As major legislative strides are being taken to eliminate deforestation from commodity supply chains – with the recently adopted EU Deforestation Regulation leading the way – financial flows have so far been overlooked in regulatory attempts to address the drivers of international forest loss and degradation.
The EU Deforestation Regulation, adopted in December 2022, prohibits the import of a range of forest-risk commodities including palm oil, timber, and natural rubber, if they have resulted in deforestation. In the UK, the Environment Act 2021 similarly prohibits companies from importing forest-risk commodities linked with illegal deforestation. In both cases, companies must undertake due diligence to ensure these conditions are met. But to date, financial institutions have had voluntary frameworks rather than mandatory regulation to guide them in assessing and disclosing their deforestation risks and impacts.
This is despite the billions of pounds invested by asset managers, banks and pension funds (according to Global Witness and Make My Money Matter) in the UK which finance companies with a high risk of being linked to deforestation.
Realigning financial flows was one of the commitments of the Glasgow Leaders’ Declaration on Forests and Land Use at the UN climate change conference in November 2021. The newly adopted Kunching-Montreal Global Biodiversity Framework, the outcome of the negotiations at the UN biodiversity conference in December 2022, also highlights introducing financial regulations as a government target.
The Financial Services and Markets Bill, currently progressing through the House of Lords, offers an opportunity to help meet these commitments. The Bill redefines the UK’s financial regulation post-Brexit, and a proposed amendment, Amendment 199, would extend the due diligence requirements currently applied to large companies under the Environment Act 2021 to the financial sector.
The amendment has widespread cross-party support, meets the recommendations of the Global Resource Initiative taskforce expert group advising government, and is supported by environmental NGOs including Global Witness, WWF, Greenpeace, and Mighty Earth. ZSL stands with these organisations in our support for this amendment.
Mandatory regulation for financial institutions to undertake due diligence, and report on their risks and impacts on forests and biodiversity, is imperative if financial flows are to be realigned. Voluntary frameworks alone, such as the Taskforce for Nature-related Financial Disclosures (TNFD), are not sufficient in halting the financing of deforestation-risk activities.
The climate and biodiversity crises cannot be averted without halting deforestation. The agriculture, forestry and land use sector is responsible for driving 90% of tropical deforestation, and almost a quarter of greenhouse gas emissions. Deforestation must be eliminated from supply chains by 2025 if Paris Agreement climate goals are to be met. Deforestation is also associated with human rights abuses of local communities and Indigenous peoples which rely on forests for their livelihoods.
ZSL recognises that achieving deforestation-free finance presents challenges to financial institutions, and that sourcing companies are also struggling with these challenges. However, new company commitments, technologies and data are demonstrating it is feasible to greatly reduce deforestation risk in supply chains and in asset ownership, lending and investment activities.
ZSL wants to see UK-based investors actively engaged with high deforestation-risk companies to drive change, rather than disinvesting from these sectors. A well-worded amendment can effectively target those financial activities with direct deforestation risks, can incentivise investors to better assess and mitigate deforestation risk, and reward companies that are addressing deforestation risk with lower cost of capital.
Bringing financial institutions in line with major corporations in their due diligence requirements would help to achieve the UK’s net-zero goals, create a green economy, and secure a more sustainable, biodiverse future for the world’s tropical forests and peoples.