Phase 3

Monitoring and engagement

Once you have set a deforestation, conversion and associated human rights policy, it is vital that your clients/holdings are engaged on the topic of deforestation. Methods and mechanisms to implement the policy will differ between financial institutions and asset classes, but this Roadmap provides some recommendations on how this engagement could be designed and structured.

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

It is recommended that Phase 3, and particularly engaging the highest-risk clients/holdings, is started by the end of 2022, or within at least fifteen months of beginning the Roadmap. The first cycle of monitoring and engaging of non-compliant clients/holdings should be completed by 2023, or within 2.5 years of beginning the Roadmap.

At the end of Phase 3, you will have:

  • engaged the highest-risk clients/holdings as identified in the in-depth risk assessment in Phase 2
  • completed the first annual screening and monitoring process of all clients/holdings to assess compliance with the requirements for clients/holdings
  • engaged with clients/holdings that do not comply with these requirements
  • engaged with other stakeholders, including ESG data providers and policymakers on deforestation, conversion, and associated human rights.

The earlier these engagement processes begin, particularly for those with the greatest exposure to deforestation, conversion, and associated human rights risk, the better to ensure portfolios are deforestation, conversion and human rights abuse-free. This will reduce the likelihood that engagement with risky clients/holdings will need to be escalated within the timeframe outlined in this Roadmap, since successful engagement with clients/holdings can take time to achieve results.

Recommended action 1: Annually screen and monitor all clients/holdings

To monitor whether your portfolios are compliant with the requirements set within your policy, it is recommended that you conduct annual due diligence of all applicable clients/holdings. This screening and monitoring can be done using data reported to/collected by you from the clients/holdings directly, data and information from affected rights-holders and organisations on the ground, as well as data from ESG data providers and third parties (e.g. NGOs).

The screening and monitoring of clients/holdings outlined within this recommended action can also be used for the onboarding process of new clients/holdings to gauge their level of exposure to risk and impacts, and the strength of their efforts to mitigate that exposure.

Screen and monitor all clients/holdings for exposure, risk, risk-mitigating measures, and performance related to deforestation, conversion and associated human rights abuses. This can be done using the same approach outlined in the in-depth risk assessment conducted in Phase 2 Step A, repeated annually and comparing results to previous cycles.

In annual due diligence processes this can include looking in more detail at changes since the in-depth risk assessment or the screening cycle, including:

  • the progress being made towards their time-bound plans or your policy
  • any changes to their commitments and their implementation
  • any changes to their exposure to deforestation, conversion, or human rights abuse risk.

Once non-compliance has been identified through the due diligence process, it is key to establish the severity of any non-compliance on the ground, e.g. cases of deforestation, conversion, and associated human rights abuses, in the operations, supply chains, or financed projects of clients/holdings. This is critical in determining which clients/holdings are priorities for immediate engagement. Guidance on how to use the severity of non-compliance to prioritise clients/holdings is given in the following Recommended action.

In some cases, particularly for lenders providing financing directly to clients/holdings with agricultural production or processing operations, this will require direct investigation on the ground which can be done directly by your organisation, or through an intermediary.

To determine the severity of non-compliance on the ground, your organisation can assess the client/holding based on five criteria.

Three of these criteria consider the actual or potential impacts of the non-compliance on people and the environment, specifically the:

  • Intensity (including the level of damage and impacts on the environment and affected rights-holders)
  • Scale (including area impacted, proportion of operations, number of rights-holders affected)
  • Persistence (is this a one-off case of non-compliance, or is it something that has occurred previously?)

And two criteria consider the client/holding itself, looking at their:

  • Culpability for the non-compliance (what role did they play in causing or contributing to the non-compliance and/or what level of ability did they have to prevent the non-compliance?)
  • Capability to remedy the non-compliance (are they able to remediate within the timeframe needed by the affected community?)

More detail on these criteria, including categorisations within each, can be found in the Accountability Framework initiative’s Operational Guidance on Supply Chain Management.

Once clients/holdings have been screened, and the  severity of any non-compliance on the ground identified, you can determine which clients/holdings are in need of additional engagement due to a lack of measurable progress towards the requirements laid out in your policy. Continued lack of progress is equivalent to non-compliance with the policy.

As recommended in Phase 2 Step A, clients/holdings can continue to be categorised into high-, medium-, and low-risk to determine priorities for engagement.

In Phase 2 Step B, your organisation set policy requirements which clients/holdings must meet in order to qualify for financing or investment, including any new or prospective clients/holdings. For new clients/holdings, any further progress needed (e.g. reaching 100% of commodities traced back to farm) should be clearly defined within any financing agreement(s).

