Why Technology Without Regulation Won't Save the Forest

Published on: 20 June 2022
by KnowESG

Regulators and enforced laws are needed to make smart technology more effective. Hard work and cooperation amongst economic players are essential to achieving sensible development despite the global compacts. Financing mechanisms that are based on environmental, social, and governance (ESG) principles can play a significant role in the financial sector.

A lot has been accomplished in the field of agriculture in the twenty-first century. New technologies are reshaping agriculture, from precision irrigation to facial recognition in cattle to the use of drones to boost agricultural yields.

Computing developments are enabling new technologies—powered by data—to be widely accessible for agriculture, whether it is hyperspectral monitoring (scanning soils and plant health) or tracking cattle's movement and health.

The revolution in agriculture has resulted in significant cost reductions and increased productivity. An $11.1 billion market in precision agriculture is predicted to be created by this technology in the next five years, according to industry forecasts.

Deforestation in Brazil is driven by demand and impunity. Brazil kept pace with global demand for soy, timber, and meat, and hyper-specialized industries like high-end leather for luxury SUVs. The country’s efforts to meet international appetites come at an environmental cost, especially when forest products are not properly accounted for and monitored. And where secrecy lurks, so can crime. Agriculture and livestock in the Amazon basin are too often linked to illicit deforestation, illegal logging, and public land grabbing. But even here, the storyline is hardly straightforward because the industries themselves walk a tenuous line between the legal and the illegal.

Take the case of the cattle industry, recently the subject of several investigative reports. Journalists documented how illegally sourced Amazon basin resources are converted into legal products entering global markets, a process dubbed “cattle laundering”. The practice entails shuffling cattle between grazing lands to disguise their origin.

Determining origin is crucial because it's the only way to connect products tied to illegal activities such as land clearing, illegal logging, planting monoculture or even grazing pastures. Of course, natural resource laundering has occurred for decades across the extractive industries. What makes the cattle business different is how easily technology can trace a product’s origins.

The good news is that there is an incredible innovation in the tracking of commercial goods: Think of internet shopping and real-time precision in package delivery. Yet, it's puzzling how little many consumers know – or care – about the source of items they purchase. Technology is necessary, but an insufficient, solution. Often the missing middle comes down to incentives.

The primary obstacle to tracking goods was hardly the lack of technology. The scarcity of incentives is far more problematic. So long as financial institutions continue to bankroll extractive industries with questionable track records on environmental activities, the cycle of environmental crime will persist.

There are two crucial steps to curbing land degradation and deforestation: clear traceability of products and financial incentives for forest conservation. Policymakers could start by rewriting incentives to promote sustainable practices. China’s success in the late 1990s with the Grain for Grain program gives early clues on how to do this. In Brazil, the record is less encouraging.

The financial sector can play a crucial role by offering new lines of financing mechanisms, anchored in environmental, social and governance (ESG) principles. Though it would be a stretch to expect ESG to reinvent markets, much less to persuade wholesalers and outside bidders bent on chasing prices and market share to mend their ways. Real change entails cooperation between different economic players.

Investors can promote smart practices, while public authorities bolster tech-enabled regulations and enforcement to safeguard against setbacks. Though a small portion of the global market, some investors care about risks in their supply chains and the long-term effects beyond quarterly earnings. Nevertheless, for all the goodwill and global compacts, the path to sensible development takes hard work and it must include the public, private, and consumer sectors.

Smart technology has a limited impact without smarter regulatory frameworks and enforceable laws. Despite earnest promises to green up the supply chains, there are few incentives to track raw materials; why bother when these are seen as replaceable. As markets begin to account for environmental degradation and the climate-related risks that pose real threats to financial investments, this could change. Bankers, boards and shareholders are taking note of climate change-related financial risk. Ultimately, when consumer pressure grows, incentives will follow making tracking, inspecting and vetting central to putting everyday products on our tables and in our homes.

Source: World Economic Forum

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