Overcoming systemic barriers to ensure deforestation-free financial portfolios

Summary

• Financial institutions must end deforestation portfolio impacts to deliver on net zero objectives, reduce mounting financial material risks and uphold fiduciary duties.
• Finance Sector Deforestation Action are energetically working towards ending commodity-driven deforestation, but the vast majority of the finance sector is still at the starting line.

• DEFT Pathway, the Deforestation-free Transition Pathway, will help financial institutions to better engage with companies on deforestation.
• There is a fast-evolving enabling environment to support finance in its deforestation-free endeavours, with increasing alignment around standards and a shift to mandatory disclosure.

It’s important not to get so caught up in the excitement of allocating new money to nature-based solutions so that we forget the importance of stopping the finance harming nature too. Capital driving nature loss and accelerating climate change through deforestation and land degradation for agriculture overwhelms the finance going towards sustainable agriculture and nature restoration. Ending deforestation portfolio impacts is the most crucial step finance can take to support nature and climate together, deliver on net zero objectives, reduce mounting financially material risks and uphold fiduciary duties. 

How then can we overcome systemic barriers to ensuring financial portfolios are free from deforestation-related activities? This was the question of a critical session held at Nature4Climate’s Nature Positive Hub at London Climate Action Week this June.

No more excuses

Niki Mardas, Executive Director of Global Canopy, kicked off the discussion stressing that whilst a group of front runners – Finance Sector Deforestation Action (FSDA) – were energetically working towards ending commodity-driven deforestation, and openly sharing their efforts, the vast majority of the sector was still “very much at starting line”, with 80% of GFANZ (financial institutions with net zero goals) still failing to make progress.

Niki emphasized that ending deforestation was a global problem, critical for climate, nature and people, and important for all financial centres – from New York to Paris to Shanghai. And now that the landmark Paris climate agreement was mirrored by the Global Biodiversity Framework, and the TCFD by TNFD, there were “no more excuses”. Finance “has the lexicons and the linkages, and ever more targets and metrics,” and we need to see serious efforts to codify nature in climate transition plans, he said.

Niki then announced a transformative new initiative, known as DEFT, or Deforestation-free Transition Pathway, which will help financial institutions to better engage on deforestation, categorizing companies according to their level of progress and synthesizing existing frameworks, guidance and metrics into actionable next steps.

Ruth Nussbaum, executive director of Proforest Global and Europe, stepped in to complement Niki’s opening remarks, explaining the need to focus on implementation towards ending deforestation.

She said we need to build on the foundations we already have; change takes time and needs sustained effort. That also means collaborating, working together so we don’t re-invent the wheel or work in siloes. Ruth also encouraged us to recognize progress, not just focus on final perfection, and the importance for people on the ground to see that progress and to feel that recognition and reward, politically and financially.

Companies do want to change

The scene set, it was time to move to the first panel, ‘Demonstrating leadership on ending deforestation’, featuring Olga Hancock, Head of Responsible Investment, Church Commissioners, Hans Mehn, Partner at Generation Investment Management and Gemma Corrigan, and Head of Policy and ESG Integration, Federated Hermes Limited, and chaired by Niki Mardas.

All participants were active members of Finance Sector Deforestation Action (FSDA), a group of 34 investors representing around $8 trillion of assets under management. Launched at COP26 in Glasgow, its members aim to remove commodity-driven deforestation risks across investment and lending portfolios by 2025. The group has just launched its 2024 progress report.

As the discussion began, Gemma Corrigan highlighted that forests account for 80% of terrestrial species’ habitats and provide crucial ecosystem services, so were the best place for investors to get started on their nature efforts. 

Hans then described how so much had happened since COP 26 to encourage and enable finance to act on deforestation; the Global Biodiversity Framework, the TNFD, the EU deforestation legislation (EUDR), and the global stocktake in COP 28 (the first time countries called to halt and reverse deforestation by 2030), were all “a big deal”, he said.

“We have had an important drumbeat that has intensified since COP 26 and we think will get stronger,” Hans said.

Olga described how FSDA-led engagements had driven tangible progress in terms of driving deforestation up the agenda at companies. She said investors needed to engage with governments and companies and policy at the same time, describing recent progress on palm oil in Indonesia as a result of all stakeholders coming together to act.

Reflecting on her personal experience of tackling deforestation Olga replied, “the companies do want to change and we are seeing progression.”  

As the panel closed, Hans emphasized that whilst a crucial part of investor efforts was of course stopping deforestation, it had to be coupled with efforts to support positive action; “it can’t be just a stop, stop, stop message,” he said.

Join something!

A second panel focused on how to create an enabling policy environment for finance to ramp up its deforestation-related efforts. Chaired by Hans Mehn, it featured Pei Chi Wong, Finance Sector Guidance Lead, Global Canopy, Emily McKenzie, Technical Director, TNFD and James Hulse, WBCSD Consultant.

Pei Chi emphasized that legislation on deforestation was now a case of how and when not if. “Deforestation is a solvable crisis and finance has to be prepared,” she said.

James helpfully described the three key trends in the disclosure and legislation landscape at present; an alignment around disclosure standards with ISSB (S1 and S2) announced last month, a shift from voluntary to mandatory disclosure and convergence towards looking at climate, nature and sustainability holistically,

Emily stepped in to highlight the intense interest in TNFD, the Taskforce on Nature-related Financial Disclosures, which already had 320 early adopters in January 2024.

She also described how she had recently been delighted to hear more finance-focused groups using a ‘planetary’ reframing. We have one planet with nine boundaries, with nature as the overall frame within which climate change is one of the boundaries, she explained.

To close the panel, Hans asked for some practical advice for finance to act on right away.

James said, “join something!”, such as Finance Sector Deforestation Action or the Forest Finance Risk Consortium. Pei Chi highlighted the need to follow the Finance Sector Roadmap and to check out Forest IQ the best aligned actionable data on deforestation. Emily recommended getting a ‘LEAP’ assessment (Locate, Evaluate, Assess and Prepare) to understand how a portfolio might depend on forests.

Next up was Tim Steinweg, Head of Stewardship – Nature at PRI who took the stage to announce the launch of Spring, the PRI’s investor stewardship initiative on nature, which now has the support of a group of over 200 investors managing US $15 trillion.

The only way to address nature risk is to halt and reverse nature loss, Tim said, hence Spring’s essential focus on forest loss and land degradation. A key feature of the initiative is responsible political engagement, and investors will engage with focus companies on how they use their influence to tackle deforestation risks, Tim said.

He stressed that Spring is complementary to other investor nature initiatives,  which all ultimately come together in intent to address a global and diverse set of systemic issues.

Alignment, drumbeat, challenge and urgency

Conversation and collaboration are key to creating a nature-positive future and it was time for the audience to reflect on the points made so far, as they grouped together to discuss questions such as “Do we have the right leadership within the finance sector?”, and, “What are the key levers for mainstreaming action across the finance sector and the real economy?”

Fifteen minutes of animated discussion later, Niki Mardas asked for keywords to summarize the table discussions. Alignment, drumbeat, challenge and urgency stood out.

After a lively and informative 90 minutes, It was time to wrap up, and for Ruth Nussbaum to sum up the event. “It’s tricky, but we have a lot to build on – and there is a real sense of wanting to solve the problem,” she said.