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Financial Institutions Play Catch-Up in Deforestation Fight

Banks and asset managers lag their corporate peers when it comes to distancing themselves from commodity producers that destroy forests.

  • Katie Gilbert

Last year was a big one in the effort to vanquish deforestation. Several major corporations pledged to source soft commodities exclusively from producers that can prove they’re not linked to the destruction of forests, with an emphasis on the four goods most often blamed for driving the problem: beef, palm oil, paper and pulp, and soy. (Such commodities are called soft because they’re grown rather than mined or extracted.)

Between January and September 2014, 19 consumer goods companies — including French food giant Groupe Danone, U.S. cereal producer Kellogg Co. and French cosmetics conglomerate L’Oréal — adopted zero-deforestation policies on palm oil, according to CDP (formerly Carbon Disclosure Project), a London-based nonprofit. At the United Nations Climate Summit in September, roughly two dozen national governments and three dozen companies endorsed the New York Declaration on Forests, which pledges to halve the rate of forest loss worldwide by 2020 and halt it by 2030.

But financial institutions stand out for their lack of real movement on the issue. “The financial sector in general is significantly lagging the agriculture and consumer companies in addressing deforestation,” says Glenn Hurowitz, managing director of Climate Advisers, a Washington-based consulting firm focused on climate change, and co-founder of sister firm Chain Reaction Research, which analyzes sustainability risk for financial institutions. “There’s a real risk that irresponsible actors in the financial industry are going to finance activities that could undermine the progress others have made,” warns Hurowitz, who is also executive director of Catapult, Climate Advisers’ campaign affiliate.

A raft of new initiatives seek to help financial institutions end relationships with companies engaged in deforestation. In January the Natural Capital Declaration, a joint initiative of the United Nations Environment Program Finance Initiative and the Global Canopy Program, launched its Soft Commodity Forest-Risk Assessment Tool, which lets banks and asset managers determine how well they’re managing risks that deforestation can pose to their businesses and portfolios, and where those policies fall in comparison with peers’. To develop its tool, the NCD partnered with Sustainalytics, an Amsterdam-based provider of sustainability research, to evaluate 30 financial institutions on their soft commodity and deforestation policies; it found that fewer than half had anything of the sort.

One bank that many in the space hail as a leader in combating deforestation is BNP Paribas. In late 2010, Paris-based BNP launched a policy prohibiting the financing of any company involved in converting UNESCO World Heritage Sites or high-conservation-value forests into plantations, among other requirements. Elisa Vacherand, the bank’s head of socially responsible investment and financing policies, says such measures exist because management believes “extra-financial risks can become financial.”

Climate Advisers’ Hurowitz cites stranded assets as one example of how deforestation could translate to financial loss. Traditional analysts and investors measure plantation companies’ value based on the size of their land banks, but those calculations don’t account for potential problems posed by the rise of deforestation-free policies, he says: “If a company cuts down a significant area of forest, it’s not going to be able to sell to the big buyers in the industry.”

Another group working to engage financial players is the Banking Environment Initiative, a project of the University of Cambridge Institute for Sustainability Leadership that gathers the chief executives of 12 major banks, including Barclays, Deutsche Bank and Goldman Sachs Group, on an ad hoc basis to discuss how to channel capital for sustainable development. Last April the BEI released its Soft Commodities Compact, which commits signatories to helping all clients achieve zero net deforestation by 2020.

But the way forward is inherently complex. Hurowitz thinks the goal of zero net deforestation is outdated and insufficient because replanting new forests doesn’t make up for the destruction of much older ones. The debate extends to questions as basic as what a forest is and what deforestation is, according to Iain Henderson, Geneva-based program officer for REDD+ (Reducing Emissions from Deforestation and Forest Degradation) and sustainable land use at the United Nations Environment Programme Finance Initiative. “It’s actually a relatively challenging job to turn around and say, ‘We’re going to strip deforestation out of our portfolio,’” Henderson notes. But the financial community needs to act, he adds. “The finance sector is a single entry point into multiple commodity supply chains in multiple geographies. Finance is not the silver bullet here, but it’s a relatively underexplored potential lever, and that’s quite exciting.”