 3^rd November 2023. 

Kedar Uttam is a postdoc at CBS, Kedar analyzes the integration of environmental, social, and governance (ESG) factors in ocean financing and the role of institutional work in marine conservation finance. Additionally, Kedar is actively engaged in developing business cases for the ocean economy and ESG curricula. He has a background in Environmental Engineering and PhD with specialization in Environmental Management and Assessment.

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics.

By Antonia Föger, Sebastian Rottensten Wieghorst and Prof. Kristjan Jespersen

Our world’s oceans cover more than 70% of the Earth’s surface and represent one of its most critical ecosystems. They absorb around 90% of global excess heat, provide food and employment for millions of people worldwide and create economic value that is comparable to the world’s seventh largest economy. Recognizing the importance of oceans for the environment, society, and the economy, it is surprising that investments in sustainable ocean initiatives, often termed ‘blue finance,’ lag behind land-based counterparts. SDG 14, focusing on ocean-related sustainability goals, receives the least public funding among all Sustainable Development Goals. Additionally, in the realm of ESG investing, oceans are yet to receive the attention they deserve.

This imbalance can be attributed to several barriers in ocean investment. A significant issue is the lack of relevant ESG data and ‘blue metrics’ for evaluating the impact and risk of ocean-related investments. Currently, ESG data providers do not offer sufficient ocean-focused scores and indicators, hindering the assessment of a company’s conduct in terms of ocean health, including marine pollution, overfishing, or operations in marine protected areas. Moreover, private and institutional investors often perceive ocean-positive investments as riskier and lack viable investment frameworks.

To address these gaps, our Master’s Thesis, supervised by Kristjan Jespersen, conducted a study analyzing the performance of three self-constructed ocean sustainable public equity portfolios using various ESG investment strategies. We tackled the lack of ocean-specific sustainability data by creating our own Ocean Impact Score (OIS). We assessed natural impact drivers for each GICS sub-industry, aligned with the TNFD framework, and overlay this with industry assessment using the ENCORE tool. We then matched these material ocean impact drivers with available environmental scores at Refinitiv to create the OIS.

Our study evaluated the financial and OIS performance of these portfolios compared to the market. We explored three ESG investment strategies commonly used: negative screening, best-in-class, and ocean tilt. These strategies demonstrate how to integrate OIS data, along with their benefits and potential pitfalls, while comparing them to the MSCI All Countries World Index (MSCI ACWI).

Our results indicate that investors can enhance the ocean sustainability of their portfolio without sacrificing risk-adjusted financial performance. All three ocean portfolios consistently outperformed the benchmark in terms of OIS performance, with the negative screened and best-in-class portfolios showing superior financial performance in seven out of nine analyzed years. We also identified small but significant alpha values of 1.1% and 1.0% in the two portfolios, suggesting that screening companies based on ocean impact performance can yield positive abnormal returns compared to the MSCI ACWI. While our study does not establish a direct causal link between ocean sustainability and financial performance, it demonstrates that integrating ocean sustainability in investment decisions does not necessarily result in lower returns.

An interesting observation is that none of the three ocean portfolios showed improvement in their Ocean Impact Score over time, while the benchmark consistently improved year after year. This raises questions about what ESG score improvement actually measures. The limited ESG disclosure available suggests that the OIS score’s improvement might result from better disclosure practices rather than actual improvements in ocean-related environmental performance. Consequently, companies with high-quality environmental disclosure in the early years tend to maintain their OIS scores without significant changes. Therefore, the overall market improvement is likely driven by advancements in disclosure practices.

Our study’s results demonstrate that investors can already reduce the negative ocean impact of their portfolios while maintaining similar or even slightly higher risk-adjusted financial performance. Additionally, assessing the ocean impact of portfolios enables investors to engage actively with companies lagging behind in environmental performance.

About the authors

Antonia Föger is a recent graduate of MSc in Finance and Strategic Management (Cand. Merc.) from Copenhagen Business School. Her focus during her master’s thesis has been on sustainable finance, reflecting her enthusiasm for integrating environmental and social considerations into investment decisions and the associated challenges.

Sebastian Rottensten Wieghorst is a recent graduate of MSc in Finance and Strategic Management (Cand. Merc.) from Copenhagen Business School. His interest in the overlap between asset management and sustainability motivated him to contribute to unexplored facets within the field of ESG investing.

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics.

By Antonia Föger and Prof. Kristjan Jespersen

As our world economy continues its rapid growth, a new crisis emerges on the horizon – the alarming decline of biodiversity. Over the next couple of decades, a quarter of existing animal and plant species face the threat of extinction. The consequences of this significant biodiversity loss would not only entail profound ecological ramifications but also bring along unprecedented levels of economic risks. The World Economic Forum (2020) has revealed that more than 50% of the global GDP is moderately to heavily dependent on the balance and intactness of nature itself. 

