Regulation needed to limit banks’ involvement in deforestation, says study

A new report warned that 85 per cent of financial institutions still do not have a publicly available policy for all four commodities at the highest risk of causing deforestation and called for regulation to limit finance's involvement in such activities. Cattle products like beef and leather, soy, timber, paper and pulp are believed to drive more than two-thirds of tropical deforestation. 

The latest Forest 500 report, A Decade of Deforestation Data, from non-profit Global Canopy, also revealed that more than half (55 per cent) of the 150 surveyed financial institutions have yet to publish a single deforestation policy. This is the case for 30 per cent of non-financial companies. The study examined 350 companies linked to deforestation and 150 financial institutions funding them.

However, 45 per cent of banks now have at least one policy on deforestation, compared to just 11 per cent 10 years ago, according to the report.

While deforestation has risen up the agenda of financial institutions in the last two-and-a-half to three years, Emma Thomson, Forest 500 tracking lead at Global Canopy, said relative to companies, financial institutions aren’t moving as quickly. 

While 10 of the 350 companies in its database have consistently scored above 50 per cent every year in which they have been assessed, no financial institutions have consistently scored above 50 per cent. “That’s partly because financial institutions started from a lower baseline,” said Thomson. “There were fewer that had a deforestation policy to begin with.”

Deforestation accounts for around 12 per cent of global carbon emissions, and at 2022 UN climate conference, COP27, in Egypt, countries agreed to halt and reverse deforestation by 2030. The Kunming-Montreal Global Biodiversity Framework, adopted in 2022, also aims to halt and reverse nature loss by 2030.

However, based on 10 years of data, Global Canopy said that progress among the 150 financial institutions and 350 Forest 500 companies it covers is stalling, and called for regulation of the financial sector. The report lists 28 financial institutions, including BlackRock, Vanguard and Wells Fargo, that it says have yet to publish a deforestation policy, despite being included in the Forest 500 for the last decade. Wells Fargo declined to comment. BlackRock did not respond to a request for comment.

A spokesperson for Vanguard said in terms of its internally managed equity funds, Vanguard’s investment stewardship team engages with portfolio company boards and executives to understand how they oversee and disclose financially material risks, including environmental risks such as deforestation.

A spokesperson for TD Bank, which featured among the 28 institutions yet to publish a single deforestation commitment or policy, told The Banker that through its Climate Action Plan and corporate citizenship platform TD Ready Commitment, it is taking action on climate change and biodiversity loss, including the risk posed by deforestation globally.

“TD also follows North American market standards on environmental disclosure and is actively monitoring developments related to the Taskforce on Nature-related Financial Disclosures,” the spokesperson said.

Lauren Compere, managing director and head of stewardship and engagement at Boston Common Asset Management, said that reporting pressures may be waning in some part of the world. Given the politicisation of environmental, social and governance factors in the US, companies there who are already struggling on climate disclosure are not going to step out of line to enhance disclosure on deforestation, she said.

In January, at the World Economic Forum's annual meeting in Davos, Switzerland, more than 320 organisations, representing $4tn in market capitalisation, committed to start making nature-related disclosures just four months after the TNFD published its recommendations. Emily McKenzie, technical director at the TNFD, said companies and financial institutions are increasingly understanding the importance of nature to their businesses and are thinking about how to address both their dependencies and impacts on nature as well as the risk to their business or portfolios.

Rapid progress by financial institutions is possible, said Global Canopy, pointing in its latest report to US-based wealth advisor Ameriprise, and UK bank Barclays, who improved their reporting and implementation scores by 34 and 31 percentage points, respectively, in one year.

A spokesperson for Barclays said the bank is committed to progressing its climate change strategy and working with clients and stakeholders to develop the market’s approach to protecting and improving biodiversity. Last April, it published a revised position statement on the financing of forestry and agricultural commodities which introduced provisions for companies producing or processing beef in “high deforestation risk” countries in South America. 

Stuck between climate and biodiversity 

Based on her engagement experience with banks, Compere believes that some of the 55 per cent of financial institutions highlighted in Global Canopy’s report as lacking a public deforestation commitment or policy are likely to have internal guidelines and sector restrictions, but have just not disclosed them publicly.

“When you dig into what they are doing, they are probably doing much more, but where I’m seeing a reluctance is disclosing their client engagement and client expectations. They don’t want to be seen as being overly restrictive as it might impact future business,” she said.

Compere said some European banks, specifically in France, are progressing on biodiversity. “The problem is financial institutions are stuck between what they need to do on climate and what they need to do on biodiversity more generally, and deforestation is getting lost in the mix.”

There is also tension between what we see publicly and what we learn through dialogue, said Compere, which is why it is important for investors to dig in through their engagement and stewardship and push for more robust disclosure, due diligence and greater reporting and monitoring of commodities linked to deforestation. 

“That is what the Finance Sector Deforestation Action initiative is doing with enhanced investor expectations around deforestation,” she said.

Launched at COP26 in the UK, the FSDA brings together 36 asset managers and owners with more than $8tn in assets under management who are working toward eliminating agricultural commodity-driven deforestation risks in their investment and lending portfolios by 2025.

In addition to investor pressure, Compere said regulation will need to be put in place to really push the stragglers on deforestation. Global Canopy said the European Union Deforestation Regulation, which comes into force later this year, and the UK Environment Act, represent a critical opportunity to “raise the bar” for action, which has been missed on voluntary commitments. 

Regulatory impact

However, financial institutions do not fall within the remit of the EUDR, and Global Canopy said the EUDR’s “narrow definition” of forests should be expanded to include the conversion of all natural ecosystems. The UK Environment Act only covers illegal deforestation, and not forests that are legally cleared.

Meanwhile, the EU’s Corporate Sustainability Reporting Directive and, to a lesser extent, the Corporate Sustainability Due Diligence Directive, require banks to demonstrate their sustainability credentials on a range of issues. “It will be interesting to see what comes out of [those regulations] and if deforestation policies become more public,” said Compere.

McKenzie at TNFD said the CSRD and the reporting standards it mandates, the European Sustainability Reporting Standards, with which TNFD has strong alignment, have pushed companies to look closely at their interfaces with nature. The two pieces of legislation will also impact international companies with European footprints. 

McKenzie said the framework TNFD has developed can be used by companies to understand the impact materiality and financial materiality of their nature-related issues as required by the CSRD framework.

The more that financial institutions are assessed on the lack of disclosure, the more they are going to have to think about the cost/benefit analysis of enhanced disclosure versus non-disclosure, said Compere. “With more global regulation and focus on nature-related risks and impacts, they’re going to want to up their game on disclosure.”

However, US banks are hit with a different set of constraints, she adds, due to a lack of regulation and the ESG backlash which has led to investment managers and financial institutions publicly withdrawing from industry initiatives such as Climate Action 100+. “That doesn’t mean they are not doing things behind the scenes,” said Compere. 

She said the jury is still out on whether leaving these industry associations will see financial institutions backtrack in terms of financing activities they might not have financed previously. “There will be more enhanced monitoring of all financing activities by NGOs to assess whether or not they are going back,” she said. “But it is a potential risk.”