Financial institutions ‘woefully behind’ on deforestation risk, says Global Canopy

Schroders takes top spot when it comes to performance of financial institutions.

Financial institutions are still not taking sufficient action to address deforestation risk, Global Canopy’s annual Forest 500 report suggests.

For the research, which was published on Wednesday, the NGO assessed 350 companies – including household names like Amazon, Starbucks, Unilever and IKEA – deemed to have the greatest exposure to the “forest-risk commodities” of palm oil, soy, beef, leather, timber, and pulp and paper.

Global Canopy also looked at 150 financial institutions that provide the most funding to these companies.

According to the report, 92 of the financial institutions do not have a commodity-specific policy on deforestation for any of the forest-risk commodities they are exposed to through their portfolios. These include Blackrock, Vanguard, State Street, Wellington Management, T Rowe Price, Wells Fargo and ABP.

“A clear, commodity-specific policy covering the highest forest-risk commodities ensures institutions use a systematic approach to dealing with deforestation risks,” Global Canopy said in the report. “It also sends a clear signal internally and externally, and sets clear expectations for clients and holdings as to how risks will be managed.”

A spokesperson for Vanguard told Responsible Investor: “On behalf of Vanguard’s internally managed equity funds, Vanguard’s Investment Stewardship team engages with portfolio company boards and executives to understand how they oversee, address and disclose financially material risks, including environmental risks such as deforestation.”

Blackrock and State Street declined to comment.

Policy shortfall

Of the 58 financial institutions that have deforestation policies for at least one forest-risk commodity, only 16 have policies for all four.

These include Nordea, BNP Paribas, Credit Suisse, Legal and General, Fidelity International, Schroders, Deutsche Bank, Standard Chartered and Sumitomo Mitsui Banking Corporation.

Global Canopy highlighted, however, that only seven of these firms have a commitment to engage with non-compliant clients or holdings to bring them into compliance for all commodities. And just two – Schroders and Standard Chartered – require their client or holding to remediate any present or past environmental or social harms related to deforestation, conversion, or associated human rights abuses.

The report also noted that the 92 institutions without any commodity-specific policy on deforestation provided $3.6 trillion in finance to companies with the highest exposure to deforestation risk.

This figure is based on publicly available information and included direct lending, as well as shareholdings that were active during Global Canopy’s assessment period of May to October 2022, and loans, bond holdings and underwritings with maturities after the end of the period.

The worst offenders were JPMorgan Chase, Bank of America and Mitsubishi UFJ Financial, which together provided $72 billion in financing to Forest 500 companies without  deforestation commitments for any of the commodities they are exposed to.

‘Rapid progress’

At the same time, the report noted that emerging leaders in the space are showing that “robust, public policies and rapid progress are possible”.

For financial institutions, Schroders was highlighted as the top performer, representing a turnaround for the £615 billion ($744 billion; €694 billion) investor over the past two years.

In Global Canopy’s 2021 report, Schroders scored just 4 percent for action to eliminate deforestation from its portfolio. Following publication of a new policy to eliminate commodity-driven deforestation in its investment portfolios by 2025 and the decision to join the Finance Sector Deforestation Action initiative, the firm’s score jumped to 50 percent by 2022.

Responding to the result, Catherine Macaulay, impact investment lead at Schroders, told Responsible Investor: “Without action, deforestation could undermine any hope of limiting global warming to 1.5C, exacerbate biodiversity loss and threaten food security and the livelihoods of communities around the world.”

In addition, she warned that exposed companies face physical and transition risks as regulation tightens and consumer and investor scrutiny increases.

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