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A group of investors, led by the Norwegian investment and pension fund, Storebrand, has written to Brazilian embassies warning that rising deforestation in the Amazon is creating uncertainty about the conditions for investing in Brazil.
The warning is timely – with the Brazilian government still looking to pass legislation to encourage the development of forested lands – and reflects the growing financial risks associated with investment in activities linked to tropical deforestation, which is worth hundreds of billions of dollars each year.
The letter urges the Brazilian Government to do more to reduce deforestation, but what can the financial institutions themselves do to minimise the risks they face? How can they ensure their investments and loans are not financing activities that are driving deforestation in the absence of government action?
The latest Forest 500 assessment shows that two thirds (102/150) of the most influential investors in forest-risk supply chains do not have policies on deforestation
Risks for investors
Investing in companies linked to cattle ranching or soy farming in areas where deforestation is taking place can result in financial risk for investors, especially where illegal activity is involved. Recent analysis suggests that some 95% of deforestation in Brazil is illegal.
The risk of potential legislative action in consumer countries could make it difficult for the companies involved to access markets. For example, some countries are looking at how they can limit their overseas deforestation footprint, with legislation being considered in the EU that would require companies to take steps to prevent deforestation in their supply chains.
Some companies, often at the retail and manufacturing end of supply chains, are already implementing due diligence to reduce their exposure to deforestation in the goods they buy – and this shift in buyer behaviour could limit market access for suppliers.
Financial institutions also face reputational risks. Institutional and retail investors are increasingly seeking to ensure their money is not being invested in companies with unsustainable business practices, especially with a view to reducing the carbon footprint of their assets.
In the face of these risks, financial institutions can adopt robust policies to govern their approach to investments in companies linked to forest-risk activities. This is the approach taken by Storebrand, which has introduced a clear commitment to zero deforestation.
But while Storebrand has taken a lead here, it is the exception. The latest Forest 500 assessment shows that two thirds (102/150) of the most influential investors in forest-risk supply chains do not have policies on deforestation.
New tools such as Trase Finance, which shows the direct deforestation risks that reside within complex company ownership structures, and the indirect exposure to these risks via loans and investments to regional banks, will make it increasingly easy for financial institutions to identify whether they are exposed.
To ensure these policies are effective in reducing deforestation, investors need to engage with companies and make it clear what they expect from them. A number of initiatives, such as the PRI working group on sustainable palm oil and the Sustainable Forest Initiative, which includes soy and beef, provide clear guidance on what companies should expect of companies as well as supporting collective engagement.
Time for change
The climate and biodiversity crises demand change across all sectors – and ending deforestation is a crucial part of this. It is then welcome to see financial institutions starting to respond to these challenges.
For too long, the financial sector’s focus on climate change has centred around scope 1 and 2 carbon emissions but ignored the indirect supply chain emissions from deforestation. That is perhaps now starting to change.
Storebrand and the other signatories of the letter are leading the way. It is to be hoped that the wider sector will also recognise this opportunity and act to protect their own portfolios against deforestation-risk.