The tipping point of transparency

Insight / 21 Mar 2021

A new era of data linking deforestation and other nature-impacts to global trade and financial flows is making evidence-based decisions possible

As we approach the closing of the first quarter of 2021, we emerge from a winter dominated by the coronavirus pandemic into a spring and beyond that will be marked by its long-term impacts on the global economy. Today is the UN’s International Day of Forests, with the 2021 theme being restoration: a path to recovery and well-being. This year will be dominated by global policy responses to climate change and the destruction of nature with major summits on desertification, biodiversity and climate change – plus the World Conservation Congress, and the launch of the UN Decade of Restoration. As world leaders balance these priorities of economic recovery, nature restoration and climate change, they may well reflect on Mark Carney’s vision of “addressing climate change by transforming the financial system,” and his commitment to place the financial sector front and centre at the COP26 climate summit in November.

Speaking in February the former Governor of the Bank of England said: “we have been trading off the planet against profit for far too long, living for today and leaving it to others to pay tomorrow. This has depleted our natural capital, had a devastating effect on the planet’s biodiversity and is causing unprecedented changes to our climate.” In his role leading the Task Force on Climate-related Financial Disclosures (TCFD), Carney has also been instrumental in improving access to the data financial institutions need to better understand and manage climate risk. This is a vital step, and one that most be deepened and accelerated. Robust data is essential if financial capital is to be shifted with the speed necessary from negative to positive for the environment.

Global trade, deforestation, biodiversity and climate

Take the case of deforestation, a leading factor in rising greenhouse gas emissions. There is no solution to climate change without a solution to deforestation. Deforestation is also a major cause of biodiversity loss and severely impacts the rights and livelihoods of indigenous and local communities in forested regions. Thankfully, global leaders are making the connections between all these problems with increasing frequency.

Deforestation is driven mainly by agricultural expansion for commodities like beef, soy, palm oil and pulpwood, that are globally traded and financed. Our new animation demonstrates this interconnectivity, and how more transparency and better data can improve accountability and help us to reverse market impacts on the climate, nature and people.

The state of play today

The 2021 Forest 500 report identifies nearly 100 financial institutions that have no policies in place to address deforestation, yet provide some $2.7 trillion in financing to the companies most exposed to this problem. Meanwhile, among the many companies that did make well-publicised commitments to end deforestation in their supply chains by 2020, not one was able to achieve what they promised.

The Little Book of Investing in Nature estimates there is a global annual shortfall of $824 billion in terms of financing a solution to the loss of vital natural ecosystems. All the while, governments provide more that a trillion dollars in subsidies to economic sectors that harm biodiversity – five times the amount spent on protecting nature.

How did we come to this point, when the issues we face have been so well known for so long? Whilst much of the answer undoubtedly lie in the profit motive, lack of political will and a lag between evidence and action, a significant part is also found in questions of data and transparency.

It has not been straightforward for financial institutions and companies to comprehensively identify and act on their role in destroying nature. The links between commodity production, trade and finance and their contribution to deforestation, biodiversity loss and climate change are well understood at a macro level. But there has been a lack of decision-relevant information to enable targeted action to be taken. Supply chains are complex and opaque, with commodities changing ownership many times before reaching end consumers. The financial sector is a further step removed, with complex investment structures and layers of ownership obscuring the relationship between the dollar and the environment.

There is a global annual shortfall of

$824 billion

  in terms of financing a solution to the loss of nature.

A new era of data for nature

A shift has occurred over the last five years. Projects like Trase and Trase Finance map the deforestation risk of companies and financial institutions at a previously unachievable scale and granularity. Meanwhile, tools like ENCORE allow financial institutions to explore their impacts and, crucially, their dependencies on nature across entire portfolios and economies.

This new wave of initiatives provides open data, free of charge. They are part of a growing transparency revolution that is helping to break down one of the critical barriers to achieving a more sustainable global economy.

Nothing better demonstrates this shift than the rapidly developing Taskforce for Nature Related Financial Disclosures (TNFD). Over the last five years, the Task Force on Climate-related Financial Disclosures (TCFD), led by Mark Carney and Michael Bloomberg, has been instrumental in mainstreaming the issue of climate risk, while also improving access to the data financial institutions need to manage that risk. The TNFD aims to do the same for nature-related risks.

With a full launch planned for later this year, the TNFD will develop an international reporting standard for nature-related risks. The majority of seats at the table developing the Taskforce are taken by financial institutions and companies, demonstrating a fundamental shift among private sector leaders intent on getting better metrics, reporting and disclosure on nature.

The TNFD also has strong support from governments and multilateral institutions, coordinated as it is by the United Nations Development Programme (UNDP), the United Nations Environment Programme Finance Initiative (UNEP FI), World Wide Fund for Nature (WWF), and Global Canopy.

The tightening net of transparency

Governments are stepping up to the plate in other ways too. Due diligence legislation, focussing on stopping imports of products linked to deforestation is being debated in the parliaments of the UK and the EU. The most influential players in the global economy are now considering mandatory reporting and disclosure to be not an ‘if’, but a ‘when’. Recent dramatic improvements in transparency and the availability of better data to monitor progress have helped open the way for these vital legislative frameworks.

Out of 500 companies and financial institutions in forest-risk supply chains,


do not have a policy to reduce deforestation.

As this net of transparency tightens, some leading companies and financial institutions are showing the way. Rather than waiting to be pushed by regulation, they are taking action on their own portfolios now. In the summer Nordea Asset Management divested its $45m shareholding in JBS, a Brazilian meat company, over its links to deforestation. The Forest 500 report shows Rabobank, Deutsche Bank, ABN Amro, Standard Chartered and BNP Paribas are the top performers in this year’s ranking. This group 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. Now the rest of the market must urgently follow.

As policy makers and business leaders around the world step up their efforts to tackle the climate and nature crises, they have better data than ever before to help them make evidence-based decisions. There are still huge data gaps of course, but the pace of progress in addressing them is encouraging. We therefore mark this International Forests Day with the hope that we are reaching a positive tipping point of transparency. One that can enable better action and accountability on the environment among the world’s largest companies and financial institutions. This is a prerequisite if we are to stop financing ourselves to extinction. If we are to build back a better economy that works with – and for – the natural world, and for us all.

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