A Solvable Problem
The world is off track on ending deforestation, but accelerating financial sector and policy action could help change course.
The fight to end deforestation is at a critical juncture ahead of a UN-backed recommendation which calls for decisive action by 2025, as part of efforts to keep global warming below 1.5°C.
The financial sector is seen as key to meeting this goal, but commitment is patchy – even amongst climate leaders. Last year, NGO Global Canopy found that only 21% of 700 financial institutions with high-profile climate and net zero commitments recognised deforestation as a business risk.
Vemund Olsen, Senior Sustainability Analyst at Norway’s Storebrand Asset Management, which has an ambition to have a deforestation-free portfolio by 2025, tells ESG Investor that its peers are not doing enough.
“Too many investors are not aware of this risk and are not acting on deforestation – that needs to change,” he says. “A strong group of investors are taking action through initiatives such as Finance Sector Deforestation Action (FSDA), the Investor Policy Dialogue on Deforestation or the Principles for Responsible Investment’s Spring engagement programme. It’s growing, but it’s not growing fast enough.”
Priscillia Moulin, Senior Leader – North America Representative at Earthqualizer Foundation, which attempts to trace supply chain links to deforestation and works with local actors to prevent deforestation at source, reports scarce interest by investors in advice or collaboration.
The foundation sees little evidence of effective investor engagement on deforestation, she says, noting that some companies respond to its queries about their supply chain links to deforestation by saying: “As long as our investors are on board, we don’t care”.
Regulatory pressure
Meryl Richards, Program Director, Food and Forests at investor network Ceres, says 2025 targets and new regulation should help change this picture. “There is growing investor awareness of the financial risks related to deforestation and nature and biodiversity loss,” she says. “We have heard from many investors that they view deforestation action as a critical part of corporate climate strategies to address these risks.”
Ceres co-leads the secretariat and corporate engagement working group of nature Action 100, a global investor-led engagement initiative to address nature and biodiversity loss. It has also developed a framework for investors to assess and engage investee companies on deforestation risk and houses the deforestation scorecard, which evaluates company policies.
Richards expects more investors to be focused on deforestation this year since many of the largest companies that source agricultural commodities have set targets to eliminate deforestation from their supply chains by 2025. Also, regulatory risk is increasing with the EU’s deforestation-free products regulation (EUDR) coming into effect for large- and mid-sized companies this December and the US Congress recently reintroducing the FOREST Act, which would restrict imports of certain agricultural commodities from illegally deforested land.
Storebrand’s Olsen, however, views companies’ 2025 targets with a degree of scepticism. “It remains to be seen if they are credible and we’ll be able to check it,” he notes. “Not many companies expect to be able to comply with EUDR – so they will start to segregate their supply chains”.
Food security conflicts
Incoming regulation could see companies sending commodities that are proven deforestation-free to Europe and selling the rest to markets where there isn’t yet the same level of regulatory oversight. “For this (EUDR) to be truly effective we would need similar sorts of regulatory initiatives in other markets as well,” says Olsen.
The FAIRR Initiative, an agriculture-focused investor network, also highlights market fragmentation as a barrier to investors effectively tackling deforestation. While its Protein Producer Index, which assesses deforestation risk, has found improvements – partly due to investor pressure – in the use of deforested-free soy among companies, laggards still remain in Asia, especially China – due to concerns over food security.
Deforestation and food security continue to be locked in a vicious cycle, some observe. The growing demand for food is a driver of deforestation as farmers burn trees for agricultural land – but this activity contributes to climate change which reduces farm yields, forcing farmers to slash more forest for cropland.
“It’s very difficult [to create change] because you have government pressure in one direction [on food security], while investors want traceability and systems, which add hurdles to imports of soy, beef and other commodities,” says Max Boucher, Senior Manager, Research and Engagements, Biodiversity at FAIRR.
Boucher says it is hard to tell how governments will resolve the tension between ensuring short-term food security and longer-term resilience of food systems. “But it’s worth making sure the two are managed in parallel and we don’t make rash decisions for the sake of near-term imports and food prices,” he says.
