A third of the solution to Paris
Finance-led climate initiatives have exploded in both number and scale over the past years, and it’s great to see huge sums of capital now committed to net-zero targets, frameworks and other schemes designed to tackle climate-related risks and opportunities.
The bulk of these focus on reducing emissions from high emitting sectors such as fossil fuel production and consumption. It’s vital that we rapidly decarbonise, but we also need to remove massive amounts of CO2 from the atmosphere.
We must be careful as investors and asset managers not to neglect the natural climate solutions that already exist to do just this.
From the tropical forests of South America to the boreal forests of Russia, the trees, plants and soil that make up our biosphere absorb and store vast quantities of carbon. At present, forests worldwide sequester a net 7.6bn metric tonnes of carbon dioxide each year – 1.5 times more than that emitted by the US.
Yet this process is increasingly threatened, and, as we write, forest fires are raging across the globe, the Amazon has recently ‘tipped’ from carbon sink to source , and tropical deforestation alone is causing more emissions than the entire EU.
If we are to address climate change, we need to put an end to deforestation. Doing so, along with implementing other natural climate solutions – the sustainable use of nature to limit warming – could provide a third of the solution to meeting the Paris climate target, with far reaching benefits for biodiversity, food security and human rights.
Addressing deforestation doesn’t require expensive, yet-to-be-proven technology – and should be a top priority for all financial institutions, a way of showing real and tangible progress towards interim 2030 net-zero goals, when emissions must fall by 45% (from 2010 levels) and biodiversity loss must be halted and reversed, if we are to have any chance of meeting the Paris agreement and global goal for nature.
Portfolios are exposed, yet awareness is low
Yet despite the growth in awareness of many climate-related issues, financial institutions are some way behind when it comes to action on deforestation, with just 14% (33 of 235) of the investors that signed last year’s Amazon fires statement setting a deforestation policy.
This is somewhat surprising, given the huge number of economic sectors – food and household products, auto components, textiles, apparel and luxury goods, and others – that are exposed to mounting physical, regulatory and supply chain risks associated with deforestation.
For example, severe drought in Brazil, brought on by the combined impact of climate change and deforestation in Amazon rainforest and Cerrado savanna, is putting coffee and sugar exports, as well as hydro-electric power production at grave risk, with serious potential financial impacts.
We need to aim for zero-deforestation portfolios by 2025
Projects that manage, protect and restore ecosystems – such as forests – can only deliver their full potential mitigating effect towards global climate targets if they are mobilised over the next 10 to 15 years.
This means a need to close the gulf between where we are as an industry on deforestation – and where we need to be – as quickly as we can. We can’t afford the luxury of talking about 2050, or even 2030 targets.
Changes need to happen much sooner, and the COP 26 Presidency has called on the financial community to commit to zero-deforestation portfolios by 2025 in advance of this November’s conference – a timeline that aligns with the ambition of the Paris climate agreement, and arguably, one that represents basic financial prudency.
With deforestation-specific due diligence laws in the UK coming into force, and EU technical screening criteria specifying which forest-related activities can be considered sustainable, all financial institutions need to get on board with this challenge.
In a way that preserves capital while driving change
So how can our industry address deforestation in a way that preserves capital as well as drives real change? The task ahead of us is to stay invested broadly in the sectors that are linked to deforestation, using our influence as engaged shareholders to encourage and support a stable and fair transition towards sustainable production and supply chains.
We need to start now with where we can make the most impact, where the breaches are most severe, and where we have the best data and tools, for example on timber, soy, cattle, palm oil and indirect financing from banks.
When it comes to our asks, we need to be looking for sustainable sourcing policies that protect forests and align with local and national social and environmental standards.
We need to see effective monitoring and verification systems that allow companies to hold suppliers to account. We also need to see the enforcement of no-deforestation policies, along with transparent and regular reporting, using comparable disclosures that enable a proper assessment of risks.
Collaboration is crucial
There is a lot of work to be done. While we are fortunate to have an ever-growing roster of tools such as Trase, Encore and SPOTT and data sets, such as CDP and Forest 500, for tackling deforestation, the information we need to conduct detailed analysis and productive engagement is still lacking, particularly for addressing non-commodity sectors with deforestation exposure, such as in mining and infrastructure.
An industry-wide collaborative approach, that brings together climate and other ESG-related investor initiatives, groups, and frameworks to set targets, establish policies, pool data, build solutions and ultimately integrate deforestation into their daily decision making is needed.
New guidance, with a timebound roadmap to support financial institutions’ journeys towards deforestation-free portfolios by 2025 is set to be announced at COP 26, but we can only deliver the changes we need at scale if enough financial institutions get involved.
Our industry must do what it can to address deforestation, along with the multitude of other climate, nature and human rights-related risks and opportunities we face. But we can’t operate in a vacuum – this is a shared responsibility.
We need regulators and companies to do their part too. Only by working together can we bring about the scale of change needed, before it is too late.
Time is running out to sign up to the COP26 Presidency’s call to commit to zero deforestation portfolios by 2025. We need to act boldly. Even a year ago, setting a 2050 net-zero target was held up to be a courageous and novel act. Now it is one that is expected.
We have come a long way as an industry towards addressing climate, nature and related challenges. Deforestation is a crucial next step. And now is the time to take it.
By Emine Isciel, Head of Climate and Environment, and Jan Erik Saugestad, CEO, Storebrand Asset Management
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