Not seeing the emissions for the trees – why responsible finance must focus on forests - SPOTT.org

Against a backdrop of increasing fossil fuel divestment and the rapid growth of the renewable energy and green transport sectors, the topic of climate change currently takes centre stage. The financial sector’s growing interest in climate change and emission reduction indicates a significant shift in the right direction, and is a crucial force for a global transition to a lower-carbon economy. However, the important link between forests and climate is too-often overlooked.

Forests are key to climate mitigation

Protecting forests is essential to any strategy for staying within the 2˚ C warming limit outlined in the 2015 Paris Agreement – a crucial target if the worst human and environmental impacts of climate change are to be avoided.

Forests pull vast quantities of carbon out of the atmosphere: between 1990-2007 it’s estimated that established and re-growing forests together sequestered a total of 73,000 megatonnes – equivalent to around 60% of global cumulative fossil fuel emissions over the same period. Stored carbon is released, however, when forests are cleared, degraded, or burned down, and thus they can also act as a major carbon source.

As forests act as both a carbon sink and source, their conservation is doubly important: keeping them standing and healthy simultaneously removes existing carbon from the atmosphere and prevents further emissions. Equally, the negative impacts of forest clearance and degradation on climate are compounded as stored carbon, and the potential for further sequestration, are lost. A failure to incorporate this double effect into emissions calculations means the mitigation potential of forests is often underestimated.

Not all deforestation is equal

The location, extent and method of forest clearance all affect carbon emissions. Globally, tropical forests have the highest carbon density, and with effective protection they alone could provide 24-30% of mitigation potential for global emissions. But tropical forests are also the most heavily cleared and degraded. Together with peatlands and mangroves they account for most of the global emissions from forestry and land use, to the extent that tropical forests are now believed to be a net source of emissions rather than a net sink.

Just four commodities are estimated to be responsible for over a third of tropical deforestation each year: palm oil, timber and pulp, cattle, and soy. Land conversion for palm oil and timber and pulp in particular is often associated with high emissions from peatlands. Water-logged, carbon-rich peat must be drained prior to planting; once exposed to air it breaks down, releasing significant amounts of carbon. This is often exacerbated by the widespread use of fire for land clearing – the emissions from Indonesia’s 2015 haze crisis alone were at times greater than those of the entire US economy.

Forests and climate in responsible finance

The 2015 Paris climate talks highlighted the link between sustainable finance and the vital importance of forests. Recent initiatives such as the Task Force on Climate Related Disclosures and Climate 100+ show financial institutions are recognising the need for action. A recent report from the EU High-Level Expert Group on Sustainable Finance stated that forests “represent one of the largest and most cost-effective solutions to climate change”.

Still, the level of attention given to forests in financial sector discussions on climate does not seem to match their significance. For example, agriculture, forests and land use change together contribute around 24% of global greenhouse gas (GHG) emissions, compared to a contribution of 9% from the transport sector. However, a joint report by multilateral development banks in 2016 stated that of the $21,217 million they spent on climate mitigation, 22% went to the transport sector, while only 3% went to ‘agriculture, forestry and land use’.

Although an increasing number of financial institutions are adopting policies to address deforestation risks, few of these are mandatory, and most do not cover all forest-risk commodities the institution invests in or lends to. Of the 150 financial institutions assessed by Global Canopy’s Forest 500 in 2017, only 8 had deforestation commitments for all relevant commodities, and less than half of the 31% with commodity-specific sustainability policies included a requirement to protect priority forest types. Forests also receive less attention in shareholder advocacy on climate change – As You Sow’s 2018 review of proxy voting reported that of 83 climate proposals filed, only 3 related to forests.

Why are forests not the focus?

It is difficult to say definitively why the role of forests might not be receiving adequate attention from the financial sector in climate change discussions. However, we can suggest some possible reasons:

Emissions from forest clearance and degradation are hard to quantify

The financial sector is inherently quantitative, while both direct and indirect emissions from forest-related sectors can be difficult to quantify. With the multitude of interlinked factors affecting emission intensity, calculating emissions from forest clearance and degradation – even for a single company – can be challenging and time-consuming. The emissions resulting from the transport and energy sectors are more directly measurable and therefore simpler for the financial sector to engage with.