The screening and monitoring of clients/holdings outlined within this recommended action can also be used for the onboarding process of new clients/holdings, to gauge their level of exposure to risk and the strength of their efforts to mitigate that exposure.

The datasets and tools recommended in Phase 2 Step A are also recommended when conducting annual screening and monitoring of all clients/holdings.

  • The Accountability Framework initiative’s Operational Guidance on Supply Chain Management and Topical Summary on Management of Non-Compliant Suppliers provides additional detail on how to determine the severity of any non-compliance on the ground, and how to use that information to determine next steps.
  • The supplementary guidance recommended in Phase 2 is also recommended when conducting annual screening and monitoring of all clients/holdings
  • Suggested metrics to identify high-, medium-, and low-risk clients/holdings can be found in the appendices.

Recommended action 2: Engage non-compliant clients/holdings identified

Effective engagement is vital to drive progress and reach compliance with the requirements listed within your policy across your entire portfolio. The steps below are recommended to engage clients/holdings that are found to be non-compliant with your policy or your requirements for clients/holdings based on annual due diligence processes.

This Roadmap acknowledges that some financial institutions have different processes in place to address non-compliance within their portfolios, and the recommendations below are designed to be introduced as either complementary steps or new processes.

As in Recommended action 1, this can also be used as an opportunity to:

  • Discuss why you have identified the client/holding as a priority for engagement on the topic of deforestation, conversion, and associated human rights abuse risks
    • This can include why you consider them to be high-risk based on the thresholds for engagement and non-compliance with the policy as outlined in Phase 2
  • Identify the key issues the client/holding faces in addressing their deforestation, conversion and associated human rights risk identified in Phase 1/Phase 2
  • Understand what measures the client/holding is taking to address their deforestation, conversion and associated human rights risks, whether these measures fulfil your organisation’s requirements for clients/holdings, and (if not) what gaps exist
  • Identify what the client/holding sees as the main internal or external barriers to taking the needed mitigative action to reduce these risks

This can be done using the data and information gathered throughout the annual screening and monitoring, as well as the detailed risk-assessment conducted in Phase 2 Step A. This can include:

  • the progress being made towards their time-bound plans for compliance with your policy requirements
  • any changes to their policies and their implementation
  • any change to their exposure to deforestation, conversion, or associated human rights risk.

If there are any concerns that were not addressed by the client/holding, or you feel external expertise is required, you can reach out to other organisations to identify whether the information provided by the client/holding shows strong enough signs of progress.

  • You can reach out to organisations which host relevant working groups, and gain additional support or advice on how to engage specific non-compliant clients/holdings
  • A detailed list of such initiatives or working groups was outlined in Phase 1 Step A

It is also recommended that the client/holding is required to report on their progress towards the updated time-bound plan within at least six months, and then again after 12 months.

For equity and bond holders, this step could be done with the support of other investors to place greater pressure on the company to drive positive change, through collaborations such as the Climate Action 100+. For banks, this required progress could be made a condition of further/extended financing.

The ramifications of continuing to make no measurable progress towards their commitment or time-bound plans should be clearly communicated to the clients/holdings.

For banks, such compliance could be established as a precondition of further financing.

Implementation plans are most effective when they include:

  • details of the root cause of the non-compliance
  • analysis of the environmental and social impacts of the non-compliance that has been identified
  • established corrective actions (including remediation activities and risk-reduction criteria) that will take place
  • roles and responsibilities for each of those actions
  • time-bound milestones and actions, and how this will be monitored and verified.

More detail on these implementation plans to address non-compliances is included in Section 5.1 of the Accountability Framework Operational Guidance on Supply Chain Management.

When developing implementation plans it is essential to engage with rights-holders whose rights have been impacted and/or violated by your clients’/holdings’ activities to understand the nature of the impacts of their non-compliance with your policy and to determine the actions desired by rights-holders to remediate these violations/harms in accordance with their rights. Your organisation can facilitate this either directly or through an intermediary, or the client/holding can do this directly with rights-holders. Any engagement should ensure that rights-holders are supported and sufficiently informed to contribute, and should be carried out in the rights-holders’ language.

Once mutually agreed by the client/holding and the affected rights-holders, such corrective actions should be documented as a time-bound implementation plan. The time-bound plans agreed with the client/holding and the affected rights-holders should be shared with all relevant parties as a basis for subsequent monitoring and accountability.

For further guidance on best practice for remediation activities, see the Accountability Framework Operational Guidance on Remediation and Access to Remedy. A similar approach can be used for non-company investments.

