Press Release: New Guide Helps Financial Institutions to Address Deforestation Due Diligence Ahead of Biodiversity COP16

Various open-source providers make extensive data on companies’ actions on deforestation available. Yet, financial institutions report that it remains challenging and resource-intensive for them to identify and mitigate deforestation risks in investment portfolios.

The new practical guide responds to this challenge, as the financial sector is increasingly committed to addressing its role in deforestation, a major driver of biodiversity loss and climate change. It is ready for implementation as the guidelines are complemented by an online code repository with a (limited) open-source dataset that financial institutions can use and adapt. The methodology is unique because it can be applied to the entire investment universe, incorporates state-of-the-art deforestation data and includes asset location data linked to deforestation hotspots.

“As financial institutions, we face significant financial risks from deforestation. As investors and owners in companies that have an impact on these risks, we have the responsibility and leverage to support a sustainable transition for climate and nature”, explains Asa Mossberg, Head of Sustainability and Communication at AP2.

“Our message to financial institutions is clear: Sufficient data and tools are available to make deforestation due diligence happen. Our new guide streamlines the process, helping financial institutions reduce the time and staff required to meet their deforestation-free commitments. Let us now address the remaining regulatory and data gaps so financial institutions can do their job and contribute to the sustainability transition”, says Malte Hessenius, Senior Analyst at Climate & Company.

“Deforestation is a solvable crisis. For financial institutions looking to progress on their net zero and nature targets at the same time, deforestation offers some of the most advanced data, metrics and frameworks in the nature space. The work by AP2 and Climate & Company highlights what can be done by financial institutions prepared to start today”, comments Pei Chi Wong, Finance Sector Guidance Lead at Global Canopy.

Background

Deforestation and land conversion are among the main drivers of biodiversity loss and climate change. Financial Institutions (FIs) are facing very real financial risks to their investments from climate change and biodiversity loss, as all economic sectors are dependent on nature and ecosystem services. The financial sector has a key role to play in accelerating the transition towards a deforestation-free economy.

At COP26 in Glasgow 2021, 35 FIs with more than (US) $8 trillion in assets under management have launched the Finance Sector Deforestation Action (FSDA), committed to eliminating deforestation from portfolios and driving the sustainable transition of the agricultural sector. Regulators hold FIs increasingly to account, in the EU for example, by requiring the financial sector to conduct a nature-related materiality assessment.

Still, according to Forest & Finance data, between 2015 and 2023, EU FIs provided approximately €256 billion in credit to companies linked to ecosystem risks. That is over 22% of the total global credit received by these companies. Additionally, EU financial institutions hold €60 billion in equity in these sectors, accounting for about 9.4% of the global total. Concerningly, according to Global Canopy’s Deforestation Action Tracker, 75% (66% for EU) of the 713 assessed FIs lack a deforestation policy.

To identify and mitigate deforestation risks, FIs need data on the nature-related impacts of their investees and clients. Massive amounts of data are currently generated through innovative solutions, such as satellite data, and made available through disclosure frameworks, such as the EU Corporate Sustainability Reporting Directive (CSRD). Yet, FIs lack the tools and guidance to make this data usable.

Therefore, Climate & Company has developed a methodology tailored for FIs conducting large-scale assessments across thousands of portfolio companies. Focusing on deforestation their methodology aligns well with broader nature-related frameworks. It has been tested using the MSCI All Country World-Index (MSCI ACWI) as a global benchmark and by AP2 for their listed equities portfolio. Building on Deforestation-free Due Diligence Guidance published by Global Canopy, Neural Alpha and the Stockholm Environment Institute, this report is complemented by online resources to facilitate implementation and an open-source Excel file with deforestation indicators for the MSCI ACWI.

What’s next?

From summer 2024 Climate & Company and AP2 will offer targeted workshops to support investor coalitions and other interested parties to conduct deforestation due diligence. The workshops aim to provide financial institutions with concrete tools and strategies to make deforestation-free portfolios a reality. Reach out to Malte Hessenius to schedule your session. Climate & Company continues its work on making the available data usable for the sustainability transition of the financial sector.

While this methodology focuses on the specific use case of deforestation, it lays the groundwork for applying the framework developed by the Taskforce on Nature-related Financial Disclosures (TNFD) or addressing biodiversity and nature more broadly.

About

Andra AP-fonden (AP2) is a Swedish Pension Fund and signatory to the Financial Sector Commitment on Eliminating Agricultural Commodity-Driven Deforestation. As such it aims to have a portfolio that does not contribute to deforestation by 2025, which is also in line with the Fund’s climate commitment to net-zero greenhouse gas emissions by 2045.

Climate & Company is Germany’s leading Sustainable Finance Think Tank. With sound data evidence, solid regulatory analysis and strategic policy recommendations they help decision-makers with making the sustainability transition work for businesses and the planet. Be it for biodiversity protection and the restoration of ecosystems or tackling the climate crisis. Climate & Company offers to find solutions for the sustainability data challenges of financial institutions. They have extensive experience with working with EU and international regulation on issues such as sustainable finance, ESG reporting, land use and deforestation, taxonomy or supply chains. Learn more about Climate & Company’s portfolio here.

Global Canopy is a data-driven not for profit that targets the market forces destroying nature. Global Canopy provides innovative open-access data, metrics and insights to leading companies, financial institutions, governments and campaigning organisations worldwide, to help them make better decisions about nature, forests and people.

Find here the New Methodology and Implementation Guidance for Financial Institutions:”Making Deforestation Due Diligence Work in Practice”.

Title image by Dylan Ferreira via Unsplash.