How new UK legislation could help the finance sector address deforestation risks

By Sarah Rogerson

New legislation, currently going through Parliament, would benefit companies and financial institutions seeking to remove deforestation risks from their supply chains and their portfolios by creating a level playing field - but the government’s proposals need to be much stronger.

Awareness of nature - and climate-related risks -  is increasing in the run up to the UN climate talks in Glasgow (COP26), and the Dasgupta Review, commissioned by HM Treasury, has made it clear that the current economic approach is putting the wellbeing of future generations at risk.

Current rates of tropical deforestation are an obvious example, with vast tracts of the Brazilian Amazon cleared for agriculture, mining and other economic activities - endangering the crucial ecosystem services the forest provides, and the lives of the people that depend on it.

While the UK government has taken welcome steps to reduce the UK’s tropical deforestation footprint, proposing measures in the Environment Bill to require companies to carry out due diligence on deforestation risks in their supply chain, these measures do not go far enough.  

With the Bill entering the final stages of debate in the House of Lords, key gaps remain. Companies only need to ensure that there is no risk of illegal deforestation in their supply chains (i.e that companies observe local laws), and do not need to assess the risks to other important natural habitats at risk from conversion, or the risks to Indigenous Peoples or local communities, who are often affected when deforestation takes place. 

Also, the banks and investors who finance these activities are not required to act. This means that activities linked to deforestation can continue to be paid for by UK banks and pension funds.

Voluntary measures are not enough

Every year, Global Canopy assesses the 350 companies that have the greatest influence on tropical deforestation through their supply chains, and the 150 financial institutions that provide the largest share of financing for these companies. They are assessed on their policies and commitments, and on how they report progress on implementation. Our latest assessment found none of the financial institutions are doing enough to ensure they are not investing in companies linked to deforestation.

Eleven of these financial institutions are UK-based and according to Trase Finance, provide some  USD 300 billion in financing through equity, bonds and loans into the 350 Forest 500 companies.

Just five of these UK-based financial institutions have a policy covering the main forest-risk commodities. One has a policy for deforestation related to palm oil, and the remaining five have no policy at all.

* Forest 500 assesses policies for scope, strength, and reporting on implementation progress, but financial institutions are also awarded points for having an anti-corruption policy, and for policies on gender, smallholder farmers and other human rights considerations, so it is possible to receive points without having a deforestation policy in place. 
** This date is the first date these companies were assessed by the Forest 500, policies may have been introduced earlier. 

Out of the entire Forest 500, 43% of companies and financial institutions do not have any commitments on deforestation. To successfully reduce tropical deforestation, action is needed from all of these companies. Without that action, voluntary commitments have failed.

“We support the Government’s proposal to introduce a due diligence requirement on business in the Environment Bill as we recognise that the private sector has a critical role in addressing global deforestation. This is an important step forward in reducing the UK’s overseas deforestation footprint and financial institutions have a key part to play.” Eugenie Mathieu from Aviva Investors

The case for including finance

The Forest 500 ranking includes banks and investors because financial institutions can play an important role in driving change in forest-risk supply chains, and more and more institutions are recognising they have a responsibility to address climate and nature risks in their lending and investment activities.

“We recognise the need for financial institutions to recognise and minimise the risks from investments in activities that harm biodiversity. This is particularly true, given the associated climate risks, for activities linked to deforestation. We need clear guidance on best practice for all forms of finance, and the government may have a role to play in driving forward this change.” Emine Isciel, Storebrand

A due diligence requirement for financial institutions would create a level playing field for UK investment - requiring action from all financial institutions, not just those that already recognise the importance of addressing deforestation risks.

It would also help drive action beyond UK companies, with UK investment linked to companies in other jurisdictions, including many which have so far failed to take action to address their deforestation risks. By requiring UK-based investors to act, the legislation could have an impact globally, which is crucial given that the majority of companies without deforestation commitments are not in the UK. 

Still time to amend the Bill

The UK government has expressed a clear commitment to protecting nature and reducing the UK’s deforestation footprint. Its Green Finance Strategy seeks to position the UK as a global hub for green finance. 

To deliver on those commitments, it needs to reflect them in the Environment Bill by supporting proposed amendments that would extend the due diligence requirements to financial institutions and extend the definition of deforestation to include all deforestation and conversion. 

This would send a clear message to companies and investors, and help meet the demands of consumers, investors and pension holders who do not want to be driving deforestation through the choices they make.