Across the globe, forests hold a century’s worth of today’s annual fossil fuel emissions. They are a crucial regulator of the climate system, home to 80% of animal, plant and insect species, three quarters of the world’s accessible freshwater and directly support the livelihoods of billions of people.
Yet we have all seen images of, or witnessed first-hand, the vast swathes of palm and soy plantations and cattle ranches that occupy former forests. Worldwide, the rate of deforestation is running at around 15 football fields a minute, and has recently rocketed in the Brazilian Cerrado, the world’s most biodiverse savanna.
In Europe, where we have already lost 97% of old-growth forests, our tall forests have declined by an area half the size of Denmark over the past two decades.
Deforestation is inextricably linked with climate change, with around 11% of annual global greenhouse gas emissions attributed to deforestation driven by land-use change and agriculture. Ending deforestation is therefore essential to meeting net-zero targets.
From an investor perspective, deforestation is a material financial risk at both top-down systemic and bottom-up individual company levels.
Systemic risk arises from deforestation’s contribution to global warming, more extreme weather events and the erosion of natural ecosystems – all of which present major economic and financial ramifications from which financial institutions cannot diversify away, particularly universal owners. At an asset level, deforestation poses regulatory, legal, financial and reputational risks.
“Banks are uniquely positioned to tackle deforestation via their financing decisions and engagements”
Stephanie Pfeifer, CEO of the IIGCC
While each investor acts based on their own circumstances, attempts to address and manage these risks is in line with the primary responsibility to protect the long-term economic interests of their beneficiaries.
If that’s the ‘why?’ then what about the ‘how?’.
By far the biggest driver of deforestation across the world is agriculture, and focusing engagement on the agricultural commodity sectors is a clear place for investors to start.
Drilling into this further, while it will always vary, a considerable portion of deforestation-exposure for investors can be via their shareholdings in commercial and investment banks. Typically, a bank’s exposure comes through the financial services they provide to companies that produce and/or utilise products contributing to deforestation within their direct operations or value chains.
Banks are essential to the economy, supporting real-world activities through lending, securitisation and underwriting. But they are also uniquely positioned to tackle deforestation via their financing decisions and engagements.
Investor-led expectations for banks
This week the Institutional Investors Group on Climate Change (IIGCC), together with Finance Sector Deforestation Action (FSDA) – a 30+ group of financial institutions that have committed to using best efforts to end commodity-driven deforestation in their portfolios – have published a set of investor expectations for banks on deforestation, conversion and associated human rights abuses in their lending and investment practices.
Designed to inform global best practice, these ask that banks first carry out a deforestation risk assessment to determine the activities that represent the highest risk in terms of commodities, sectors and region. Banks are also encouraged to set a public commitment to deforestation-free and conversion-free banking, that includes using best efforts to eliminate deforestation caused by high-risk commodities, no later than the end of 2025.
Banks are also encouraged to set deforestation-related expectations for their clients, such as establishing traceability (the ability to identify and track a product’s entire lifecycle) across supply chains. They should look to provide financial products that support clients to invest in deforestation-free and conversion-free production systems.
Today’s new expectations also highlight the importance of ongoing due diligence on clients, and annual client reporting on deforestation risk.
Lastly, banks are encouraged to publicly report their progress towards eliminating deforestation on an annual basis.
We acknowledge that considerable effort will be required to meet these expectations, and that each bank’s ability to do so will depend on the legal and regulatory environments in which they operate.
We hope that all financial institutions that choose to use these expectations do so as part of a comprehensive approach to tackling deforestation. For those investors and pension funds that haven’t yet started mapping and/or taking steps to manage their deforestation risk exposure, they present a good opportunity to begin.
Our ambition is that many more investors will be integrating measures to tackle deforestation into their investment strategies and processes before COP30 in Belem, Brazil.
Stephanie Pfeifer is the chief executive officer of the IIGCC
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