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Financial institutions without any deforestation policies invested US$3.6tn in some of the companies most at risk of driving forest clearance, leaving the sector “woefully behind” in tackling related risks in supply chains, non-profit Global Canopy has found.

The Forest 500 report, an annual ranking of the top companies and financiers exposed to forest-risk commodities, found that 92 out of 150 financial institutions linked to deforestation in their supply chains and investments did not have a commodity-specific policy in 2022, marking a marginal improvement on the 95 numbered the previous year.

“From our perspective, we’re not sure why so many financial institutions still aren’t acting on deforestation. They’ve got everything that they need to get started – data, tools and guidance,” Forest 500 lead Emma Thomson tells GTR.

“They’ve shown that over the past nine years they’re not all willing to act voluntarily. What we really need to see is legislation that applies to the finance sector on deforestation to require those that still haven’t acted to make progress and to encourage those that already have policies to implement them,” she adds.

Global Canopy uses publicly available information to track policies for pulp and paper, palm oil, soy, beef, leather and timber. Businesses are given a score out of 100 and evaluated according to the ambition and scope of their pledges and their approach to transparent reporting and implementing commitments throughout the supply chain.

JP Morgan, Bank of America and MUFG together gave US$72bn of financing to Forest 500 companies that do not have a single deforestation commitment, contributing to a total of US$527bn invested in companies without policies.

None of the banks were available for comment.

Overall, financial institutions provided US$6.1tn in financing to the 350 companies most at risk of driving tropical deforestation in 2022 via loans, underwriting, bond holdings and shareholdings.

Ending deforestation, the conversion of natural ecosystems and associated human rights abuses, such as threats of violence against Indigenous leaders and child labour, are considered to be among the highest priorities for combatting climate change and biodiversity loss.

This year’s Forest 500 scoring also includes updated criteria such as whether a company has a zero-tolerance approach towards threats and violence against forest, land and human rights defenders.

The average company’s score on associated human rights fell by seven percentage points after the new criteria were included, Global Canopy says. It calls for financial institutions to use their leverage by implementing their own policies and checking their clients are also taking action on human rights abuses.

“The finance sector has outsized impact and influence on the market, but has made comparably less progress than other sectors,” the report says. “The movement is much too slow for a sector that yields so much power and ability to affect change through its investments.”

 

Small changes

While the pace and scale of change remains limited, 58 financial institutions do have at least one deforestation policy for forest-risk commodities in their portfolios. A total of 16 financial institutions have policies for all commodities assessed, an improvement of 7% on last year, including ABN Amro, Deutsche Bank, HSBC, Santander, Standard Chartered and Société Générale.

Asset management company Schroders was commended for improving its score from 4% in 2021 to 50% a year later.

Catherine Macaulay, impact investment lead at Schroders, tells GTR in a statement, “We’re very pleased that the efforts we have made across Schroders to examine and act on biodiversity risks, opportunities and impacts are recognised.”

Macaulay adds that dealing with deforestation is “critical in enabling us to act in the long-term interests of our clients across the portfolios that we manage. There is also an exciting opportunity for the financial industry to be part of the solution through direct investment into natural capital projects.”

BNP Paribas, Rabobank, Schroders, SMBC and Standard Chartered were the top five highest scoring financial institutions.

“While there have been pockets of progress, the majority of companies and financial institutions are living on borrowed time, putting climate and nature goals at risk,” says Niki Mardas, executive director at Global Canopy.

“But 2023 can be a year of rapid progress. More than ever before, the global architecture, with the UK and EU legislation, and the Global Biodiversity Framework, is pushing in the same direction; and excellent tools, guidance and data are freely available,” he says.

The report also highlights the business risk – reputational, regulatory and physical – that investing in companies exposed to deforestation poses to financial institutions.

Last year, Mark Carney, former central bank governor and leader of the Glasgow Financial Alliance for Net Zero, said that voluntary actions were limited and called on G20 governments to introduce mandatory requirements for transition finance.

While the EU’s due diligence law to ban products causing deforestation from being imported or exported into the EU – which was finalised in December 2022 and comes into force this year – does not include financial institutions, this will be reassessed in two years’ time.