It is therefore no wonder that governments, investors, and other actors in the financial market are increasingly concerned about their assets’ exposure to biodiversity-related risks. Despite this newfound willingness to incorporate biodiversity issues into investment decisions and portfolio management processes, assessing biodiversity-related risks and opportunities poses a substantial challenge in itself. 

As part of a case study on biodiversity risk for one of Denmark’s largest pension funds, we investigated the biodiversity-related regulatory and data landscape in the example of the mining industry, identifying data gaps and trying to form a feasible framework for biodiversity risk assessment. Here are the key steps that we took:

1. Mapping Material Metrics: As an initial step, the TNFD’s risk management and disclosure framework supplemented by the Encore materiality assessment tool were used to map out the material metric categories for biodiversity-related risk. 
2. Reviewing Regulatory Landscape: We then reviewed ESG regulations and standards to profile the overall regulatory landscape for reporting on biodiversity risk. These included mandatory standards such as the SFDR (PAIs) and ESRS (CSRD) as well as voluntary reporting frameworks including TNFD, GRI, CDSP, and SASB. This resulted in a comprehensive collection of six indicator categories and 17 specific indicators that would enable investors to make fully informed investment decisions in terms of companies’ biodiversity risk and impact. 
3. Assessing ESG Data Providers: Finally, we reached out to and analyzed nine different ESG data providers to understand the availability of the identified biodiversity indicators. The results are shown in the below Data Provider and Key Biodiversity Indicator Map. 

Our findings clearly indicate that there currently exists a significant gap in the available biodiversity data by ESG data providers. Probably the most critical and, at the same time, most underdeveloped indicators are those on biodiversity geo-exposure. While there is mediocre availability of geolocated exposure to biodiversity-sensitive areas that are mainly linked to the principal adverse impact (PAI) indicator no. 7 on biodiversity, granular asset level data to fully understand the extent of exposure is missing. Additionally, the available data does not link to legally protected or recognized areas and provides no information on exposure to the intactness of an ecosystem. Moreover, impact and pressure as well as response metrics are only limitedly available, making it difficult to quantify a company’s actual impact on biodiversity.

Alternative third-party datasets, such as IUCN Red List of Threatened Species and WWF Water Risk Filter, can play an important role in understanding biodiversity risks, especially in the context of location and asset level metrics. At the moment, however, these types of datasets are not yet integrated by ESG rating agencies, therefore requiring an increased amount of effort in collecting data from them. 

While the current data landscape may not enable investors to fully grasp and evaluate biodiversity risks and company performance, significant changes are on the horizon. Biodiversity is steadily becoming a central theme in sustainability discussions, leading to increased demand for thematic financial products. Additionally, the introduction of mandatory reporting requirements is expected to prompt companies to enhance their disclosure quality. Future developments such as Science-Based Targets for Nature (SBTN), common nature-related targets through COP 15, and EU Taxonomy minimum safeguards may contribute to a deeper understanding of impacts and financial risks. Additionally, investors can use current, imperfect scoring systems to identify biodiversity laggards or firms with inadequate disclosures and engage in constructive dialogue with them to drive best practices and better environmental outcomes

In conclusion, as the world grapples with the critical issue of biodiversity loss, the financial industry is taking steps to address these challenges. While there are substantial data gaps and hurdles to overcome, the growing recognition of biodiversity risks and the evolving regulatory landscape are driving positive changes. As biodiversity and the intactness of natural ecosystems move to the forefront of global concerns, investors are poised to play a pivotal role in integrating nature-related risks and opportunities in the investment decision process. 

About the Authors:

Antonia Föger is a recent graduate of MSc in Finance and Strategic Management (Cand. Merc.) from Copenhagen Business School. Her focus during her master’s thesis has been on sustainable finance, reflecting her enthusiasm for integrating environmental and social considerations into investment decisions and the associated challenges.

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics.

By Isabella Bergström, Vendela Jonsson and Prof. Kristjan Jespersen

Climate change is one of the most defining issues of our time and human actions generate over 50 billion tonnes of greenhouse gas (GHG) emissions each year. In order to combat climate change and limit global warming, the Paris Agreement was formed in 2015, providing a framework for international cooperation. Sweden is one of the 196 nations that has signed the Paris Agreement, aiming to reach net-zero by 2045. The steel industry is one of the largest contributors to Sweden’s GHG emissions, accounting for ten percent of its total. Therefore, in order to decarbonize the nation, Sweden must decarbonize its steel industry. This has created pressure on Swedish steel companies to revise their sustainability strategies and explore new production technologies. The incumbent SSAB and the new entrant H2 Green Steel are the frontrunners in transforming the Swedish steel industry by developing the hydrogen-based steel (HBS) production technology.

