Is finance failing on deforestation?

There is no solution to climate change without a solution to deforestation. It is the source of some 15% of global carbon emissions – and an important driver of biodiversity loss.

Yet far more finance continues to flow into activities that drive deforestation than those that protect forests. Our eighth annual Forest 500 report finds that 150 financial institutions provide some US$ 5.5 trillion of capital to the 350 companies with the greatest exposure to tropical deforestation. What’s more, two-thirds of these 150 financial institutions do not even have a policy on deforestation, and the minority that do show little evidence of implementing it.

The lack of action is shocking and means that despite high profile net-zero pledges and biodiversity commitments, banks, pension funds and investment managers are not doing enough to address their climate-related risks.

With little progress from corporates

It’s not just financial institutions that are falling behind. Our recent Forest 500 ranking also assessed the progress of 350 producers, processors, manufacturers and retailers who sell products containing the six main forest-risk commodities (palm oil, soy, beef, leather, timber, and pulp and paper). We found that two-thirds of these companies do not have a commitment to end deforestation across their supply chains, and one-third have no commitments on deforestation at all. Worryingly, companies are least likely to have a commitment for beef – the biggest driver of deforestation in the Amazon.

Inaction doesn’t square with climate pledges

This inaction on forests from finance and business doesn’t square with the high profile climate pledges that were made at COP26, when signatories to the Glasgow Financial Alliance for Net Zero (GFANZ), representing US$130 trillion in private capital, all committed to transforming the global economy to net zero, a target that cannot be met if finance continues to flow to activities and companies that drive deforestation.

Despite this, there is a growing understanding across the finance and business world that deforestation is part of climate risk - and one that urgently needs addressing. The public do not want their pensions and their savings to be driving deforestation – and there is a growing likelihood that regulators across the world will strengthen measures to reduce climate risks and protect the natural world.

Forward thinking institutions are stepping up – and business needs to follow

Thirty-three forward-thinking financial institutions, with US$8.7 trillion in assets under management made a public commitment at COP26 to address commodity-driven tropical deforestation by 2025.

A number of these are already well on the way to addressing the issue, with some, such as Storebrand Asset Management, leading the field, with a comprehensive deforestation policy, implemented through engagement with their investee companies.

Tools are available for those looking to follow Storebrand’s lead, for example a finance sector roadmap sets out clear steps to tackle deforestation. These include mapping deforestation risks, setting an effective deforestation policy, monitoring risks, engaging with companies, disclosing progress and following up on engagement to eliminate deforestation.

For sustainability professionals at corporates, understanding where the risks in their supply chains lie - and engaging with suppliers to ensure these risks are addressed, is key. The Accountability Framework initiative sets out best practice for addressing deforestation risks in supply chains.

The momentum from COP26 must not be lost

The Glasgow climate talks delivered a significant shift in understanding and expectations around ending deforestation. The Glasgow Leaders Declaration on Forests and Land Use, signed by 141 countries including Brazil, China and Indonesia, is a commitment to eliminate deforestation by 2030. To deliver on that commitment, governments need – and expect – finance and business to act. Financial institutions hold considerable leverage over the companies linked to deforestation – and by working with them, they can help them transition to a more sustainable future.

The momentum from COP26 must not be lost. The financial community and companies have the opportunity to be real drivers of change, and they need to step up to the challenge. The current narrow climate focus on fossil fuel emissions must be broadened to include the climate and nature-related risks, especially those linked to land use and deforestation.

So while our Forest 500 findings paint a bleak picture, there is reason to believe that things are changing. COP26 set a clear direction of travel and the businesses and finance sector need to follow. It is time for greater ambition. We need and expect to see better performance over the next year.

Sarah Draper, corporate performance programme manager at Global Canopy

Global Canopy