Skip to main content

Can banks reverse course to become a solution to global deforestation?

Criticism of banks' financing of environmentally destructive industries continues to grow, but a new report argues they could play a critical role in protecting forests and driving climate action.

Piles of tree logs in a forest, other trees can be seen in the background

Photo by Ales Krivec on Unsplash.

Banks have faced increasing criticism in recent years over their ongoing financial support for environmentally destructive industries, but by tweaking their practices they could become part a critical part of the solution to escalating deforestation and habitat destruction worldwide.

That is the core message this month from research by the University of Cambridge Institute for Sustainability Leadership (CISL), which outlines a set of five key actions banks and other financial firms can take to help respond to the biodiversity and climate crises, de-risking their investments in the process.

Released in mid-January, the report from CISL's Centre for Sustainable Finance focuses on soft commodities, such as palm oil, soy, beef and timber products, which are responsible for most deforestation worldwide caused by commercial agriculture.

Banks often provide finance and financial services to companies along these supply chains, indirectly contributing to deforestation and land-use change, which make up the second largest source of greenhouse gas emissions after the burning of fossil fuels. In 2019, deforestation was responsible for around 11 percent of global emissions, and growing demand for land for palm oil, cattle and soy production continues to drive destruction of critical forests and habitats worldwide. Banks often support commercial agricultural firms responsible for these activities through loans, trade finance, bond and fund structuring, capital raising and project finance.

Due to their role in offering financial support for agricultural firms, they can act as intermediaries for financial incentives that can increase the supply of deforestation-free and forest-restorative soft commodities.

But CISL's report argues it is this very positioning of financial services along global supply chains for soft commodities that also means banks are very well-placed to support activities that can put a stop to — and even reverse — deforestation.

Due to their role in offering financial support for agricultural firms, they can act as intermediaries for financial incentives that can increase the supply of deforestation-free and forest-restorative soft commodities, according to the report. That is because they have access to both businesses along the soft commodities supply chain and impact investors looking to tackle global challenges, as well as risk assessment expertise and data about client operations.

However, Nick Villiers, director of CISL's Center for Sustainable Finance, warned this potential is yet to be fully realized and more collaboration is urgently needed between local and global banks and their clients in order to help drive changes that could halt and reverse deforestation. "Our action plan maps out the unique part banks can play in tackling deforestation and aims to catalyze further action by the banking industry and beyond," he said. "By acting together, banks can help rewire the economy, mobilizing and structuring finance so that it supports deforestation-free and forest restorative soft commodity production."

CISL's report came as the U.K. this month joined more than 50 countries worldwide in pledging to protect 30 percent of land and oceans by 2030 as part of the High Ambition Coalition for Nature and People, announced at the One Planet Summit hosted by the France, U.N. and World Bank. In addition, the Prince of Wales unveiled a new "Terra Carta" charter aimed at encouraging businesses to agree to a set of ambitious actions to combat climate and nature destruction over the next decade. The initiative was also backed by a new Natural Capital Investment Alliance of asset managers aiming to drive $10 billion of capital allocation in this direction by 2022.

While hopes are high that such moves can help catalyze more ambitious, concerted action to avert the rapid, escalating declines nature and wildlife worldwide at the vital upcoming COP15 U.N. biodiversity summit to be hosted in China this year, such efforts have been met with skepticism given the ongoing failure of the international community and corporates to meet existing biodiversity and deforestation targets.

Despite the U.N. declaring a "decade of biodiversity" from 2011 to 2020, not one of the 20 global targets agreed by nations worldwide a decade ago have been met, prompting Swedish activist Greta Thunberg to argue slow progress on the issue threatens to lock in "decades of further destruction."

Ineffective voluntary commitments are not working — there needs to be real accountability for the financial institutions that are bankrolling deforestation and forest-related human rights abuses.