To understand whether the steel industry can turn green, we decided to take a multi-level approach and analyze the micro-, meso- and macro-level factors affecting a potential transition. In particular, our study aimed to answer the following research question: “How will the potential sustainability transition of the Swedish steel industry develop and what are the respective roles of the incumbent SSAB and the new entrant H2GS in accelerating the transition?” In order to provide an answer to the research question, we took a qualitative methods approach through 15 semi-structured interviews with employees from SSAB and H2 Green Steel as well as external actors with knowledge of the steel industry, and conducted a comparative case study of the two firms.

We applied the Dynamic Capability (DC) framework, originally developed by David Teece (2008) and later improved by Strøm-Andersen (2018), to better understand what type of capabilities the firms are adopting in order to prepare for the transition. Additionally, we applied the Multi-Level Perspective (MLP) developed by Frank Geels (2002), to better understand the current state of the Swedish steel industry and the dimensions affecting the transition. By combining these two theories, we complemented the firm-level perspective with the industry-level perspective to understand the interactions between the firms and the industry. As Strøm-Andresen’s framework was used to study incumbent firms, we extended the applicability of the framework by using it to also analyze the dynamics between incumbents and new entrants in a sustainability transition. Conclusively, these theories in combination provided grounds to predict how a potential sustainability transition of the Swedish steel industry will develop, and what the roles of the incumbent and the new entrant are in accelerating it.

In the first part of the analysis, the DC perspective was applied to the respective companies, revealing that both firms adopted the DCs of learning, financing and organizational restructuring to prepare for the transition. The two firms were adopting these capabilities in different ways, where SSAB used its DCs to introduce the technology, and H2 Green Steel used its DCs to accelerate the development of it. However, some challenges were identified related to how the firms adopt their DCs, which are important for the firms to manage in order to optimally develop their DCs and successfully pursue a sustainability transition. In the second part of the analysis, the Swedish steel industry was analyzed using the MLP. The analysis revealed that the industry is affected by five landscape developments: 1) the Sustainability Movement, 2) Climate Targets & Regulations, 3) the Economic Downturn, 4) the Renewable Energy Revolution, and 5) the Energy Crisis. Moreover, it was found that the industry regime constitutes five main dimensions: 1) Regulation & Standards, 2) Customer Demand, 3) Public Funding, 4) Knowledge & Competency, and 5) Infrastructure Developments. Finally, the analysis revealed that there are currently four main technologies being developed at the niche level: 1) Carbon Capture & Storage, 2) Bioenergy, 3) HBS, and 4) Direct Electrification.

Conclusively, the findings revealed that several trigger events have led to landscape developments that have collectively created pressure on the steel industry regime to change, creating a window of opportunity for new niche-technologies to be developed. These sequences of events have led to the creation of several trajectories, some of which are aligned with the HBS development, and others that are misaligned. Conflicting pressures from a regime dimension, meaning that it is an enabler that is currently insufficient and therefore constitutes a barrier for the transition, results in a transition tension. In the Swedish steel industry, three dimensions generate transition tensions: 1. Knowledge & Competency, 2) Public Funding, and 3) Infrastructure Development. It was found that both SSAB and H2 Green Steel play a critical role in circumventing and resolving these tensions by efficiently adopting their DCs and in turn can help accelerate the transition of the Swedish steel industry.

About the authors

Isabella Bergström and Vendela Jonsson studied the master’s program in Finance and Strategic Management at Copenhagen Business School. They both have a great interest in sustainability, and after deep-diving into this topic through their elective courses and work, they felt the urge to explore it even further. They decided to investigate one of the most hard-to-abate industries – the steel industry, and how it potentially can be decarbonized. After completing their master’s degree they have both pursued a job in management consulting, and are hoping to continue to work on exploring solutions to tackle climate change by consulting clients on related matters. 

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics.

By Katryn Pasaribu and Prof. Kristjan Jespersen

Tropical deforestation has been targeted as the primary driver of agricultural-induced deforestation. Consequently, the conservation of remaining natural forests is an internationally growing concern. However, even though multi-billion-dollar initiatives have been poured out for nature-based solutions to address climate change, including the protection of forests or biodiversity, recent studies suggest that conservation is underfinancing due to the lack of continuity or a steady flow of funds for every single forested spot around the world (Barral, 2021; Bos et al., 2015; Phelps et al., 2011). Thus, the question of how to link financing for conservation and the business value chain is substantial. An ambitious research project, “No Trees, No Future – Unlocking the Full Potential of Conservation Finance,” funded by the David and Lucile Packard Foundation, seeks to design and test a rigorous methodology that addresses the linkage between the private sector’s contribution to conservation financing and their value chain.

