Extending due diligence to the financial sector

News / 11 Jul 2022

The UK government should adopt a staged approach to introducing mandatory due diligence requirements for the finance sector in order to ensure legal and sustainable forest risk commodities, the government-established Global Resource Initiative Taskforce (GRI Taskforce) has advised.

UK banks, pension funds and asset managers invest billions of pounds in companies linked to deforestation – with estimates suggesting the UK pension industry alone invests more than £300 billion, exacerbating the climate crisis. Deforestation is currently responsible for some 13% of global greenhouse emissions, with action urgently needed to reduce emissions from tropical deforestation to deliver on global climate goals.

The Glasgow Leaders Declaration on Forests and Land Use, signed by 141 countries including the UK at COP26 in November 2021, also committed to ‘facilitate the alignment of financial flows with international goals to reverse forest loss and degradation’.

The GRI Taskforce Finance Report highlights that the loss and degradation of forests and native vegetation globally is “a major threat to humanity” and has accelerated “a sharp decline in global biodiversity over the last decade”.

It highlights the scale of the problem, citing data from Make My Money Matter (MMMM), Global Canopy and Systemiq which estimates over £300bn of UK pension fund investments alone are in companies, sectors and financial institutions with high deforestation risk.

The report drew on work from the GRI’s Finance Working Group – which included Global Canopy and other civil society groups, alongside experts from finance, supply chains and government.

It recommended that the UK government set a legal requirement for financial institutions that would prohibit lending/investments in illegally produced forest risk commodities. The report also called on the government to demonstrate leadership by extending this requirement to UK financial institutions’ lending/investments in other jurisdictions outside the UK.

As a second step, the report says that the government should take action to ensure financial institutions and supply chain companies take measures that go beyond checking for illegality, to provide assurance on both the legality and sustainability of forest risk commodities, saying “this must be the goal if Government commitments on deforestation and climate mitigation are to be met”.

The GRI Taskforce said the UK government must also aim to achieve a ‘level playing field’ internationally to minimise the risks for financial institutions in this transition, with consistency in regulatory frameworks “critical” as well as standards for risk assessment, management and disclosure.

The Taskforce also called on the UK government to help identify gaps and coordinate the development of finance sector-specific guidance on deforestation risk management, with funding for the creation of a Central Point of Expertise to bring supply chain, deforestation and finance expertise together to share best practice globally.

Global Canopy has produced a Finance Sector Roadmap, setting out a high-level approach to eliminating commodity-driven deforestation, and will be publishing guidance for pension funds on how to ensure they are deforestation-free later this year.

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