This should also include asking your clients/holdings to report, preferably publicly, on:

  • which suppliers, business partners, and financiers they have engaged with as part of their time-bound plans and remediation efforts, and details of this engagement
  • which rights-holders and relevant organisations they have engaged with as part of their remediation efforts
  • the degree of progress toward resolving the non-compliance, stated in specific and quantitative terms to the extent possible (e.g., “restoration was initiated for 50 of the 200 hectares that were illegally deforested”).

In addition to requiring your clients/holdings to report their progress towards their time-bound plans and remediation activities, your organisation can again engage with the rights-holders on the ground (directly or through an intermediary) to monitor the implementation of these plans and activities on the ground – and whether the actions being taken are effective and aligned with the needs of the rights-holders.

  • Accountability Framework Operational Guidance provides detail on the best practice for companies operating in forest-risk commodity supply chains
  • CDP provides guidance for financial institutions on how to use the CDP platform to drive engagement with clients/holdings
  • Ceres ‘Investor Guide to Deforestation and Climate Change’ provides suggested questions to guide engagement with clients/holdings on deforestation and climate change issues
  • The Investor Initiative for Sustainable Forests, run by PRI and Ceres has a number of investor expectations documents for companies involved in palm oil, soy and cattle supply chains.
  • Ceres’ ‘Proxy voting for sustainability’ provides guidance on how your financial institution can use proxy voting to drive action on ESG issues
  • OECD’s ‘Guidance for Responsible Agricultural Commodity Supply Chains’ provides guidance on agricultural commodity production which can be used to engage non-compliant clients/holdings

Recommended action 3: Continue to engage clients/holdings which are making too little progress or with high-risk exposure

Following the annual due diligence cycles detailed in Recommended Action 3, continue to identify which of your clients/holdings remain highly exposed to deforestation, conversion, and associated human rights risk and those who are making too little progress towards the standards outlined in your policy and your requirements for clients/holdings.

Continuing to engage those of your clients/holdings which have the greatest exposure to these risks is key to achieving portfolios that are free from deforestation, conversion, and associated human rights abuses.

The recommended actions outlined above can be repeated in order to continue maintaining portfolios that are free from deforestation, conversion, and associated human rights abuses.

During your due diligence cycles you can identify which clients/holdings are continuing to either act too slowly or do too little to progress towards the requirements of your policy, and which are failing to address and remedy non-compliances on the ground.

These clients/holdings should remain key priorities for engagement activities in order to bring them in line with the requirements of your policy.

Continued engagement with clients/holdings which are exposed to these risks and impacts is vital in transforming the deforestation economy.

Appendices

The risk posed by clients/holdings can be determined by evaluating their exposure to deforestation risk (their potential risk) and how they manage their exposure (how they limit the risk).

This roadmap provides suggested metrics, and associated tools and datasets, which can be used to determine whether a client/holding is high-risk based on their exposure to deforestation risk and their mitigation activities.

This roadmap does not provide suggested categorisations of high-, medium-, and low-risk based on these proposed metrics, but this may follow in the actor-specific guidance pieces.

Additional metrics that you may wish to use can be found in the Accountability Framework initiative’s Common Methodology.

Potential metrics Useful sources/tools
Identifying exposure to deforestation risk
  • Direct sourcing from high-risk regions (as defined in Stage 1)
  • Indirect sourcing from high-risk regions (as defined in Stage 1)
  • Hectares of deforestation occurred after the cut–off date (if they have one)
  • Dependency on forest-risk commodities
  • Proportion of annual revenue which is dependent on forest-risk commodities
  • Volume of forest-risk commodity and derivatives produced, processed, traded, used, or sold
Identifying steps taken to manage deforestation risk
  • Deforestation and/or conversion and human rights abuse policies in place for all high-risk commodities
  • Success and progress towards achieving previous policies
  • Proportion of commodity sourcing from high-risk countries/regions (or that which is financed) which can be traced back to the processing facility and the point of production, or to a point where deforestation-free status can be determined
  • Publicly reported stats by the customer/client
  • ESG providers
  • Compliance monitoring and verification systems in place
  • Proportion of commodity sourced/financed monitored for compliance
  • Proportion of commodity sourced/financed verified for compliance
  • Deforestation and human rights controversies on the ground, including non-compliance with the human rights laid out in the UN Guiding Principles on Business and Human Rights
  • NGO lists of controversies, on websites or newsletters
  • Alerts from Indigenous peoples and local community organisations/representatives reported directly or through an intermediary
  • RepRisk
  • Controversy indices from ESG providers

Through engaging with financial institutions, companies, governments, and ESG data providers, your organisation can make your new and existing processes easier and drive change beyond your own financing activities.

Recommended action 1: Collaborating with other financial institutions

Through collaborating with other financial institutions, and finance-focused initiatives, your organisation can share knowledge but also raise the bar for others.

This will facilitate capacity building for your own financial institution and for others by sharing knowledge, experience, and resources.
There are a number of finance initiatives which cover deforestation to get involved with, including:

Suggest that any of the finance-sector initiatives you are a part of also endorse the 2025 target date for achieving portfolios that are free from commodity-driven deforestation, conversion, and human rights abuses. This will send an even clearer message to your clients/holdings to help drive forward progress on halting deforestation.

Recommended action 2: Engage ESG data providers on need for better data

As outlined in Phase 2, there are numerous different data sources your organisation can use to inform your financing activities, but none provide fully comprehensive data and information. You can engage with different ESG providers on what the ideal dataset(s) would include for different sectors, commodities, and regions, and through doing so encourage them to strengthen the data they provide.

Engaging with ESG providers can help to streamline your due diligence and risk assessment processes in the long-term, through advocating for strengthened and comprehensive datasets. Once you have conducted the in-depth risk assessment in Phase 2 you will have a clear idea of the data that is needed to strengthen your due diligence processes and financial decision-making.

You can communicate these needs to your preferred data provider, and ask them to expand their dataset – particularly through the inclusion of grievances raised and information from rights-holders and communities on the ground where possible. For instance, CDP facilitates financial institutions requesting environmental disclosure from specific companies through their disclosure platform, providing data which can then be integrated into investment, lending and financing processes.

Recommended action 3: Engage index providers on the need to develop indexes and funds that are free from deforestation, conversion, and associated human rights abuses

In addition to engaging ESG data providers, if your organisation uses indexes you can also engage with Index providers to create deforestation-, conversion-, and associated human rights abuse-free indexes.

This will highlight to index providers that there is a growing demand for indexes which are free from these issues, and encourage them to develop funds that meet these criteria. This will make it easier for more financial institutions to make deforestation-, conversion-, and associated human rights abuse-free index funds – enabling change across the sector.

Recommended action 4: Advocate for due diligence legislation

Due diligence legislation, if effective and comprehensive, has the potential to make your organisations’ identification and mitigation of deforestation, conversion, and associated human rights risks and impact significantly easier. This is in part due to the implications of due diligence legislation on company and financial institution reporting of exposure to and action on these risks. While there is proposed due diligence legislation in some regions, these existing proposals and future proposals for legislation must be as strong as possible to ensure that these risks are mitigated effectively

Once you have an understanding of your organisation’s exposure to deforestation, conversion, and associated human rights risks, your organisation will be in a position to advocate for due diligence legislation focused on these issues in forest-risk commodity supply chains – such as those currently proposed in the EU, UK and the US.

It is key that this proposed legislation covers all stages of forest-risk supply chains, from financiers through to retailers. It should align with best practice for the sector, as defined by the Accountability Framework and your policy, to ensure that the disclosure frameworks provide useful and actionable data and information.

You can advocate for stronger due diligence legislation by responding to consultations on legislative frameworks and encouraging other financial institutions to do the same. This sends a clear message to policymakers about the requirements for clients/holdings – as well as the disclosure of data needed.

The introduction of due diligence legislation to cover financial institutions would level the playing field, raising the bar for other financial institutions to address their exposure to deforestation, conversion and associated human rights risks.

In line with the WWF Risky Finance report, strong due diligence should incorporate:

  • enhanced due diligence processes for financial institutions which are financing clients, including other financial institutions, who are operating in or may be operating in countries or regions where there is a risk of deforestation, conversion, and associated human rights risks
    • This due diligence should not just be for the client/holding, but also for the client/holdings’ supply chains.
  •  requirements for effective and sufficient data and information available to the financial institutions for its due diligence processes, and require financial institutions to only provide finance to new clients/holdings if there is enough data to conduct a thorough risk assessment, and to require pre-existing clients to implement time-bound plans to become compliant with the financial institution’s policy
  • comprehensive risk assessment and mitigation processes which can be readily incorporated into financial decision-making, such as those included in Phases 2 and earlier in Phase 3 of this Roadmap.

Existing due diligence and complementary frameworks for financial institutions provide a useful starting point, such as Know Your Client (KYC), anti-money laundering (AML), anti-bribery and corruption regulations.

Recommended action 5: Advocate for deforestation to be included in all climate or nature-related initiatives or strategies

Deforestation is a critical component of action on nature loss or climate change. Initiatives or strategies to address these issues need to explicitly include action on deforestation.

Examples of initiatives or strategies where deforestation or land use change emissions should be explicitly included are in voluntary or mandatory disclosure/reporting, or the inclusion of deforestation in net zero transition plans.

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 Phase 5

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