Phase 1

Understanding and mapping risk

Most financial institutions are exposed to commodity-driven deforestation, conversion, and associated human rights abuse risk through their financing activities. By mapping this exposure, you will be able to effectively identify this risk within your portfolios and take action to address it.

Recommendations for timings to eliminate commodity-driven deforestation, conversion, and associated human rights abuses by 2025:

We recommend that Phase 1 should be started within 3 months of beginning the Roadmap at the latest. We would expect Phase 1 to be completed by mid-2022, or within 9 months of beginning this Roadmap.

At the end of Phase 1, you will have:

  • gained an understanding of deforestation, conversion, and associated human rights abuses and the risks posed to the finance system, your organisation, and your portfolio
  • estimated your financial institution’s exposure to deforestation, conversion, and associated human rights abuse risk through its financing activities, and identified opportunities to drive change through your financing activities
  • categorised your clients/holdings into high-, medium-, and low-risk based on their exposure to deforestation, conversion, and associated human rights risks
  • begun collaborating with other financial institutions and multi-stakeholder groups to address deforestation, conversion and associated human rights risks where appropriate.

Deforestation poses a systemic risk to the finance sector. To eliminate deforestation, conversion, and associated human rights abuses from your portfolio by 2025, financial institutions should have a clear understanding of deforestation, conversion, and human rights risk in their portfolios in order to be able to manage this risk.

Recommended action 1: Recognise deforestation, conversion, and associated human rights risks

This understanding will provide a solid foundation to build a strong and effective policy on deforestation, conversion, and associated human rights abuse risks for your financing activities.

Understanding these risks will also enable you to align your portfolios with other climate-related policies and targets your organisation has, such as net zero emissions, as well as helping to identify relevant Sustainable Development Goals which might be affected by the environmental and social implications of deforestation.

If your financial institution is using this Roadmap having never addressed these risks before, there are numerous resources and initiatives which will help to build your understanding of the systemic risk posed by agricultural commodity driven deforestation, conversion, and associated human rights abuses. Some recommended datasets, tools, and guidance pieces are detailed below.

Financial institutions are exposed to deforestation, conversion, and associated human rights abuse risk in multiple different ways. These risks can be in the form of market access, policy, regulatory, reputational, and physical risk, as well as systemic. These are outlined in the graphic below.

The Accountability Framework initiative provides detail on how companies can address their exposure to deforestation, conversion and associated human rights risk through their agricultural commodity supply chains, and is a useful resource to understand how that exposure translates to those financing said companies.

The following recommendations are useful resources on the risks deforestation poses to the finance sector as a whole, and individual financial institutions. There are plenty of other resources which can provide useful background knowledge on deforestation and the systemic risk it poses.

Recommended action 2: Recognise the business case for acting on deforestation

Risks and opportunities can translate into financial impacts through numerous pathways. 

Company revenues and costs can be affected by physical risks such as flooding and changing yields, market risks such as changes in price or availability of inputs such as fertiliser, and regulatory risks such as changes in requirements to develop concessions. Company asset values can be affected by changes in regulations which could make some facilities less viable or result in stranded assets. Cost of capital can also be affected by these risks – potentially increasing the cost of capital for companies that have high exposure to these risks and reducing those costs for companies addressing these risks. Recent green loans and bonds have linked interest rates and coupons to performance on environmental performance. 

These risks can impact all financial exposure to a company, including equity and fixed income as they affect a company’s profitability, cash flow or liabilities. Sovereign debt and currencies could also be impacted by risks and opportunities. For example, as markets increasingly become deforestation-free, national economies which have a high dependence on forest-risk commodities will be exposed to market risks that may impact sovereign debt.

Transition risks arise from the capital reallocation decisions associated with the shift to a low-carbon and deforestation-free economy. They include: 

  • Market access risks – changes in consumer and retailer preferences for more sustainably-sourced goods can reduce market access for less sustainably sourced goods, affecting company revenues.
  • Policy risks – the introduction of more stringent deforestation policies by producers, or their customers (including traders, manufacturers, and retailers), may restrict business practices and strand existing land assets. This is a risk for the producer and their financiers as productivity and extent of land assets is a key element when valuing soft commodity producers. 
  • Regulatory risks – as governments act to meet their own commitments, including under the Paris Climate Agreement and the UN Sustainable Development Goals, some are introducing legislation to require companies to act on deforestation and other unsustainable practices. Implementation of legislation could impact companies’ access to certain markets or customers, as well as incur financial costs to become compliant with that legislation.

