“Deforestation poses a systemic risk to the finance sector — financial, material and reputational.” Yet less than a third of financial institutions have publicly recognised deforestation as a business risk, concluded last week’s Forest 500 report, published annually by Global Canopy, a not-for-profit organisation. Many of the banks cited in the report insisted they had deforestation policies in place, but were reluctant to comment on its findings.
Forest 500 tracks the policies and performance of the 350 companies and 150 financial institutions “most exposed to deforestation risk in their supply chains and investments”. Forty per cent of them still have not set a single policy on deforestation, it concludes.
Regulatory pressure
Immediate action is necessary, says the report, to meet the Paris climate goals. It cites the Glasgow Financial Alliance on Net Zero, which included action on deforestation as key to eliminating emissions by 2050 in its recent transition guidance.
Likewise, last year’s Global Biodiversity Framework agreed at COP15, the international nature summit, underlined the connection between climate change, the nature crisis and ending tropical deforestation. Financial institutions should be “encouraged and enabled to regularly monitor, assess and transparently disclose their risks, dependencies and impacts on biodiversity”, stated the Framework.
The EU’s recent law on due diligence, which requires companies to demonstrate that products made domestically and outside Europe’s borders are not responsible for deforestation, only increases the need for banks to fully engage with the issue, suggests the report. The US and the UK are also examining the possibility of introducing similar regulation.
Despite these pressures, deforestation is still not receiving the same attention from banks as climate change, suggests Forest 500. The financial institutions assessed in the report “provide $6.1trn in finance to companies in forest-risk supply chains”. Yet “only a small proportion” of them are addressing deforestation as a systemic risk and have policies addressing palm oil, soy, beef, leather and timber products, says the report.
Nonetheless, regulation is perhaps having some impact. The majority of the financial institutions included in Forest 500 are headquartered in Europe and the US. Sixty-nine per cent of those headquartered in Europe, where climate policies tend to be more stringent, have at least one deforestation policy, compared with 16% of those headquartered in the US, where there is increasing pushback against ESG influencing investment decisions.
Banking policies
The Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA) is one of the financial institutions accused of having failed to set any policies on deforestation. A spokesperson for Nuveen, TIAA’s asset manager, insists the organisation does have a deforestation policy, but did not wish to comment further. The policy was published after information for Forest 500 had been gathered, says Global Canopy.
JPMorgan Chase, Bank of America, Mitsubishi UFJ Financial, BNP Paribas and Credit Agricole are singled out in the report as “the five financial institutions providing the most finance to these companies without a single deforestation commitment – totalling nearly $112bn”.
Credit Agricole said it did not want to comment on the report or the figures given. “The fight against deforestation is one of our major concerns,” insists a spokesperson, citing the bank’s biodiversity pledge and forestry and palm oil policies.
Many financial institutions are setting net-zero targets without supporting them with a comprehensive deforestation policy
BNP Paribas offered a similar response. “The lack of information on the methodology and the aggregation of sources we cannot identify, renders any analysis impossible and we are therefore unable to comment on this report,” a spokesperson told The Banker. “In addition, no details are provided on the amounts of alleged financing to these companies [and] the majority of companies identified in this report are not among BNP Paribas’ clients.” The bank has a deforestation policy and, in 2010, published policies on the various sectors highlighted in the report.
Data tools
Emma Thomson, Forest 500 lead at Global Canopy, insists there remains “a disconnect between action on climate change and net-zero commitments, and action on deforestation” within financial institutions. Many are “setting net-zero targets without supporting them with a comprehensive deforestation policy”, she says. Deforestation is responsible for around 10% of global emissions.
Many financial institutions quote a lack of data and guidance related to deforestation and suggest it can be difficult to get a proper understanding of their exposure to the risks and impacts of deforestation, Ms Thomson told The Banker. While this may have been true in the past, “there has been a huge increase in the quality and quantity of data, guidance, and tools that financial institutions can use to take action”, she insists. Ms Thomson cites the Forest IQ platform and the Deforestation-Free Finance Roadmap being developed by Global Canopy and other organisations.
“With growing awareness of climate and biodiversity crises, and the improved quality and accessibility of data and guidance, 2023 has the potential to be a watershed year for action on deforestation,” says Ms Thomson.
An overview of the methodology used by Global Canopy to assess financial institutions is available here.
