Financial institutions have an important influence on tropical deforestation through the finance they provide to the companies in their portfolios. But the latest Forest 500 assessment found that only 37% of the 150 financial institutions with the greatest influence on tropical deforestation, have any deforestation policies for their financing activities.
Global Canopy found that just one in five of these 150 financial institutions (19%) had a deforestation policy covering all four high deforestation-risk commodities – palm oil, soy, timber products, and cattle products. While these financial institutions are clearly leading the way, how effectively are these policies being implemented?
We looked at four European financial institutions with deforestation policies covering all four high deforestation risk commodities to see whether they were still exposed to deforestation risks in their portfolios.
Finance under scrutiny
The Forest 500 ranking identifies the 350 most powerful companies in forest-risk supply chains. We selected the four European banks providing the most finance to these companies, HSBC, BNP Paribas, Deutsche Bank, and Santander, and analysed how much finance they provided to companies within the Forest 500 ranking that have not made deforestation commitments.
Focusing on the four biggest investments made by each bank, we found that collectively, between 2015 and 2020, these four financial institutions had invested more than $5.1 billion in 11 companies that have no public deforestation commitments, but which are exposed to deforestation risks in their supply chains.
And this is just the tip of the iceberg. We only looked at the four European financial institutions with deforestation policies which are providing the most finance to companies without any deforestation commitments. We then looked in detail at the four companies that receive the most finance from each one. This gave us 11 companies, with one company (Pertamina Persero) in the top four for two financial institutions.
But these banks are also likely to be investing in other companies exposed to deforestation risks, including those with poorly implemented deforestation commitments and companies outside of Forest 500.
Out of the four banks analysed, HSBC was found to have the greatest exposure to deforestation risks, with US$4.4 billion invested in just four companies without deforestation commitments.
Overall, more investments from the four financial institutions were in palm oil and timber companies without deforestation commitments, with individual investments in palm oil and timber also the largest. Some banks were also exposed to deforestation risks in beef, leather and soy supply chains, with Santander found to have invested US$80 million in Argentinean beef, leather and soy producer Cresud and Deutsche Bank found to have invested US$30 million in the Brazilian soy producer, Caramuru Alimentos.
Are they engaging for change?
To implement their policies and ensure portfolios are deforestation-free, financial institutions need to engage with the companies in their portfolios on how they are addressing deforestation. While withdrawing finance from companies without deforestation commitments would reduce their exposure to deforestation risk, it also means the companies are likely to seek investment elsewhere - whereas by engaging, financial institutions can help drive change on the ground.
HSBC, DeutscheBank, BNP Paribas and Santander all report that they are engaging with some of the companies in their portfolios. But none of the banks report comprehensively on implementation, rates of compliance, or engagement and outcomes for all companies and commodities covered by their policies - meaning it’s hard to know whether they have engaged with these 11 companies concerning their deforestation risks, or whether they have requested action from them.
Unless these companies are working towards deforestation-free supply chains, the banks are at risk of financing deforestation, which would be in breach of their policies. They would also be exposed to financial risks as a result through the risk of reputational damage.
Financial institutions need to be much clearer on where they have identified non-compliance in their portfolios, and how they are addressing it, including which companies they are engaging with, how they will track progress, and consequences of no improvement.
How can financial institutions show that they are implementing their policies effectively?
When Forest 500 assesses financial institutions on how they are implementing their deforestation policies within their financial portfolios, our methodology looks for two key pieces of evidence.
Forest 500 expects financial institutions to have a clear process in place to identify non-compliance within their financial portfolios (indicator 4.3). The strongest ways in which this can be done is through either a screening and monitoring process or having a deadline for compliance (asking companies to become compliant within a specific time period).
To be transparent about their activities, financial institutions need to report on the proportion of companies they finance that are operating in compliance with their policies, and should report at least annually, including details of which companies were engaged on deforestation, what the outcome of that engagement was, and details of any improvement plans agreed.
The latest Forest 500 assessment found that 44% of financial institutions with a deforestation policy had not reported on implementation of their policies. This doesn’t necessarily mean they are not acting on deforestation, but it does mean they aren’t being transparent about either their exposure to, or action on, deforestation.
Ending the finance of deforestation in supply chains
As our latest Forest 500 report stressed, there is no solution to the climate and biodiversity crisis which does not include eliminating deforestation. At the recent G7 summit, leaders agreed a Nature Compact with commitments to address deforestation and sustainability in supply chains. To do this effectively, leaders need to not only consider due diligence for companies in forest-risk supply chains (with companies required to check that they are not importing commodities linked to deforestation), but to introduce mandatory due diligence for the financial institutions that finance deforestation activities.
In the meantime, banks and financial institutions should take steps to address their exposure, be more transparent about what they are doing to implement their policies - and this will send a clear message to companies that future funding requires action to remove deforestation risks.
