Gaps in guidance and data have long been cited as barriers to action but this no longer holds. With a suite of guidance now available, financial institutions – from banks to pension funds – have the tools they need. And with regulatory pressures increasing, they must use this guidance to avoid falling behind.
The 150 financial institutions assessed by the Forest 500 provide more than $6.1 trillion in finance to the companies with the greatest exposure to tropical deforestation.
Deforestation sits at the heart of the climate and biodiversity crises. If deforestation were a country it would be the third highest emitter in the world. And the capital behind the destruction comes from the finance sector. The 150 financial institutions assessed by the Forest 500 provide more than $6.1 trillion in finance to the companies with the greatest exposure to tropical deforestation. That is why, according to the Glasgow Financial Alliance for Net Zero, net-zero transition plans are incomplete without addressing this issue.
The UN has set a target of 2025 for addressing deforestation in financial portfolios. That deadline is also in line with initiatives like the Finance Sector Deforestation Action Group, a leading investor initiative to end deforestation. It’s a deadline that needs to be taken seriously.
Global Canopy’s guidance helps financial institutions to act on the exposure in their portfolios and ensure the companies they invest in are making significant progress towards becoming deforestation-free. Some financial institutions have already started the journey, and some are yet to begin, but the guidance is designed so that rapid progress can be made wherever they are in the process.
Due diligence towards Deforestation-Free Finance
Finally, there is the new due diligence guidance. Currently financial institutions are exempt from UK and EU due diligence laws, but the political mood is changing. The EU regulation on deforestation-free products (EUDR) is set to be reviewed in two years to see if financial institutions should be included. In the UK, an amendment with cross-party support to the Financial Services and Markets (FSM) Bill calls for financial institutions to face the same due diligence regulations as companies. To avoid being left behind financial institutions need to act now.
Developed by Global Canopy, Neural Alpha and the Stockholm Environment Institute, the due diligence guidance sets out a recommended approach for financial institutions to conduct due diligence to identify, prevent and mitigate the risks and impacts of deforestation, conversion and associated human rights abuses. It helps financial institutions to identify gaps in supply chain policies and practices. They can then decide on appropriate mitigating actions when engaging clients or holdings during pre- or post-financing phases.
The UN has made clear that the window for action is rapidly closing. But through their power and influence financial institutions can drive real change. Actions we take in this decade will have impacts for thousands of years. By following this suite of guidance, financial institutions can move forward with confidence to meet the urgency of this moment.