Palm oil, cobalt highest risk for commodity-linked land grabs

As the world’s population expands, the demand for more land to produce the commodities we need grows with it. This comes at a cost. The reality on the ground is that thousands of people are illegally forced from their homes each year so miners and farmers can move in. What is produced on this land can, and does, find its way into the vast volumes of commodities traded by investors – and then into the food and the goods we consume.

Analysing over 170 commodities using our ESG risk data shows that palm oil and cobalt are the two raw materials posing the greatest risk of land grabs globally. But minerals critical to the energy transition – silicon, zinc, copper and rare earths – in addition to less obvious commodities like coconuts, garlic and yams, are highly associated with the practice as well.

Our research also makes a clear link between land grabs and the loss of natural capital, an increasingly popular term covering the services provided by nature, such as clean air and water, pollinating insects, and soil quality. Both land grabs and natural capital degradation are influenced by poverty, corruption and weak rule of law. Failing to understand these interconnections leaves corporates and investors exposed to reputational, regulatory and potentially legal threats that a more holistic view of the risks involved in commodity production might avoid.

Key commodities most at risk

Unsurprisingly, palm oil is ranked highest risk for land grabs of all the hard and soft commodities our data covers. As shown in Figure 1, this is largely because the greatest risk lies in its biggest producer – Indonesia. The country produces more than half the world’s palm oil and land conflicts are on the rise. One NGO, the Consortium for Agrarian Reform (KPA), recorded 241 land conflicts across Indonesia in 2020, 10 times the 24 reported during the last global recession in 2008.

Alternative sources of palm oil that avoid the risk of land grabs entirely are hard to come by though. Malaysia, the next largest producer, is rated as ‘high’ risk for the issue by our commodities data. Together, the two countries account for around 85% of global production.

Cobalt, the only other commodity to be rated ‘extreme’ risk for land grabs in our commodities data, has long been linked with child labour and unsafe working conditions, particularly in DR Congo. But the country also has a poor record of land expropriation. On-the-ground studies report communities face frequent evictions, derisory compensation, and almost non-existent consultation at the hands of negligent mining companies and corrupt officials. Our commodities data rates DR Congo’s copper, gold, tantalum and diamond industries as ‘high’ risk by weighted volume.

These hidden ESG threats also impact materials other than cobalt that are crucial for the energy transition, including silicon, zinc and bauxite, which all originate from a small number of ‘extreme’ risk suppliers. Unless threats to human rights in the supply chain like these are addressed by companies and investors, it will be increasingly hard to justify labelling the likes of EV’s, lithium-ion batteries and solar panels as ‘clean’ technology’.

The breadth of raw materials associated with land grabs is surprisingly wide, as illustrated in Figure 2, which features data from our Land, Property and Housing Rights Index. This index measures the risk of land expropriation across 198 countries and 170 commodities by assessing the legislation protecting citizens, adherence to international structures, enforcement of laws, and the severity and frequency of violations. The map shows the three highest risk commodities for the 12 highest risk countries. Among these are a host of metals – cobalt, copper, bauxite, gold, molybdenum – and agricultural goods, led by palm oil, but also including cocoa, maize, rice, bananas, cashews and coconut.

All but three of these 12 highest risk countries are also considered ‘high’ or ‘extreme’ risk in terms of natural capital degradation, measured by using a combination of four of our indices: Deforestation, Air Quality, Water Pollution, and CO2 Emissions from Land Use Change and Forestry.

Clear the people, then clear the forest

The loss of biodiversity sits hand-in-hand with land grabs, and the intersection of these two different risks can be seen in our data. Countries in the top right of Figure 3 show higher levels of both natural capital degradation and land grabs. Typically, they are also higher risk in our Poverty Index, as shown by the bubble colour. Where it is harder to make a living – in India, in Myanmar, in Angola – there will be significant appeal in felling forests if it is lucrative enough.

Picking out a few commodity exporters, highlighted by bubble size, Brazil and Indonesia are notable examples of countries with huge agricultural sectors and poor reputations for land grabs and social rights abuses. In these countries, dependence on agricultural revenues literally adds fuel to the fire when it comes to land clearances and razing forests.

Figure 4 confirms that in each category of the Poverty Risk Index, countries’ levels of natural capital degradation and land grabs go up the more commodities they export. Their dependence on fluctuating export markets could put nations in the two highest risk groups, such as Brazil, DR Congo, India and Indonesia, firmly in the sights of sovereign investors, who are increasingly looking to influence governments by making finance debt restructuring contingent on ESG performance.

It would be wrong to suggest that poverty is alone in influencing land grabs and natural capital losses: poor governance and corruption are also key drivers, while simultaneously playing a contributing role in solidifying that poverty in the first place. Across the globe, governments lose USD7 billion to USD12 billion per year in potential fiscal revenues from illegal logging, fishing and wildlife trade.

The connection with abuse of indigenous peoples’ rights is also undeniable. Indonesia, Brazil, India, Myanmar and Angola all feature in the risky top right of Figure 3 and are also considered ‘extreme’ risk in our Indigenous Peoples’ Rights Index.

Rooting out natural capital threats to organisations

Billions of dollars’ worth of illegally produced commodities tainted by land grabs and the destruction of natural capital are washed into global supply chains each year. Corporates, investors and banks must be prepared to determine if their purchases of these goods are linked to expropriated land or trashed ecosystems, otherwise the backlash could be considerable.

Organisations and investors can mitigate risks by working within frameworks like the forthcoming Taskforce for Nature-related Financial Disclosures (TNFDs) to identify natural capital risks and then integrate those findings into corporate strategies. A more proactive approach would see sovereign investors using capital to persuade governments to improve their ESG performance through policies that create jobs and alleviate poverty, which would have the knock-on effect of addressing land grabs and natural capital risk.

As the pandemic continues to roil national finances, these investors may never have a better opportunity to embed a far-reaching, holistic ESG agenda in government policy.