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Why financial institutions hold the power to stopping deforestation

Insight / 15 Oct 2021

Pressure is growing on financial institutions to change as the world connects the dots between big money and deforestation.

In 2020, 4.2 million hectares of primary tropical forest was lost to deforestation. That forest covered an area the size of the Netherlands. Forests are a key ally in our battle against the climate crisis – the Amazon alone absorbs 5% of the world’s annual emissions. That’s why – ahead of COP26 – deforestation is firmly on the agenda, and that means looking at the finance behind it. 

In September, former Governor of the Banks of England and Canada, Mark Carney, said that “by COP26 the world will know which banks, asset managers and asset owners are part of the solution to climate change and which remain part of the problem.” He’s not alone. The COP26 Presidency is calling for the financial community to sign up to a commitment to zero-deforestation portfolios by 2025. 

Two thirds of tropical deforestation is driven by the global trade in key commodities, known as forest risk commodities – including soy, palm oil, cattle, timber and wood pulp. These commodities end up in half the products in our supermarkets. They end up in animal feed, in clothes and upholstery in furniture and cars.

But the capital that makes this global trade flow comes from financial institutions. Through loans and shareholdings, banks, pension funds and asset managers, finance companies that produce or trade in forest risk commodities. Because banks and investors provide finance and financial services along these supply chains, they have an opportunity to influence the companies that they finance. And they could use that influence to help end deforestation.

In January, Global Canopy’s Forest 500 Rankings revealed that financial institutions provided over US$5.5 trillion dollars to the 350 most influential companies in forest-risk commodity supply chains. That’s $5.5 trillion dollars potentially funding deforestation. That money, through loans, shareholdings, bonds and underwritings puts financial institutions in a unique position in forest-risk commodity supply chains and industries, enabling them to drive progress towards a deforestation-free economy. 

Forest 500 showed that $2.7 trillion of the investment in companies in forest-risk supply chains came from financial institutions with no deforestation policies themselves. If that changed, financial institutions could engage with companies in their portfolios, demanding action. Ultimately finance could be made conditional on companies meeting specific requirements on deforestation.

This is already happening. January’s Forest 500 Report showed Rabobank, Deutsche Bank, ABN Amro, Standard Chartered and BNP Paribas are at the top of the list with commodity-specific deforestation policies. It doesn’t mean that all their financing is deforestation free, but they are heading in the right direction.

Often power comes through shareholdings. In 2020, Nordea Asset Management divested its $45m shareholding in JBS, a Brazilian meat company, over its links to deforestation. 

The world’s largest asset manager – Blackrock – doesn’t have a specific commodity driven deforestation policy. However, in 2020 and for the first time ever, it joined with other shareholders in the consumer goods giant Procter & Gamble to require it to step up transparency efforts to address the deforestation and forest degradation caused by its use of palm oil and forest pulp. Blackrock is P&G’s second-largest shareholder with a 6.6% stake.

Other shareholder action is also making a difference. Bunge is the leading soy player in the Cerrado – the world’s most biodiverse savanna and home to 5% of the planet’s animals and plants. The Cerrado is also the fastest growing soy deforestation frontier in the world. Trase data shows that Bunge’s soy exports were linked to almost 50,000 hectares of deforestation risk between 2015 and 2018. In May this year, a resolution launched by the investment group Green Century Capital Management asking Bunge to strengthen its deforestation policies was backed by 98% of shareholders.

Source: Trase

As the world faces up to the linked crises of the climate emergency and nature loss, financial institutions have an opportunity to be a force for good. They can engage with the companies they finance and if there is no action on deforestation, shift the flow of finance away from those who refuse to act. Such action makes climate and nature goals achievable. It also makes business sense, as consumers, investors and politicians alike all demand action. That means financial institutions have the power to lead the way.

Don’t miss what we’re doing at COP26 – visit our nature and climate hub or follow us on Twitter and LinkedIn to keep up to date with the latest COP news.

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