Due diligence legislation for the finance sector is “the most important thing the UK can do”

News / 3 Mar 2023

Global Canopy’s Policy Director, Helen Bellfield, has given evidence to MPs from the  Environmental Audit Committee. Here we summarise her key points covering the finance sector’s exposure to deforestation and why mandatory due diligence laws for financial institutions are needed.

Deforestation is a systemic risk for the finance sector

“When we look at the number of financial institutions that recognise deforestation as a material risk, a lot of them do not. Only 18 out of the 150 financial institutions [ranked in Global Canopy’s Forest 500] recognised deforestation as a material risk, a further 20 sourced it as a reputational risk and that’s why there’s a clear need for regulation, to bring the floor up.”

The Global Resource Initiative task force and the subsequent working group on finance both recommended that due diligence is extended, due to the slow progress by the finance sector voluntarily. It wasn’t included in Schedule 17 of the Environment Act, but I wanted to draw attention to the Financial Services and Markets Bill that is currently going through. An amendment has been laid that has cross-party support on transposing schedule 17 for the finance sector in the context of this finance regulation and I think that’s really exciting opportunity to close that gap and fulfil the recommendations of the Global Resource Initiative task force and potentially also to extend it to improve the coverage of of human rights issues.”

Mandatory due diligence for the finance sector is critical

“Both the original taskforce report and the follow up [report] on the finance sector were incredibly clear that the most important step the UK government could do, was [to implement] mandatory due diligence requirements for the finance sector. That’s obviously been missed in the Environment Act, but there is an opportunity right now to include that in the Financial Services and Markets Bill. The finance working group report also recommended extending that to include legal deforestation, not just illegal, but also extending that around human rights as well. I think it’s the most important thing the UK can do. It could also be world leading. I think it’s a big opportunity building from COP26 where the UK convened a lot of voluntary commitments from investors and to demonstrate that the UK finance sector is world leading at this stage.”

The finance sector is lagging behind on deforestation

“Global Canopy has an initiative called the Forest 500, which over the last 10 years has assessed the policies and reporting on implementation of those policies of 150 financial institutions and 350 companies with the most exposure to agricultural commodity deforestation. 11 of those are headquartered in the UK, five have voluntary policies that cover all of the relevant commodities, but three have no policies at all. This is better than the global benchmark, globally when you look at all 150, two thirds of them [financial institutions] have no policy at all.”

“The finance sector is clearly lagging behind companies on this issue. Many more companies have policies. Although again there is an implementation gap and that’s why we’ve seen in the UK and the EU mandatory due diligence coming in for companies. This should also rapidly increase the availability of the relevant information for the finance sector as well.”

Deforestation goes hand in hand with human rights abuses

“Excluding it [human rights] ignores the fact that deforestation is often associated with human rights abuses particularly targeting Indigenous peoples and local communities in production regions. Also protecting the rights of Indigenous peoples and those with customary tenure has been shown to be the most effective way of reducing deforestation rates as well.”

“It is critical that policies and legislation include human rights under international law because often, as we saw in Brazil over the last four years under the Bolsonaro government, local legislation in countries is not necessarily strong enough. It has to include customary tenure rights and also the rights of Indigenous peoples and local communities to give or withhold their consent for activities that might impact their rights, resources or their food security as well. You can’t tackle deforestation without tackling human rights abuses because they go hand in hand.”

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