Accountability can be unclear

Deforestation is a cross-sector issue, linked to many different industries. Investors and banks can therefore be linked to it through multiple channels, both directly and indirectly.

The complex nature of the commodity supply chains involved – due both to the different stages and actors a product may go through, and the complicated, often deliberately opaque, ownership structures of the companies – can also obscure accountability for deforestation, especially for downstream financial institutions which are not directly part of the supply chain.

This is further complicated by the mechanisms through which companies are financed. For instance, the shares an investor holds in a company might be held through multiple funds, or anonymously through nominees, or might represent only a minor proportion of the company’s ownership.

The combination of all these variables can mean even once emissions are calculated, determining whether an institution’s investment or lending has funded the activities causing them can still be tricky.

ESG issues are manifold and interlinked

Sectors linked with deforestation usually have many other environmental, social and governance (ESG) risks associated with them, such as biodiversity loss, pollution and human rights abuses. They also produce GHGs through sources other than deforestation and degradation.

In palm oil production, for example, the breakdown of palm oil mill effluent produces methane, carbon dioxide and hydrogen sulphide. In pulp supply chains there are significant emissions associated with processing. Emissions associated with trade and transport are also high.

This complex mesh of interrelated ESG issues mean financial institutions cannot focus their engagement, screening or due diligence efforts on the climate impacts of deforestation in isolation.

Engagement requires expertise

The combination of all factors outlined above often means these sectors and issues are discussed in technical language, making engagement harder for those in responsible finance without relevant expertise.

What should financial institutions be asking?

The answer to this varies according to the approach of the investor or bank involved. For commodities such as palm oil and timber and pulp, there are key issues relating to upstream companies which investors and banks can target to improve engagement, support their own screening processes, or strengthen lending policy criteria. These include:

Emissions disclosure

Companies should report time-bound, target-based commitments to progressively reduce the intensity of the greenhouse gas emissions associated with their operations, and should be clearly reporting progress against these targets. Disclosure should include emissions from land-use change. Clear targets and reporting make it easier to hold a company accountable for its action on emissions.

Only 6% of timber and pulp companies assessed on SPOTT in July 2018 had a time-bound commitment to reduce GHG intensity

No-deforestation commitments

Companies should have clear policies for zero deforestation, including commitments to zero burning, no development on peat of any depth, and the identification and protection of all High Carbon Stock (HCS) forests, preferably following the HCS Approach. Companies implementing rigorous no-deforestation commitments are more likely to have a lower carbon footprint.

46% of palm oil companies assessed on SPOTT in November 2017 had made a clear NDPE commitment

Landbank and location

Companies should clearly disclose the exact locations and boundaries of upstream operations, including all plantation or concession areas and all relevant processing and refinery units. Disclosures should include the extent of the area under the company’s control, areas planted and designated for future planting, and areas set aside for conservation. Understanding where a company is operating is vital for holding it accountable for any forest clearance and degradation.

Timber and pulp companies assessed on SPOTT in 2018 failed to clearly disclose the location of operations that would cover 6 million football pitches (a similar lack of transparency is seen in the palm oil sector – see our report)

Certification

Companies should develop time-bound action plans and targets to achieve 100% certification through credible certification schemes incorporating climate mitigation requirements. The scope of targets should cover their own operations, as well as those of all direct and third-party suppliers. The audit requirements for certification help verify whether company commitments are being implemented.

60% of palm oil companies assessed on SPOTT in November 2017 had some level of Roundtable on Sustainable Palm Oil (RSPO) certification

This is just some of the information SPOTT gathers and makes available through its assessments of the most significant upstream palm oil and timber and pulp companies operating in tropical landscapes. SPOTT also provides reports and guidance to help users understand the industries and issues, such as our report on sustainable palm oil and investment with AVIVA, and the guide to our palm oil indicators.

What next?

Disclosures of this kind are a starting point, and the information provided on SPOTT can be used for constructive engagement with companies in these supply chains, to influence them to increase disclosure and improve practices on the ground.

All those looking to tie their finance to positive action on climate change should be making every effort to bring the vital role of forests to the forefront of climate-related policy discussions, and should be pushing for greater, faster action to protect them and the essential mitigation capacity they provide.

Not seeing the emissions for the trees – why responsible finance must focus on forests

Eleanor Spencer