Boucher hopes the UN Food and Agriculture Organisation’s (FAO) roadmap for aligning food systems with a 1.5°C climate trajectory, announced at COP28, will help guide governments toward longer-term stability. By providing a strong definition for what constitutes a forest, he says, the roadmap should pave the way for policies that protect biomes of high value of carbon and biodiversity.
Action across the supply chain
While the policy landscape may be a mixed picture, investors already have much of the tools and knowledge to end deforestation, suggesting that the road to success is achievable with greater participation.
“We understand the issue [of deforestation] well, how it works and what are the credible systems for most commodities to end it and what are the regulatory levers needed,” says Boucher, who adds the technology to identify and monitor deforestation is in constant improvement through tools such as satellite monitoring.
Richards from Ceres says investors should demand companies take three key actions. First, they should set timebound commitments to eliminate deforestation from supply chains which also uphold the rights of Indigenous Peoples and local communities. Second, they should implement deforestation plans that include key elements, such as supply chain traceability, effective monitoring and verification systems, and financial incentives for suppliers to adhere to no-deforestation policies. Finally, she says, companies should also disclose progress towards deforestation commitments, including the percentage of supply verified as deforestation-conversion free and percentage of suppliers in compliance with a no-deforestation and no-conversion policy.
Elizabeth Levy, Biodiversity Co-ordinator at shareholder advocacy group As You Sow, adds that investors should know if a company’s no-deforestation policy is publicly available; whether it covers all commodities, especially beef, soy, palm oil and pulp/paper; and whether it applies to all geographies that the company sources from and all markets where it operates.
As You Sow offers the Deforestation Free Funds tool, built in partnership with Friends of the Earth, that scores mutual funds on their exposure to companies at risk of deforestation.
Experts argue that extensive due diligence is needed by investors. Levy says they should know if a company is working towards traceability to a commodity’s point of origin for both direct and indirect suppliers and whether a supplier’s location, compliance with no-deforestation policies and quantitative progress towards goals are being disclosed.
Boucher says that another key consideration is how a company addresses non-compliance with deforestation-free demands within its supply chain – for example via a resolution mechanism – as is the quality and frequency of its audits.
“The information is not out there and supply chains are not very traceable,” says Storebrand’s Olsen, adding this should not be an excuse for inaction.
“We have enough data to know more or less which companies are exposed [to deforestation] and which companies should be added to due diligence and communicate to investors and clients that their supply chains are free of deforestation.”
Solving the data puzzle
Among the tools coming on stream, Olsen highlights Global Canopy’s Forest IQ, which provides data on the links to deforestation of 2,000 major firms, as particularly useful for investors.
Forest IQ benchmarks a company’s exposure to deforestation, the share of its revenue dependent on commodities, and its reporting on deforestation risk. Global Canopy, which has a 20-year track record in tracing deforestation, collaborated with the Stockholm Environment Institute and the Zoological Society of London on Forest IQ, which was also developed in consultation with global financial institutions, including BlackRock, BNP Paribas, and Lombard Odier.
The tool, explains Freya Bannochie, Global Canopy’s Forest IQ Lead, also delivers granularity for investors on supply chains by assessing a company’s traders or manufacturer deforestation exposure separately.
“Deforestation is a solvable crisis for financial institutions,” says Bannochie. “You can’t act on climate targets without also acting on nature and deforestation – and that is the solvable piece because we’ve got the data.”
Bannochie reveals that Forest IQ is working on a tool to try and simplify corporate engagement on deforestation for financial institutions and help them make “unified asks” of companies.
But while Olsen welcomes such tools from NGOs, he says it’s big commercial data providers need to step up and integrate deforestation into their products to financial institutions.
Olsen says FSDA, a coalition of financial institution pledging to eliminate agriculture-driven deforestation from their investment and lending portfolios by 2025, is engaging with the data sector on this, with Dutch asset manager Robeco among those taking a leading role.
“That’s how investors will feel confidence in the data provided being properly checked and delivered regularly. And I hope that will increase the number of investors taking action.”
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