Working towards deforestation-free portfolios – the finance sector perspective

“Halting and reversing deforestation can have an outsized impact on achieving the net-zero world that we’re striving for,” Isobel Mitchell, Senior Responsible Investment Analyst at the Church Commissioners for England, told a webcast hosted by EY and Global Canopy. The webcast brought together an industry-leading panel to discuss why financial institutions should act on deforestation risk in their portfolios, and the practical tools and guidance available to help them do so.

By Katy Golder

Communications Officer, Global Canopy

Why deforestation matters, and where to begin

Protecting forests is one of the most effective ways to combat climate change and nature loss. When forests are destroyed, they release carbon, land degradation accelerates and countless species lose their habitats. 

“Deforestation accounts for 10-12% of global emissions – that’s the same as the world’s land transport,” said James Hulse, Senior Adviser for Sustainable Finance at Global Canopy. “If you have climate targets, net-zero targets, transition plans, you need to be taking deforestation into account.”

This urgency is beginning to translate into greater focus within the sector. “Deforestation has been a growing area of focus for financial institutions since COP26 in particular,” said Bethany Ridley-Moran, Nature Manager at Lloyds Banking Group. “The science has been clear for some time that there is no pathway to net zero without rapid action on deforestation.”

By putting into place strong and well-integrated climate and nature transition plans – with deforestation and associated human rights central to both – financial institutions can play a crucial role in galvanising corporate action.

Even with this growing awareness, the pace of change remains too slow. “Despite global policy efforts and the momentum we’ve seen since COP26, and the leading efforts of many financial institutions and voluntary initiatives, there’s a continued pervasiveness of deforestation,” Bethany warned. “We know that private sector investment and lending to sectors that are funding deforestation continue to outpace those conservation efforts.”

For many institutions, the link between deforestation and portfolio risk is becoming clearer. “We see deforestation as a risk to the resilience of our investment portfolio,” said Isobel. “We see halting and reversing deforestation as something that can have an outsized impact on achieving the net-zero world that we’re striving for through our net-zero-by-2025 goal.”

Financial institutions are beginning to act accordingly. “Lloyds Banking Group set an ambition in 2020 to achieve net zero by 2050 or sooner,” said Bethany. “As part of our nature materiality assessment in 2023, we recognised that deforestation is a critical issue that is linked to climate change and nature loss, as well as impacting Indigenous Peoples and local communities. So it really is a risk that sits across climate, nature and social issues – it’s a compound risk across these areas,” Bethany explained.

Tools exist – and institutions are using them

A growing ecosystem of tools, guidance and data is already helping the sector assess and address deforestation risks in their portfolios.

“There’s really no shortage of NGOs in the space who have put out useful materials and resources for financial institutions,” said Isobel. “Those include Global Canopy’s Forest 500, which is a useful starting point for financial institutions to assess the exposure and management practices of companies in their portfolios. Global Canopy’s Finance Sector Roadmap sets out clear expectations and recommendations for financial institutions working to address deforestation. It’s a good place to start.”

“Beyond these, the Accountability Framework initiative also has best practice guides and sector frameworks you can use, as well as CDP’s questionnaires, which provide comparable data across companies that might be exposed to deforestation,” explained Isobel.

Still, challenges remain – particularly when it comes to consistent data. “There’s no current one-size-fits-all golden source for deforestation data, though Forest IQ has definitely helped with the consolidation of the many available sources,” Isobel added.

Collaboration is critical to progress

Collaboration emerged as a central theme throughout the discussion – not just between financial institutions, but also with NGOs, regulators and global initiatives. 

“Deforestation transcends borders, industries and individual institutions,” said Bethany. “Collaboration among banks where possible is also critical. For example, it can help banks to establish and encourage consistent asks of other supply chain actors.” 

Lloyds Banking Group is working through the Sustainable Markets Initiative to support progress in this area: “We are an active member of the Financial Services Task Force, co-chairing the Deforestation Workstream alongside HSBC and working with other global banks. In the last year, we’ve used our collective efforts to support WWF-UK and Themis in developing the Environmental Crimes Financial Toolkit.” 

As Bethany put it: “It takes a network to beat a network.”

Looking ahead, collaboration will remain central to tackling deforestation across the finance sector. “We’re still working towards having a deforestation-free portfolio, and exploring what the appropriate KPIs and targets for us post-2025 might be,” said Isobel. “For that, we’re drawing on tools and guidance such as the Deforestation-free Transition (DEFT) Pathway and the TNFD transition plan guidance. Whatever we decide our next steps should be, we can be certain that a key part of that will be collaboration.” 

For those looking to begin, the panel’s advice was simple: 

• “Collaborate,” advised James. “There’s a lot of work being done out there. You don’t need to start from the beginning.” 
• Bethany agreed: “Get started. The tools are there, the guidance is there, there’s a whole host of NGOs that can assist you to get started. Also, get close to how the policy and regulatory architecture is shifting, particularly this year with COP30.” 
• Isobel concluded: “Be pragmatic. We don’t have all the answers and the data is not perfect yet, but there is enough out there to get started.”

This article was written using quotes taken from the Global Canopy and EY webcast moderated by Niamh Boyle, Senior Manager, Climate Change and Sustainability Services, Ernst & Young LLP. The webcast is freely available to watch after registering on the EY website.

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