At the same time, the current progression of the EU Corporate Sustainability Reporting Directive compels companies to disclose, identify, and describe their environmental risk and opportunities for the whole value chain, including topics such as emissions (climate change) and biodiversity. Companies are expected to develop targets and policies and to measure their accomplishments accordingly. This condition means the report should be comparable over time (historical progression), verifiable (geo-location), and understandable (measurable). With this current development in regulation, companies need serviceable methods to address the requirements. We find that the spatial footprint approach developed through the “No Trees, No Future” project affixes the two unrelated issues, conservation finance and companies’ sustainability reporting, and turns the two issues into two sides of a coin.

The methodology generally consists of a spatial analysis, a forest cover loss-to-emission conversion calculation, an assessment of carbon-based pricing impact evaluation, and an analysis of benefits-based burden-sharing guided by economic benefits. Figure 1 below explains the process of the spatial footprint analysis for conservation finance.

Figure 1. Animation of the analysis process of spatial footprint analysis for conservation finance 

The methodology starts with spatial analysis. The spatial analysis identifies the deforested spots within the agricultural concession. In this analysis, leakage or spillover conversion is not counted to have a clear-cut linkage between business activities and their direct impact. The empirical work of this research project centers on the spatial information of oil palm concession as the object of analysis. The spatial analysis results in deforested spots within the oil palm concession by overlaying the global forest cover map, annual forest cover loss map, and oil palm concession map. The next step involves translating the biomass loss from deforested spots into emissions. The deforested spots map is overlayed with the above-ground biomass map, resulting in the estimated above-ground biomass loss from the deforestation within the concession. The total emission arising from deforestation is calculated using the biomass-emission conversion rate. The third step is calculating the monetary value of the calculated emission using the carbon price mechanism; in this research, a carbon tax is used. From this third step, the dollar value of the total fund can be interpreted as the amount of conservation funds that should be allocated back to the region where the concession is in place.

Nevertheless, the oil palm buyers should not entirely be burdened by the dollar value because the burden should be distributed based on the benefits received (Hayward, 2012; Page, 2008). The conservation burdens should be proportionally shared between producers and buyers based on the economic benefits received. Thus, the buyers’ responsibility for conservation is proportionately calculated based on the market surplus received by the buyers within the palm oil market transaction. An individual buyer’s tonnage of palm oil is used to calculate the individual buyer’s shares. The last step is replicable for every chain in the whole value chain of the oil palm industry. Thus, the contribution is distributable throughout the value chain.

The spatial analysis covers the EU-CSRD requirement regarding environmental impact analysis, especially biodiversity-related issues, such as land use change impact. The forest loss-to-emission calculation covers the EU-CSRD requirement regarding climate change mitigation (emission) related issues. The emission pricing also helps companies translate their impacts in terms of monetary value, which the recent regulation requires. Thus, the spatial footprint approach addresses the reporting requirement and explores a strategy of financing mechanisms for conservation throughout business value chains.

The next question will be, will the identified fund be enough? What will be the possible implications once the “burdens” are identified? Intuitively, the identified fund is insufficient because the pricing does not factor in the value of ecosystem service loss or biodiversity loss from the forest conversion. However, this method covers proxy and emission, which is, at the moment, globally acknowledged. The possible implication, once the burden is identified for every region of oil palm producers, is sourcing shifting due to the different magnitude of the dollar value of the “burden” of each region. Without regulation in place being enforced, the dynamic of sourcing shifting may backfire on the forest conservation goal.

References

Barral, S. (2021). Conservation, finance, bureaucrats: managing time and space in the production of environmental intangibles. Journal of Cultural Economy, 14(5), 549–563. https://doi.org/10.1080/17530350.2020.1846593 

Bos, M., Pressey, R. L., & Stoeckl, N. (2015). Marine conservation finance: The need for and scope of an emerging field. Ocean & Coastal Management, 114, 116–128. https://doi.org/10.1016/j.ocecoaman.2015.06.021 

Phelps, J., Webb, E. L., & Koh, L. P. (2011). Risky business: an uncertain future for biodiversity conservation finance through REDD+. Conservation Letters, 4(2), 88–94. https://doi.org/10.1111/j.1755-263X.2010.00155.x 

Hayward, T. (2012). Climate change and ethics. Nature Climate Change, 2(12), 843–848. https://doi.org/10.1038/nclimate1615 

Page, E. A. (2008). Distributing the burdens of climate change. Environmental Politics, 17(4), 556–575. https://doi.org/10.1080/09644010802193419 

About the authors

Katryn is a postdoctoral researcher at Copenhagen Business School. Katryn received her Ph.D. in Natural Resource Economics from the University of Tennessee, her MS in Agricultural and Applied Economics from the University of Wyoming, and her BA in Economics from the University of Indonesia. Her research interests are Environmental and Natural Resource Economics, Sustainable Production, Rural Development, and Environmental Carrying Capacity. Currently, she is working on a Conservation Finance research project named “No Tree – No Future”.

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics.