Phase 5
Eliminating deforestation
Eliminating deforestation, conversion, and associated human rights abuses from your portfolio requires consistent efforts to monitor and engage clients/holdings to bring them into compliance with your policy within a set timeframe. Within four years of beginning this process, you will have the necessary data, information, and monitoring and engagement systems in place to be actively eliminating commodity driven deforestation, conversion, and associated human rights abuses from your portfolio.
By following the Roadmap up to this point, you will now have the data available to continue engaging with your clients/holdings who are making progress to help bring clients/holdings in line with your policy, or to make decisions to redirect financing away from those that are not making sufficient progress.
Recommendations for timings to eliminate commodity-driven deforestation, conversion, and associated human rights abuses
It is recommended that Phase 5 should be completed within four years of committing to the Roadmap at the latest. For those who began the roadmap in 2021, this would be by the end of 2025.
By implementing Phase 5, you will have:
- continued effectively engaging with your clients/holdings who are making progress on deforestation, conversion and associated human rights risks
- identified clients/holdings which have continued to make insufficient measurable progress toward addressing risk or resolving non-compliances
- as a last resort, looked to redirect finance away from clients/holdings who are not making sufficient progress.
To eliminate deforestation, conversion, and associated human rights abuses from your portfolio by 2025, it is vital that your organisation continues to regularly engage with your clients/holdings to ensure they continue making progress to address deforestation, conversion, and associated human rights abuses in their operations and financing activities.
Recommended action 1: Continue to identify and engage clients/holdings making too little progress or with high risk exposure
Continue to follow the actions on due diligence and engagement outlined in Phase 3 to identify your clients/holdings which remain highly exposed to deforestation, conversion, and associated human rights risks and engage clients/holdings who are making too little progress towards the standards outlined in your policy and your requirements.
Engagement with non-compliant clients/holdings should involve escalation measures, some of which are outlined in Phase 3 Section 2. Escalation measures can follow guidance such as the ShareAction framework for escalating engagement with companies, and the due diligence guidance published by Global Canopy, Neural Alpha and Stockholm Environment Institute, in progressing measures from the private to public domain, and from dialogue to imposing restrictions on financing.
Measures can include (in order of severity from low to high):
- Direct engagement with senior company leaders
- Making formal statements or releasing observation letters
- Joining collaborative campaigns
- Filing shareholder resolutions
- Voting against management
- Adjusting capital allocations
Continued non-compliance may necessitate placing conditionalities on financing; details around such measures are outlined further in the next step.
Communicating clearly to your clients/holdings the timelines in which escalation can be expected to take place, can ensure that escalation continues in a structured manner and companies receive consistent and predictable feedback. This also incentivises the timely transition towards commodity supply chains free from deforestation, conversion and associated human rights abuses.
To show that your organisation continues to act on deforestation and associated risks, annual reporting should be sustained indefinitely, even once your organisation has eliminated deforestation, conversion, and associated human rights abuses from your portfolios.
Recommended action 1: Continue to publish annual reports of clients’/holdings’ progress towards compliance with the policy
Doing this will put pressure on your clients/holdings to continue making progress towards the standards outlined in your policy. Follow the guidance detailed in Phase 4.
Financial institutions will have different limitations and restrictions on withdrawing financing. However, as a last resort, financing should ultimately be withdrawn from clients/holdings which have not made sufficient progress towards compliance with your policy requirements, their time-bound plans/commitments (both set in Phase 2), their implementation plans to correct non-compliance on the ground or the risk-reduction criteria set during engagement activities (both in Phase 3).
Recommended action 1: Redirecting financing away from clients/holdings who have not made sufficient progress toward compliance
Through engagement, your organisation can drive change beyond your clients/holdings through their supply chains and financing – active stewardship is key to maintaining portfolios that are free from deforestation, conversion, and associated human rights abuses.
Withdrawing financing from clients/holdings who have not made sufficient progress toward compliance is generally reserved as a last step in cases where engagement has not been productive or effective, as outlined through the engagement framework in Phase 5 Step A.The appropriate trigger and timing for withdrawing financing depends not only on the nature of the non-compliance and the company’s failure to address it but also on the type of financing and how your organisation can best use its leverage to influence positive change.
Redirecting finance can be especially impactful for ongoing corporate/project financing such as loans, insurance and working capital, but redirecting finance away from equity holdings rarely results in an immediate impact on financing and so engagement could continue for longer.
For implementation plans set in Phase 3 Step A, it is vital to monitor the client’s/holding’s progress towards the implementation of the agreed corrective actions within specified timeframes.
These decisions can be made using the data collected during your annual due diligence processes, as detailed in Phases 2 and 3, and should specifically include reviewing clients/holdings that have continually not met established corrective actions and risk-reduction criteria, including on the ground, set by your organisation during engagement activities in Phase 3.
Once the severity of any non-compliance with your policy on the ground has been identified, your organisation can then decide how to proceed with the relationship, and whether to consider redirecting financing away from the client/holding. Before reaching this stage, it is essential to determine whether the client’s lack of progress stems from financial, technical or other constraints, or from a lack of will. If finance is the primary barrier, providing targeted technical and financial support can help enable compliance, address the root causes of the risk, and drive meaningful improvements on the ground.
If it is an option for your organisation, you can consider suspending financing to the applicable clients/holdings until they achieve compliance with your policy or make progress towards the implementation plans set in Phase 3, choosing not to renew financing agreements when they are up for renewal, and finally withdrawing financing altogether.
Only consider divestment after all other options have been explored, since it is likely that non-compliant clients/holdings will be able to receive financing from other financial institutions which do not have as stringent/comprehensive policies in place, thus failing to address and eliminate the risk of deforestation, conversion, and associated human rights violations.
Many financial institutions, especially those with index funds, are unable to terminate financing agreements. These financial institutions should continue to prioritise engagement with their clients/holdings, and create new deforestation, conversion, and associated human rights abuse free finance products, including funds, and actively market these to clients. More detail on this can be found in the ‘Going above and beyond’ section. Asset managers which enable passive investors to participate in collaborative engagement will be able to better support them in addressing systemic ESG issues such as deforestation.
It is recommended that engagement continues for as long as possible, but if your organisation is considering withdrawing financing, it is vital that you engage the client/holding in advance of this decision.
If you are considering redirecting finance away from clients/holdings due to deforestation, conversion and, in particular, associated human rights abuses, it is vital to engage Indigenous Peoples and local communities who have been subject to such impacts to seek their views on continued engagement or disengagement with the client/holding. You may also wish to supplement such engagement through consulting with local governments, NGOs, and community-based organizations who may have detailed knowledge of the local context including information relating to financing and land tenure to better understand potential consequences of divestment.
It is also key at this point to discuss if, how, and when would be the most beneficial time for those peoples and communities for the client’s/holding’s financing to be removed. If the rights-holders request continued engagement with the client/holding this should be continued, at least until any grievances and judicial actions are resolved and remedied.
To follow best practice, it is key to ensure transparency throughout this process by documenting and communicating how input from local stakeholders has informed financing decisions, while ensuring the confidentiality and safety of participants, where necessary.
This decision to redirect financing away from clients/holdings should be considered as a last resort. If it is indicated by all of the preceding considerations (including support from any affected rights-holders), then your organisation should look to redirect finance away from clients/holdings that have not made meaningful progress.
If you do decide to redirect finance away from clients/holdings, and remove them from your portfolio, this decision and the reasons for it should be communicated to the client/holding. Making the decision public can also draw attention to the issue and drive change.
The same datasets and tools used to identify non-compliance in Phase 3 are also applicable within this recommended action.
- The Sustainable Finance Initiative’s report, ‘A guideline on the use of deforestation risk mitigation solution for financial institutions’ provides some additional guidance on how to determine when to withdraw financing from clients/holdings.
Appendix
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).
exposure to deforestation risk x steps taken to manage exposure = actual 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 |
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| Identifying steps taken to manage deforestation risk |
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