Leading UK academics are calling on the financial sector to do more to tackle deforestation, urging trade finance lenders to give financial incentives to suppliers that support sustainable practices.

A report from the University of Cambridge Institute for Sustainability Leadership (CISL) also says authorities should consider regulatory reforms, including mandatory due diligence requirements across entire supply chains – and even making it an offence for banks to handle the proceeds of deforestation-related activity.

“Soft commodities such as palm oil, soy, beef and timber products are responsible for the majority of deforestation caused by commercial agriculture,” CISL says in the report.

“Banks provide a variety of finance and financial services to enterprises along soft commodity supply chains, from term loans, trade finance and revolving credit facilities, to bond and fund structuring, capital raising, project finance and more.”

The report suggests financial institutions could lean on those existing relationships – as well as their access to suppliers, their diverse sources of capital and their extensive data around client operations – to support the introduction of sustainability standards among producers.

By collecting and sharing information about producers’ adherence to anti-deforestation standards, it says banks could structure and distribute financial benefits to sustainable suppliers.

Such benefits could include extending debt financing terms, reducing the cost of capital for loans or project finance, and improving the pricing or tenor of trade finance programmes.

Banks could “agree types of producer finance that could effectively transfer benefits… and create legally viable standardised templates”, CISL suggests, giving the example of discounted invoice financing.

Despite the initial difficulty in establishing such programmes, the report says there could be longer-term commercial benefits to banks of doing so.

“Over time, a bank’s appetite to contribute to these financial benefits itself may also increase,” it says. “For example, if a client’s operational profit and resilience improves as a result of regenerative agriculture techniques, rating agencies and banks may upgrade the client’s rating.”

However, to encourage the uptake of its proposals, CISL suggests governments around the world adopt a series of anti-deforestation policies applicable to the financial sector.

Mandatory due diligence obligations on suppliers could improve the availability and quality of information around deforestation risk, it says, while sustainable supply chain scaling could be encouraged through incentive mechanisms such as sustainable import guarantees.

More drastically, the report says: “If action taken by governments makes deforestation illegal, proceeds resulting from the practice could also come under the purview of banks’ financial crime team.”

It cites US enforcement action against companies linked to illegal logging as a precedent for such action.

The report follows the conclusion of the Soft Commodities Compact, an alliance between sustainability groups and private sector entities. The goal of the compact was to encourage banks to help achieve net zero deforestation by 2020.

Though acknowledging deforestation remains a problem – CISL notes that every six seconds a football pitch-sized area of primary forest is lost – the report says banks involved in the compact have become among the most advanced in terms of policy.

But campaigners say voluntary initiatives have failed to rein in financing granted to companies involved in deforestation.

“Our research has shown that despite their membership of the Compact, banks including Barclays, Santander and Deutsche Bank have financed and facilitated companies linked to the destruction of climate-critical forests,” says Jo Blackman, head of forest policy and advocacy at Global Witness, referring to a recent study of three beef producers in Brazil’s Amazon rainforest.

“Ineffective voluntary commitments are not working – there needs to be real accountability for the financial institutions that are bankrolling deforestation and forest-related human rights abuses,” Blackman adds.

“While we welcome the report’s call for government regulation to ensure mandatory due diligence on deforestation risks in supply chains, banks cannot be let off the hook.”