The 19%: the pioneering financial institutions leading the way on deforestation

Growing finance sector momentum around nature and climate action is yet to translate into deforestation policies for the majority of financial institutions

By Beate Triantafilidis

Finance Content Lead

Over the last year, financial institutions have rapidly expanded their awareness of the escalating nature crisis. The initiative to bring together a Taskforce on Nature-related Financial Disclosures (TNFD) includes 48 financial institutions from five continents. Tackling the climate emergency has continued its journey into the mainstream.

Halting deforestation is essential to preserve biodiversity and meet global climate targets. But despite the finance sector growing more vocal on the need to solve the twin crises of nature loss and climate change, only 55 of the 150 financial institutions most exposed to forest-risk companies have a deforestation policy in place, according to the new assessment from Global Canopy’s Forest 500.

Progress – but vast gaps remain

There’s some progress worth celebrating. Twenty-two additional financial institutions introduced at least one new deforestation policy in 2020 compared to 2019, mainly for timber. 37 percent of financial institutions have some form of policy now, while last year 32 percent did. Europe is the global leader. Here, 67 percent of financial institutions have deforestation policies in place.

Some in the finance sector are moving in the right direction, but the rate of improvement must ramp up dramatically. 37 percent of financial institutions score zero percent in the Forest 500 assessment, meaning that they have yet to show awareness of deforestation as a problem, and they don’t have policies on social and governance issues relevant to deforestation, like corruption. A larger group of financial institutions receives a handful of points for having awareness of deforestation as a problem. Recognising an issue always has to be step one, but financial institutions now need to move at warp-speed from acknowledging the problem to taking clear action.

Follow the leaders

Lagging institutions and regions must urgently catch up with those leading the way. There is no solution to the growing climate and nature crisis without a solution to deforestation, and left unabated, nature loss and run-away global heating pose massive financial risks. The vast gap between leaders and laggards on deforestation is an opportunity: leading institutions provide concrete examples for the rest to follow.

Rabobank, Deutsche Bank, ABN Amro, Standard Chartered and BNP Paribas are the top performers in this year’s ranking.

This group of leaders are among the 19 percent of financial institutions that have commodity-specific deforestation policies across all the four high forest-risk commodities of palm oil, soy, beef and leather, timber and paper. Such commodity-specific policies are a critical next step from an overarching institution-wide deforestation policy. In 2020, Italy’s Unicredit was the only financial institution that published new policies for all forest-risk commodities. During 2021, a much greater number must do the same.

Best performers must also improve

While laggards need to catch up with the leaders, the best performers must chase further improvements. The leading financial institutions are ahead of the pack, but no financial institution is implementing best practice yet. Top performer Rabobank scores 72 percent overall, while Deutsche Bank in second place scores 66 percent and ABN Amro in third scores 65; no one is close to a perfect score.

Leaders must continue to improve their reporting and implementation practices in particular, as well as the social element of their deforestation policies.

And there’s still room to strengthen commodity policies across the board. Making performance uniform across commodities is another avenue to improvement. At the moment, commitments for palm oil are the strongest. A lower share financial institutions have commitments for beef and leather, and when they do, the commitments are typically weaker, despite cattle being the biggest driver of tropical deforestation.

Time for step-change

With deforestation in the Brazilian Amazon recently reaching a 12-year high, leaders and laggards alike must make 2021 the year they prioritise action on deforestation. With a flurry of nature-related finance sector initiatives continuing to gain momentum this year, including the TNFD and the Finance for Biodiversity pledge, the foundations are finally in place for a step-change.

Nature-based solutions will be a key theme at the COP26 climate summit scheduled for the end of the year. As the nature and climate agendas increasingly merge into one, having a public deforestation policy will be necessary for financial institutions to claim climate leadership without risk looking insincere. By the time global leaders gather for the climate summit in November, we expect to see a much higher number of financial institutions with deforestation policies.

Ambitious voluntary leadership is key, but so is legislation. It’s time for ‘both-and’, not ‘either-or’.

Policymakers in the UK and the EU have already proposed due diligence legislation for deforestation. It’s in the interests of financial institutions that have led the way through voluntary action to encourage policymakers to make that legislation include the finance sector as well as corporates. By raising the bar for the poorest performing financial institutions, due diligence legislation levels the playing field and rewards those financial institutions who led the way.

‘Time for change: Delivering deforestation-free supply chains’ is the latest Forest 500 report from Global Canopy.

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Hero image: Photo by Viktor Jakovlev on Unsplash