This text is sponsored by Accountability Framework initiative.
At the same time as the twin crises of local weather change and biodiversity loss change into ever extra pressing, banks proceed to pump $30 billion to $50 billion a yr into actions that drive nearly all of tropical deforestation. And that’s not counting capital from asset managers, pension funds, institutional buyers and different monetary establishments.
Whereas financing of deforestation has been business-as-usual for many years, there are indicators of change. Main monetary establishments are starting to chart a method ahead, whereas laggards ignore escalating danger at their peril.
This danger ties again to adverse impacts on the bottom. When uncovered to environmental and social harms of their operations or provide chains, firms can face authorized, market, operational, regulatory and reputational dangers that threaten monetary efficiency. For monetary establishments, having dangerous firms of their portfolios can translate into adverse returns on investments, defaults on loans or losses on account of stranded property.
And whereas deforestation is however certainly one of many ESG points on firms’ radar, it’s among the many most salient for monetary establishments to grasp and handle. That’s as a result of, along with being a serious danger in its personal proper, deforestation is a number one driver of greenhouse fuel emissions and contributor to human rights abuses within the comfortable commodities sector.
To deal with these dangers, monetary establishments should interact with the businesses of their portfolios. Happily, there isn’t a want for them to reinvent the wheel. As an alternative, they will adapt approaches which have already labored for firms in forest-risk commodity sectors. Monetary establishments can construct from these firms’ experiences and look to the Accountability Framework as a information for efficient motion.
Setting a robust coverage
On the core of a monetary establishment’s method to tackling deforestation danger must be a robust and credible coverage that commits the monetary establishment to eliminating deforestation from its portfolio. This contains avoiding loans and different capital flows that assist deforestation, whereas managing deforestation dangers and affect throughout all forms of investments.
To align with the Accountability Framework, no-deforestation insurance policies ought to use accepted definitions and acceptable timeframes and targets. They need to additionally embrace commitments to respect the rights of Indigenous peoples, native communities and employees, for whom human rights violations usually accompany deforestation-linked commodity manufacturing.
Extra monetary establishments are recognizing the worth in setting no-deforestation insurance policies. In keeping with International Cover’s newest Forest 500 evaluation, the proportion of 150 main monetary establishments adopting no less than one such coverage has grown from 18 to 45 % over the previous seven years. But extensive gaps stay, with solely 15 % of those monetary establishments having insurance policies that cowl all commodities with materials deforestation danger.
By setting a robust no-deforestation coverage, monetary establishments can place themselves favourably relative to friends and display management in direction of broader initiatives to reorient finance to fight local weather change, safeguard nature and transition to a inexperienced financial system. Examples of such initiatives embrace the Finance Sector Deforestation Motion Initiative and the Glasgow Monetary Alliance for Web Zero.
Managing portfolio danger
To implement no-deforestation insurance policies, monetary establishments should take steps to evaluate publicity, set up efficient implementation methods and interact enterprise companions throughout their portfolios. ForestIQ, whose strategies and metrics are aligned with the Accountability Framework, can assist an preliminary portfolio evaluation course of via its information on deforestation danger publicity and materiality for greater than 2,000 firms.
Extra implementation steps are outlined within the Deforestation Free Finance Roadmap, which gives an motion pathway for monetary establishments, tailored from the Accountability Framework. Central to this method is for monetary establishments to speak no-deforestation expectations to the businesses of their portfolios. Monetary establishments also needs to ask purchasers and different portfolio firms to set their very own no-deforestation insurance policies; conduct annual monitoring of all purchasers and holdings; and interact purchasers and holdings to assist or require enhancements the place wanted.
A remaining essential step is for monetary establishments to report no less than yearly on progress towards attaining their no-deforestation insurance policies. The rising tide of obligatory disclosure necessities will place such reporting way more centrally for each monetary establishments and their purchasers and enterprise companions over the subsequent couple of years.
Clear pathways for motion
Whereas commodity-linked deforestation is a fancy challenge, there are clear steps for monetary establishments to handle it throughout their portfolio. Doing so can mitigate key dangers at this time and much more so sooner or later, as local weather, nature, and human rights regulation, market expectations, and disclosure necessities proceed to develop. To get began managing portfolio dangers with the Accountability Framework, go to our web page for monetary establishments.
