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:

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:

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.