Meanwhile, it has been estimated that every six seconds a football pitch-sized area of primary forest is lost, with corporates having fallen badly short of meeting a high profile target to deliver zero deforestation by 2020. Meanwhile, the coronavirus crisis has been linked to the destruction of nature and a group of the world's top scientists convened by the U.N. last year warned the world is in an "era of pandemics" as a result of the ongoing degradation of natural habitats.

CISL's report also stresses that there is a compelling economic case for restoring natural ecosystems given more than 50 percent of global GDP relies on services provided by nature, including freshwater, healthy soil and clean air. Yet such natural resources are facing a precipitous decline, leading to increased risks and costs for many businesses.

As such, this month's new report urges banks to play a proactive role in halting the decline in habitat and forest destruction, emphasizing their ability to become part of the solution to the growing problem, rather than waiting for political, public and regulatory pressure to clamp down on unsustainable deforestation. And with banks also exposed to risks to their investments and financial support by failing to adequately trace and mitigate deforestation, it argues taking action to collaborate with others in the supply chain and wider industry to reduce deforestation can help cut costs and accelerate the adoption of best practices.

Among its five key recommendations, the report calls on banks to align their anti-deforestation policies with established standards, boost traceability, structure financing to incentivize deforestation-free practices, set measurable targets to combat the problem and identify teams with C-suite accountability responsible for delivering against these time-bound targets.

Simon Connell, head of sustainability strategy at banking giant Standard Chartered and chair of CISL's Banking Environment Initiative, said the action plan provide the wider banking industry with "a way to engage with tangible methods for collective action on deforestation."

The report marks the culmination of the Soft Commodities Compact project, a company-led alliance between CISL's Banking Environment Initiative and the Consumer Goods Forum (CGF). The alliance was set up in a bid to find means of assisting the banking industry in aligning with the CGF's ambition to push for zero net deforestation by 2020.

However, firms in the CGF — including those signed up to the Compact — have failed to meet their 2020 target. As such, the report attracted criticism from some green campaigners, who highlighted the ongoing failure of voluntary industry measures such as the Soft Commodities Compact in combatting deforestation, biodiversity loss and human rights abuses across the global agricultural supply chain.

Jo Blackman, head of forest policy and advocacy at Global Witness, said the Compact had "clearly failed to rein in" banks financing of deforestation, and called for greater accountability, regulation and governance to ensure compliance with existing regulations and a renewed effort to meet deforestation goals.

The diverse group of banks and other stakeholders needed to deliver the action plan has yet to be formed. This Plan aims to catalyze banks and stakeholders toward action.

"Ineffective voluntary commitments are not working — there needs to be real accountability for the financial institutions that are bankrolling deforestation and forest-related human rights abuses," she said. "While we welcome the report's call for government regulation to ensure mandatory due diligence on deforestation risks in supply chains, banks cannot be let off the hook."

Nevertheless, CISL's report points out that the 12 banks which have adopted the Compact are among the most advanced in terms of their deforestation policy, with all of them in the top 30 of 150 financial institutions in the Forest 500 rankings. Moreover, it stresses that the recommendations outlined this week are designed to act as a "starting point" for the industry, with CISL seeking further actions from stakeholders throughout 2021.

"The diverse group of banks and other stakeholders needed to deliver the action plan has yet to be formed," it states. "This Plan aims to catalyze banks and stakeholders toward action. During 2021, CISL will seek expressions of interest from the wider financial sector, corporates, NGOs, policymakers and funders to together develop and implement the action plan."

Ongoing failures over the past decade from governments and companies to deliver on deforestation pledges underscores the difficulty of policing voluntary commitments, and ensuring companies are held to account. It suggests that voluntary targets need to be accompanied by more robust top-down regulatory measures, such as welcome recent moves from the U.K. and EU to clamp down on companies which source goods linked with deforestation.

But as CISL emphasizes, with deforestation still a major threat to planetary and economic health — particularly in the wake of the coronavirus crisis — banks should not be waiting for governments to take steps to enhance forest protection throughout their portfolios. And with this week's report setting out a clear plan for banks to take meaningful steps to tackle deforestation right away, there is little excuse for continued inaction.

This story first appeared on:


More on this topic