Physical risks arise where deforestation impacts the ecosystem services that businesses depend on. Physical risks are often longer term, and closely tied to climate change, but can result in financial risk for companies and financial institutions. Clients and holdings linked to soft commodity supply chains rely on the services provided by tropical forests, such as maintaining and regulating regional rainfall, and providing soil stability and wildlife habitat. Deforestation compromises these services, affecting yields, driving higher costs and more volatile commodity prices, with impacts on company cash flow and revenue.

Financing companies that are committed to deforestation-free production or sourcing can have financial benefits, as detailed by the Tropical Forest Alliance. Companies that produce or source deforestation-free products are not at risk of being fined for illegal clearance. This will protect market access, and in some cases may lead to higher price premiums.

Deforestation accounts for around 10% of global greenhouse gas emissions, and forests also mitigate climate change by storing carbon, so addressing deforestation is critical to meet net zero targets. Tropical forests are also vital for biodiversity and therefore new commitments to reduce biodiversity loss, such as the Glasgow Declaration on Forests and Land use, are likely to increase pressure on governments and companies to reduce deforestation. 

Climate change is also creating physical risks for commodity production, affecting rainfall, temperatures, risk of floods and droughts, sea level rises and increased pests and diseases.

Deforestation and ecosystem conversion is frequently preceded by or occurs in conjunction with human rights abuses, particularly around failure to respect customary rights to land, resources, and territory, communities’ right to Free, Prior, and Informed Consent, and threats and violence towards Indigenous peoples, local communities and Forest, Land and Human Rights defenders. Supply chains and operations associated with deforestation are also frequently linked to labour rights abuses, especially in commodity supply chains.

Without addressing deforestation and conversion, your organisation will continue to be exposed to human rights abuse risks – which may be in contradiction to international human rights legislation and standards, as well as pre-existing policies and commitments.

2021 saw the UK introduce due diligence legislation for companies operating or trading within the UK, with proposals for more extensive legislation currently being finalised in the European Union. This would require companies to identify and address deforestation risk in soft commodity supply chains, and report on their exposure and actions to address that exposure. The secondary legislation for the UK proposal is currently being finalised, and the EU legislation is expected by the end of 2022.  This creates a clear precedent for further legislation globally – with a legislative proposal on deforestation already on the table in the USA. There are also mandatory investor disclosures, including the EU Sustainable Finance regulation, and a similar proposal in the USA.

Recommended action 3: Collaborate with other organisations

Multi-stakeholder initiatives (those made up of multiple different actors including other financial institutions, companies, NGOs in high-risk countries/regions, and Indigenous peoples and local communities) provide a key opportunity to share knowledge and learn from those addressing deforestation on-the-ground. This is essential in developing and implementing an effective policy on deforestation, conversion, and associated human rights abuses. This can include exchanging knowledge on:

  • the drivers of deforestation on the ground
  • the critical opportunities and challenges faced by companies, smallholders, and Indigenous peoples and local communities in addressing deforestation on the ground
  • why previous efforts to address deforestation have been unsuccessful
  • what support from the finance sector is needed.

Continuing this engagement through the following phases and steps of the Roadmap will also serve to strengthen your action on deforestation, and help to further reduce your exposure to deforestation, conversion, and associated human rights risk. This could include:

  • biannual meetings with organisations working on deforestation in high-risk regions/countries
  • consulting with organisations working on deforestation in high-risk regions/countries in advance of Annual General Meetings (AGMs)
  • meetings with associations of Indigenous peoples in high-risk regions/countries.

Conducting an initial assessment of your financial institution’s exposure to deforestation, conversion, and associated human rights risk will enable you to understand your overall risk profile and identify the highest-risk customers/clients in your portfolio which you can prioritise for more in-depth risk assessment (see Phase 2 below) and engagement. It will also provide you with a baseline of exposure – which you can report progress against – and preliminary information to inform the development of your policy in Phase 2.

Recommended action 1: Identify profile of clients/holdings with likely high exposure to deforestation risk

Some sectors and industries have a greater exposure than others to deforestation, conversion, and associated human rights risks, and you can use the data sources highlighted below to identify which clients/holdings are likely to have high exposure to deforestation, conversion, and associated human rights abuse risks. This information will allow you to identify priorities for in-depth risk assessments and engagement in later Phases.

 

This action has two key steps: to identify whether the client/holding is in a high-risk sector, and to identify whether they have been categorised as a high-risk client/holding by any third party data providers. Additional guidance on data sources for this step are included below.

 

A full list of high-risk sectors linked to deforestation can be found in the appendices using GICS categorisations which can be used to identify which of your clients/holdings are potentially exposed to high deforestation, conversion, or associated human rights abuse risks.

