How Financial Institutions can protect Forests

Forests are the powerhouse of our planet. Yet, financial institutions still finance deforestation. In this article, we show how financial institutions can protect forests. After all, they provide the financial incentives and resources for companies and smallholders along the value chain to transition to sustainable land use practices. This is how they can mitigate deforestation.

Forests not only harbour 80% of terrestrial biodiversity, but forests also provide 86 million green jobs and are home to 60 million indigenous people. Forests are essential CO2 sinks and therefore vital for our climate. Deforestation caused by global supply chains within land-use sectors such as agriculture and forestry contributes 12-20% of GHG emissions. To put it bluntly: we simply cannot afford to finance deforestation any longer. 

The good news: Financial institutions (FIs) have an enormous lever to protect forests.

1. Financial Institutions can help high deforestation-risk companies transition towards deforestation-free supply chains, providing the right incentives for their investee companies to reduce their impact.
2. Small farmers and indigenous communities lack the resources to generate the data necessary for verifiable and traceable deforestation-free supply chains. Yet, FIs can provide capital to finance good local practices and the technologies necessary to achieve deforestation-free supply chains.
3. Producer countries with high deforestation risks, such as Brazil, already have expertise in, and measures for, transition finance mechanisms. Accordingly, if we enhance global dialogue among FIs, EU and non-EU regulators, we can shape best practices. Read about Brazil’s rural credit requirements for FIs here.
   

The bad news: Financial Institutions are still a major financier of deforestation

As of 2022, private financial institutions were still providing USD 6.1 trillion in active financing to 350 companies most at risk of driving tropical deforestation. Many FIs don’t have any deforestation policy in place. EU-Regulations such as the CSDDD or the EUDR do not yet require FIs to act on deforestation in their value chains. In our 2023 report, you can learn all about the deforestation impact of financial institutions.

Here’s what we can do to protect forest:

1. Start with what we have. A massive amount of data on deforestation risks already exists and can be used. We’ll soon show you how here.
2. However, reporting standards, such as the European Sustainability Reporting Standards (ESRS), need to be adopted as soon as possible. They help generate information on companies’ deforestation impact. Read our open letter by the academic community on the importance of the timely adoption of ESRS sector standards.
3. Legislation needs to provide a level-playing field for EU and global FIs to engage with their clients and investees. This is how they can take measures to mitigate their deforestation impact. 
4. We need to make anti-deforestation regulation work for all: New initiatives and reviews must be developed and implemented in dialogue and collaboration with producer countries and smallholders. Read our joint open letter on how to improve the implementation of the EU regulation for deforestation-free products (EUDR). The letter was led by Amigos da Terra – Amazonia Brasileira, Imaflora, and Climate & Company, and signed by a total of 17 civil society organisations.