Financial institutions must act now to end deforestation finance. Here’s how

Insight

25th May 2023

The finance sector is key to ending deforestation. Through their power and influence, financial institutions can shift company practices towards becoming nature-positive and deforestation-free.

By Sarah Draper, Corporate Performance Programme Lead, Global Canopy

Gaps in guidance and data have long been cited as barriers to action but this no longer holds. With a suite of guidance now available, financial institutions – from banks to pension funds – have the tools they need. And with regulatory pressures increasing, they must use this guidance to avoid falling behind.

Deforestation sits at the heart of the climate and biodiversity crises. If deforestation were a country it would be the third highest emitter in the world. And the capital behind the destruction comes from the finance sector. The 150 financial institutions assessed by the Forest 500 provide more than $6.1 trillion in finance to the companies with the greatest exposure to tropical deforestation. That is why, according to the Glasgow Financial Alliance for Net Zero, net-zero transition plans are incomplete without addressing this issue.

The UN has set a target of 2025 for addressing deforestation in financial portfolios. That deadline is also in line with initiatives like the Finance Sector Deforestation Action Group, a leading investor initiative to end deforestation. It’s a deadline that needs to be taken seriously.

Global Canopy’s guidance helps financial institutions to act on the exposure in their portfolios and ensure the companies they invest in are making significant progress towards becoming deforestation-free. Some financial institutions have already started the journey, and some are yet to begin, but the guidance is designed so that rapid progress can be made wherever they are in the process.

Finance Sector Roadmap

Launched at COP26, Global Canopy’s Finance Sector Roadmap is the entrypoint for addressing deforestation, ecosystem conversion, and human rights abuses linked to soft commodity financing in portfolios. The step by step guide was created after almost 40 financial institutions with over $9 trillion in combined assets committed to working to eliminate deforestation from their portfolios.

The Roadmap breaks down each stage of the journey with six phases to work through. They include mapping and setting an effective policy; monitoring action and engaging with companies; disclosing progress; and finally going above and beyond and making investment nature positive. It emphasises the importance of engagement over divestment, because engagement is the key to driving change.

Pension funds

Beyond the Finance Sector Roadmap, there is also sector specific guidance available. As the largest group of asset owners in the world, pension funds have the opportunity to lead the finance sector on becoming nature-positive and deforestation-free. But Global Canopy’s research with Make My Money Matter and SYSTEMIQ revealed that two pounds for every ten invested in an average UK pension is linked to deforestation. That cannot continue.

Shaped by a working group of twelve pension funds, the Pensions Guidance details how pension schemes can integrate deforestation-free requirements into agreements with asset managers, as well as how to work with them on the need to engage with companies and investments. It also provides guidance on how pension funds which directly finance companies and investments can identify, assess, and eliminate deforestation, conversion, and associated human rights abuses from their portfolios.

Deforestation, Conversion and Abuse-Free Investment Mandate

Guidance for family offices and foundations is another crucial piece of the puzzle. For decades, philanthropic giving has led the way on environmental funding. But deforestation lurking in investment portfolios could be undermining that good work many times over.

The Deforestation, Conversion and Abuse-Free Investment Mandate provides a blueprint for family offices and foundations to ensure their investments are not part of the problem. Designed to work as an addendum to existing investment mandates, this extra resource is intended to prompt asset managers into action in halting and reversing deforestation.

Due diligence towards Deforestation Free Finance

Finally, there is the new due diligence guidance. Currently financial institutions are exempt from UK and EU due diligence laws, but the political mood is changing. The EU regulation on deforestation-free products (EUDR) is set to be reviewed in two years to see if financial institutions should be included. In the UK, an amendment with cross-party support to the Financial Services and Markets (FSM) Bill calls for financial institutions to face the same due diligence regulations as companies. To avoid being left behind financial institutions need to act now.

Developed by Global Canopy, Neural Alpha and the Stockholm Environment Institute, the due diligence guidance sets out a recommended approach for financial institutions to conduct due diligence to identify, prevent and mitigate the risks and impacts of deforestation, conversion and associated human rights abuses. It helps financial institutions to identify gaps in supply chain policies and practices. They can then decide on appropriate mitigating actions when engaging clients or holdings during pre- or post-financing phases.

The UN has made clear that the window for action is rapidly closing. But through their power and influence financial institutions can drive real change. Actions we take in this decade will have impacts for thousands of years. By following this suite of guidance, financial institutions can move forward with confidence to meet the urgency of this moment.