 

There are also datasets and tools which you can use to determine whether any of your clients/holdings have already been identified as high-risk by third party data providers. This can include Forest 500, CDP Forests, ZSL SPOTT, Global Forest Watch Pro, Forests & Finance, and Trase/Trase Finance. A more comprehensive list of tools, including descriptions of how they can best be used for high-level risk assessments, can be found below.

This information will be built on in the in-depth risk assessment in Phase 2 Step A.

Country-level data

  • UN COMTRADE provides data on the trade value and volume of commodities, and all associated derivatives, from all countries
  • MapBiomas provides historical data on the land use cover in Brazil, allowing greater visibility of which areas/regions are most at risk of deforestation
  • Verite Commodities Atlas provides country level data on the risk of child and forced labour in commodity supply chains
  • IBAT (Integrated Biodiversity Assessment Tool) holds three key datasets – IUCN Red list of Threatened Species (the STAR layer is of particular relevance to this Guide), the World Database on Protected Areas, and the World Database of Key Biodiversity Areas. This can be used to identify high-risk regions

Company risk exposure and performance profiles

  • Business & Human Rights Resource Centre stores news and allegations relating to the human rights impacts of over 20,000 companies. Depending on the availability of data, this ranges from a handful of articles to over a decade of news stories, civil society reports and company disclosure. 
  • CDP Forests assesses companies on their progress towards removing commodity-driven deforestation and forest degradation from their operations and supply chains, based on their CDP disclosures
  • ENCORE maps the impacts and dependencies of economic sectors on nature, and can be used to identify and assess nature-related risks at a sector and sub-sector level
  • Global Canopy’s Forest 500 project identifies the 350 companies and 150 financial institutions with the greatest exposure to tropical deforestation risk through their production, processing, procurement, and financing of the six highest-risk forest commodities. The open-access dataset also includes data on volumes of commodities used, as well as a total score for each company and financial institution for their performance on deforestation and associated human rights abuses.
  • Forests and Finance assesses the financing of 300 companies in forest-risk commodity supply chains, and evaluates the policies of financial institutions involved
  • Global Forest Watch Pro uses geospatial data to monitor companies and banks in forest-risk commodity supply chains, and can be used to understand the extent of deforestation in forest-risk commodity supply chains and financing
  • Trase maps forest-risk supply chains linking consumer countries, and traders with places of production, allowing banks and investors to see which of their holdings are exposed to potentially high-risk regions and commodities.
  • ZSL SPOTT assesses palm oil, timber, paper and rubber producers and processors on the strength of their ESG policies

Geospatial data

  • Nusantara Atlas provides maps of concessions and mills for wood pulp and palm oil in South East Asia
  • Global Forest Watch Pro uses geospatial data to monitor companies and banks in forest-risk commodity supply chains, and can be used to understand the extent of deforestation in forest-risk commodity supply chains and financing
  • Land Matrix provides information on large agricultural investments and land acquisitions in almost 100 countries, including information on investors, commodity, and scope
  • Environmental Justice Atlas maps socio-environmental conflicts, and can be used to understand key socio-environmental risks related to forest-risk commodity production in specific regions

Human rights risk data

  • UN Human Rights Treaty Body database provides details of records and observations from different Human Rights Treaty bodies, which can be filtered by country and Human Rights Treaty body
  • Land Portal Geoportal provides a map with layers on forest tenure, corruption, forest landscape restoration, and Indigenous and community land rights
  • Landmark map of indigenous and community lands, which can be used to identify where Indigenous peoples hold rights to land, resources, and territory and which regions may be at risk of conflict over land use rights and Free, Prior, and Informed Consent
  • Verite Commodities Atlas provides country level data on the risk of child and forced labour in commodity supply chains
  • Environmental Justice Atlas maps socio-environmental conflicts, and can be used to understand key socio-environmental risks related to forest-risk commodity production in specific regions

Note that although these datasets and tools are helpful in understanding deforestation, conversion, and associated human rights risks, none provide all of the relevant data and information on their own. They are best used in combination with each other. A further list of applicable datasets and tools is available from the Accountability Framework initiative.

Appendices

More details on how sectors are exposed to other agricultural commodities, can be found in Ceres’ Investor Guide to Deforestation and Climate Change.

