Financial institutions are exposed to deforestation risks, but this is a wholly solvable crisis

By Isadora Carvalho, Sustainable Finance Engagement Lead at Global Canopy

In his first letter addressed to world leaders, the private sector, and civil society, the president of COP30, André Corrêa do Lago, recently highlighted that change is inevitable—it will happen either through conscious decision or in response to catastrophe. In his call for action, he stressed: “Humanity needs you.”

Among the influential actors in this collective journey (a ‘mutirão’, according to Corrêa do Lago), are financial institutions. Investors and financiers, like the rest of society, also face the alternatives of action or calamity, including in relation to deforestation risk.

Financial institutions are exposed to socioenvironmental risks through investments, services or loans to companies that produce or use agricultural commodities such as beef and leather. They are also exposed to human rights abuse risks and impacts such as forced labour and land conflicts. This exposure carries both financial and reputational risks.

Driven by negative feedback loops between climate and nature, deforestation is one of the main catalysts of climate change, contributing to rising temperatures and increasing climate variability, including extreme drought and precipitation events.

Companies with high exposure to deforestation-related risks not only contribute to the perpetuation of these cycles but also experience their direct impacts. Consequences include reduced productivity, higher production costs, and a loss of market competitiveness. For financial institutions, such impacts may translate into a shortage of liquid assets, increased default rates, and asset devaluation, heightening systemic risk and requiring greater attention to the integration of environmental criteria into risk analysis and management processes.

As the main driver of deforestation on a global scale, cattle ranching plays a central role in this equation—Brazil alone accounts for around 60% of global deforestation linked to the conversion of land into pasture.

Addressing this reality requires more than mere adaptation—it demands recognition of the financial sector’s active role in the dynamics of deforestation. These risks are not only external to the financial system but also endogenous, reflecting a dual materiality: financial institutions, through their investments and financing, can either drive or curb deforestation. This is not just about mitigating immediate risks but also about strengthening portfolio resilience and contributing to long-term financial stability in a global context that is increasingly sensitive to environmental issues.

In Brazil, where livestock farming, agriculture, and land-use conversion drive around 75% of national emissions, tackling deforestation is particularly critical for investors seeking to align their climate commitments with zero-emission portfolios.

While some financial sector leaders have made progress, 80% of financial institutions with the most influence on the cattle sector remain inactive. Lower profitability, more volatile earnings and potentially stranded assets could translate to permanent loss in the value of loans and investments held by financial institutions.

If on one hand there are financial and reputational risks, on the other hand, establishing financial mechanisms that improve credit access for farmers implementing best practices in the cattle supply chain, for instance, can boost productivity while easing pressure on natural ecosystems. These mechanisms also help enhance production, increase farmer incomes, and reduce credit risks.

Fortunately, high quality data and frameworks are available and have been successfully applied by leaders in the financial sector. Among the available resources is the Deforestation-Free Finance Roadmap, which provides essential information and tools for financial institutions to assess and manage risks within the Brazilian context, clearly outlining the regulatory requirements that institutions must comply with along the cattle supply chain in Brazil.

For financial institutions that have yet to start on the necessary transition journey, now is the time, with existing best practice available. According to the Roteiro de Finanças Livres de Desmatamento, institutions can transition within four years after taking the first step. It was originally launched by a group of leading experts in sustainable finance, and now it is more accessible and customised for Brazilian financial institutions.

Delaying action now will make effective action more expensive and difficult in the future. In the era of COP30 and the call for the “fight of the century” against climate change, President Corrêa do Lago’s words must be continuously remembered: “Now is the time we leave behind inertia, individualism, and irresponsibility to embrace the best versions of ourselves through creativity, solidarity, and perseverance.”

This article was originally published on the Global Canopy website.