High-risk sectors

GICS Sub-industry GICS Code High forest-risk commodities for the sub-industry
Energy (1010)
Coal and consumable fuels 10102050 Palm oil, Soy
Materials (1510)
Paper packaging 15103020 Pulp and paper
Forest products 15105010 Pulp and paper, Timber
Paper products 15105020 Pulp and paper
Capital goods (2010)
Trading companies and distributors 20107010 Beef, Leather, Palm oil, Pulp and paper, Soy, Timber
Automobiles and components (2510)
Automobile manufacturers 25102010 Leather
Consumer durables and apparel (2520)
Home furnishings 25201020 Leather, Timber
Homebuilding 25201020 Timber
Apparel, accessories and luxury goods 25203010 Leather, Pulp and paper (including cellulosic fibres)
Footwear 25203020 Leather, Pulp and paper (including cellulosic fibres)
Textiles 25203030 Leather, Pulp and paper (including cellulosic fibres)
Consumer services (2530)
Restaurants 25301040 Beef, Palm oil, Soy
Retailing (2550)
Internet & direct marketing retail 25502020 Pulp and paper
Multiline retail 25503010 Beef, Leather, Palm oil, Soy, Pulp and paper, Timber
Apparel retail 25504010 Leather, Pulp and paper (including cellulosic fibres)
Home improvement retail 25504030 Timber
Automotive retail 25504050 Leather
Home furnishings retail 25504060 Leather, Timber
Food and staples retailing (3010)
Food distributors 30101020 Beef, Palm oil, Pulp and paper, Soy
Food retail 30101030 Beef, Palm oil, Pulp and paper, Soy
Food, beverage and tobacco (3020)
Agricultural products 30202010 Beef, Leather, Palm oil, Pulp and paper, Soy, Timber
Packaged foods and meats 30202030 Beef, Palm oil, Soy
Household and personal products (3030)
Household products 30301010 Palm oil, Pulp and paper, Soy
Personal products 30302010 Palm, Soy, Pulp and paper
Banks (4010)
Diversified banks 40101010 Beef, Leather, Palm oil, Soy, Pulp and paper, Timber
Regional banks 30302010 Beef, Leather, Palm oil, Soy, Pulp and paper, Timber
Thrifts and mortgage finance 40102010 Beef, Leather, Palm oil, Soy, Pulp and paper, Timber
Utilities (5510)
Renewable electricity 55105020 Palm oil, Soy, Timber

As defined by the Forest 500 selection methodology. The Forest 500 does not cover all possible commodities, and for some countries other commodities will be more important.

High-risk countries and regions: Producers

Country Key forest-risk commodities produced and processed
Brazil Cattle, Palm oil, Soy, Timber
Indonesia Palm oil, Timber
Paraguay Cattle, Soy, Timber
Mexico Cattle, Palm oil, Soy, Timber
Nigeria Palm oil, Timber
Democratic Republic of the Congo Palm oil, Soy, Timber
Colombia Cattle, Palm oil, Soy, Timber
Côte d’Ivoire Cattle, Palm oil, Timber
Angola Palm oil, Soy, Timber
 Bolivia Cattle, Soy, Timber
 Thailand Palm oil, Soy, Timber
Cameroon Cattle, Palm oil, Timber
 Argentina Cattle, Soy
 Madagascar Cattle, Timber
 India Cattle, Palm oil, Soy, Timber
United Republic of Tanzania Cattle, Timber
 Viet Nam Soy, Timber
 Peru Cattle, Palm oil, Soy, Timber
Venezuela Cattle, Timber
Malaysia Palm oil, Timber
Lao People’s Democratic Republic Cattle, Soy, Timber
Cambodia Cattle, Palm oil, Timber
 Guatemala Cattle, Timber
 Honduras Cattle, Palm oil, Timber
 Nicaragua Cattle, Palm oil, Timber
 Ecuador Cattle, Palm oil, Timber
 Myanmar Palm oil, Timber
 Liberia Palm oil, Timber
 South Africa Cattle, Soy
 Philippines Palm oil, Timber
 Zambia Cattle, Soy, Timber
 Guinea Palm oil, Timber

As defined by the Forest 500 selection methodology. The Forest 500 does not cover all possible commodities, and for some countries other commodities will be more important.

High-risk countries and regions: Traders

Country Key forest-risk commodities produced and processed
China Beef, Leather, Palm oil, Pulp, Soy, Timber
USA Beef, Leather, Palm oil, Pulp, Soy, Timber
Germany Beef, Leather, Palm oil, Pulp, Soy, Timber
India Beef, Palm oil, Soy, Timber
Thailand Leather, Pulp, Soy
Indonesia Palm oil, Soy
United Kingdom Pulp, Timber
Japan Pulp, Timber
Canada Beef, Pulp, Timber
Italy Leather
Viet Nam Leather, Soy
Brazil Leather
 Malaysia Palm oil
 Spain Palm oil, Soy
 Mexico Leather, Timber

The Roadmap

Phase 1: Understanding and mapping risk Phase 1

Phase 2: Setting an effective policy and managing risk Phase 2

Phase 3: Monitoring and engagement Phase 3

Phase 4: Disclosing Phase 4

Phase 5: Eliminating deforestation

Going above and beyond: Nature and people positive Going above and beyond